Simple Criteria for Growth-Enhancing Social Security Systems

It has been believed that a social security system (SSS) is harmful to economic growth. However, it has been recognized recently that a SSS can encourage economic growth if the engine of the growth is human-capital accumulation. This paper uses an analytical model à la Uzawa/Lucas to examine the growth effect of SSS, focusing on the financing method. We have four analytical results. First, the SSS with wage income tax is more (less) likely to encourage economic growth than the SSS with interest income tax if the income share of physical capital is relatively small (large). Second, at least one of the two SSSs is growth-enhancing. Third, the SSS with comprehensive income tax is more likely to encourage economic growth than the SSS with wage income tax. Fourth, the growth effect of a SSS is enhanced if the social security benefit is based on the household account. The results imply that an appropriate reform in the financing of SSS would be useful for encouraging economic growth.