| The purpose of this dissertation is to examine the welfare cost of social security that results from the program's effect on private savings. Social security affects an individual's private savings in different ways. The major ways social security affects private savings are referred to as the wealth replacement effect, the induced retirement effect, and the (pre-retirement) saving behavior effect. The most recent analysis dealing with this topic was done by Martin Feldstein (1987b). However, his paper was restricted to only the analysis of the wealth replacement effect.;In analyzing the welfare cost of social security, the analysis developed in this dissertation adds two more effects as determining factors that influence the welfare cost of social security--the induced retirement effect and the (pre-retirement) savings behavior effect. In general, past studies have lumped these two effects together as one.;In expanding upon Feldstein (1987b), this dissertation also emphasizes how the welfare cost of social security is related to the existence of capital income taxation. He assumed that the benefits of spending the revenue from the capital income tax accrued to the generation of savers who own the capital. This implies that the capital income tax revenue will be returned to savers who use it for consumption, rather than invested for future generations. However, when the capital income tax revenue is invested in government projects, the welfare cost of social security can be dramatically altered. In summary, this study will add the analysis of the induced retirement effect and the pre-retirement effect to Feldstein's (1987b) model. In addition, the role played by capital income taxation will be developed more fully.;Under the social security financed on a pay-as-you-go basis, current taxes are not invested but instead finance current benefits for the retired. The reduction of the total saving will hurt the social welfare seriously. Nonetheless, this paper shows how much the welfare costs can be reduced by the change in the private savings which is decided by individuals, endogenously or exogenously, in our model. |
