Social Insurance Based on Personal Savings Accounts: A Possible Reform Strategy for Overburdened Welfare States?

A central dilemma for overburdened welfare states is that many proposed reform strategies either lead to higher marginal effects of taxes and subsidies (called the marginal tax rate from here onwards) or deepen poverty. Cutbacks, for example, that maintain the standard of living of the poorest reduce benefits more for those with medium or higher incomes. This tends to make social insurance less actuarial and thus raises the marginal tax rate. Cutbacks that actually reduce the marginal tax rate generally imply that people have to rely more on own saving and private insurance and this typically hurts low-income group s who face the highest risks of, for example, unemployment and sickness.