On the Optimal Timing of Implicit Social Security Taxes Over the Life Cycle

Are there still opportunities for welfare-improving reforms in unfunded pension systems? To answer this question, we analyze the intertemporal structure of implicit taxes in pay-as-you-go pension schemes. We demonstrate that these tax rates are declining over the life cycle. This timing is optimal if periodic wage elasticities of labor supply are inversely related to the tax structure. Using German micro data for men and married women, we estimate periodic wage elasticities of labor supply. We observe that an efficient taxation would require implementing a steeper tax profile for male workers and a U-shaped (or mildly N-shaped) tax profile for female workers in addition to a general reduction of the level of implicit tax rates for the latter.