Optimal Progressivity of Public Pension Benefit and Labor Income Tax

Abstract

This paper characterizes optimal progressivity of public pension benefit and labor income tax, which leads to intra- and inter-generational redistributions. The optimal progressivity of public pension benefit and that of labor income tax mutually depend on each other. The optimal ratio of public pension benefit progressivity to labor income tax progressivity is not constant rate of time discounting. Optimal public pension benefit is more progressive than optimal labor income tax. Whereas effects of pre-government inequality on the optimal progressivity of public pension benefit and that of labor income tax are positive, effect of population aging on them is theoretically ambiguous.