Optimal Taxation of Capital and Labor Income with Social Security and Variable Retirement Age

This paper extends the Diamond overlapping-generations model with pay-as-you-go social security by allowing for variable retirement age and for distortionary taxation of earnings and interest income. The tax rates are shown to depend on whether or not debt policy is available, and on the compensated elasticities of the two key variables: the amount of saving and the age of retirement. The relative tax on earnings, and thus the downward distortion on the age of retirement, is shown to be low if the age of retirement has a high tax elasticity and if, when there is no debt policy, there is underaccumulation (with respect to the modified golden rule).