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An Analysis for the Effects of Income Deduction for Pension Contribution on Social Welfare

  • Journal of Insurance and Finance
  • 2009, 20(3), pp.201-245
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Kang Sung-Ho 1

1국민연금관리공단

Accredited

ABSTRACT

An income deduction for public or private pension contribution increases disposable income. On the other hand, it also makes an income redistribution worse. An empirical analysis shows how social welfare can be changed before and after the income deduction for pension contribution using social welfare function(SW=μβ(1-G)). According to the empirical results, the level of social welfare improvement depends on the value of the parameter(β). For example, social welfare is more improved with β=1/2 or β=1 than β=0. In other words, positive effects on the improvement in income from the income deduction are slightly larger than the negative effects on equality (represented by(1-G)). That is, the total improvement of social-welfare was less than one percent due to the tradeoff. The social welfare improved more in one-income family than dual-income family. It also improved as the income increased. Consequently, it implies that different level of the income deduction based on income brackets may be necessary in that higher income group can be relatively better off from the income deduction.

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