Financing Social Security

: Issues in Taxes and Social Insurance Premiums

Abstract

Paying taxes is not directly connected to the receipt of particular public services, whereas social insurance premiums are regarded as the price of the benefits. This paper discusses pertinent issues concerning these two sources of revenue.First, the personal income tax is assessed based on an individual’s aggregate income, and can realize the principle of horizontal equity. However, an employee’s social insurance premium is levied only on the payroll for his/her main employment. Second, the personal income tax is imposed on a progressive scale, and can realize the principle of vertical equity. However, the social insurance premium is regressive. Third, there are some arguments that the right to receive social benefits is based on paying social insurance premiums. However, the right to receive benefits financed by taxes is rooted in citizenship. Fourth, the democratic aspect of taxation is based on the rule that taxation must be prescribed by law. However, the extent to which insured persons can participate in deciding social insurance premium rates differs among programs. Fifth, taxes account for about half of the revenues of some social insurance programs.It is desirable to shift the source of revenue for universal benefit programs from social insurance premiums to taxes.