Tax funding of social security benefits? Distribution and efficiency effects from refinancing of social security benefits in the state pension and health insurance system

Many studies' regulatory aim is to have non-insurance entitlements of the social insurance system funded by taxes. Since most studies use (macro)econometric methods, changes in household behaviour are not shown and the allocative effects resulting from tax funding are not sufficiently taken into consideration. It is the intention of the present study to fill this gap. A numerical equilibrium model of overlapping generations with a disaggregated household sector is used in the study. Differentiation is made according to occupational groups and income brackets. Furthermore, the relevant interdependences between tax and social law are modelled at the household level. The study examines the impact of partial tax funding of benefits of the state health and pension insurance. Since the resulting efficiency effects are explicitly derived, it is shown that from an allocative point of view the combined funding from higher income and consumer taxes, which is often favoured for distributional purposes, is inferior to a pure funding from consumer taxes. Combined funding is not needed, since the primary assumption of a regressive burden on contributors resulting from a consumer tax increase does not arise in the simulation study. In addition, it is shown that partial funding of health care benefits by consumer tax increases is not associated with an excess burden. Of all the examined funding alternatives, such a partial funding seems to be superior due to allocative neutrality and the resulting distributional effects.