We study the interactions between capital income tax and social security in the context of longevity. On the one hand, taxing capital income gains reduces capital accumulation and slows down economic progress. On the other hand, increasing life expectancy raises incentives for capital accumulation, which makes capital relatively less responsive to the tax hikes. Under longevity, reforming social security from a defined benefit system to a defined contribution system limits the extent of fiscal imbalance in the long run, thus further raising efficiency.  

The existing view in the literature states that the insurance motive dominates the efficiency gains when evaluating the welfare effects of social security reform with stochastic income shocks. We show, under plausible calibration of the US economy, that the efficiency gain resulting from the interaction of social security and capital income taxation in the context of longevity provide welfare gains sufficient to outweigh the loss of insurance. By analyzing a variety of fiscal closures, we reconcile our result with the earlier literature. We also study the political economy context and show that political support for capital income taxation is feasible.