TY  - JOUR
AU  - Grochulski,Borys
AU  - Kocherlakota,Narayana
TI  - Nonseparable Preferences and Optimal Social Security Systems 
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13362
PY  - 2007
Y2  - September 2007
UR  - http://www.nber.org/papers/w13362
L1  - http://www.nber.org/papers/w13362.pdf
N1  - Author contact info:
Borys Grochulski
Federal Reserve Bank of Richmond
701 East Byrd Street
Richmond, VA 23219
E-Mail: borys.grochulski@rich.frb.org

Narayana R. Kocherlakota
Federal Reserve Bank of Minneapolis
90 Hennepin Avenue
Minneapolis, MN 55401
Tel: 612-204-5444
E-Mail: narayana.kocherlakota@mpls.frb.org
AB  - In this paper, we consider economies in which agents are privately informed about their skills, which are evolving stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation.  We show that such nonseparabilities imply that optimal asset income taxes are necessarily retrospective in nature.  We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement.  The average asset income tax in this system is zero.
ER  -