Optimal Life Cycle Social Security Tax

The unfunded social security has long been criticized for reducing capital stock and social welfare. In this paper, we study the aggregate and welfare effects of reforms that make social security tax (SST) age dependent. We characterize the optimal age-dependent SST schedule that maximizes social welfare and find that it increases capital and social welfare significantly. In addition, we propose a simple two-bracket SST schedule that captures the most of welfare gains from a fully age-dependent SST schedule. The welfare gains from the optimal schedule mainly comes from the increase in consumption level and better consumption smoothing over the life cycle, while the insurance effect of the age-dependent schedule is small