TRANSFER INCOMES, especially retirement pensions and unemployment benefits. The provision of such benefits varies greatly from country to country, being particularly generous in Scandinavian countries and Germany The ratio of employer and employee contributions (used to finance social security) to wages is high in countries such as the Netherlands but much lower in countries such as Japan and the USA. Many studies show that an increase in social security charges is shifted to the wage earner if he or she regards the corresponding benefits as part of his or her wage. Social security schemes increase distortions in the LABOUR MARKET by increasing the cost of labour to the firm without increasing it to wage earners who do not regard the benefits as a full addition to their incomes.
Social security can be financed in two ways. It can be fully funded so that investments are accumulated to produce an income for future recipients of social security grants, or it can be financed on a ‘pay-as-you-go’ basis, i.e. by current contributions, mainly by present members of the labour force.
References
Gramlich, E.M. (1998) Is it time to reform social security?, Ann Arbor, MI: University of Michigan Press.
Hicks, A. (1999) Social democracy and welfare capitalism: a century of income security politics, Ithaca, NY, and London: Cornell University Press.
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