Social Security: Universal vs. Earnings-Dependent Benefits

Jorge Soares ()

No 11-14, Working Papers from University of Delaware, Department of Economics

Abstract: I compare the welfare implications of implementing Bismarckian and Beveridgean social security systems. In an overlapping generations environment with intragenerational homogeneity, agents can be better off with a system with universal benefits than with a comparable system with earnings-dependent benefits because the latter generates a stronger decrease in net wages. Once I allow for intragenerational skill heterogeneity, agents are on average better off with the more redistributive universal benefits system. I then let agents vote for the replacement rates in a democratic process. In the absence of intragenerational heterogeneity, a larger social security system is implemented when benefits are earnings-dependent than when they are universal resulting in a larger decrease in net wages; this makes young agents worse o¤ with earnings-dependent benefits. In the presence of intragenerational skill heterogeneity, the reverse occurs and agents fare on average better in the long-run when benefits are earnings-dependent. However, because of its redistributional effects, agents born at the time of implementation are on average better o¤ with an universal benefits system.

Keywords: social security; universal benefits; earnings-dependent benefits; Bismarckian social security system; Beveridgean social security system; voting; welfare. (search for similar items in EconPapers)
JEL-codes: E62 H55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-dge and nep-lab
Date: 2011
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Forthcoming in Economica

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