Positive Arithmetic of the Welfare State

J. Ignacio Conde-Ruiz and Vincenzo Galasso

No 2003-04, Working Papers from FEDEA

Abstract: This paper argues that social security enjoys wider political support than other welfare programs because: (i) retirees constitute the most homogeneous voting group,\ and (ii) the intragenerational redistribution component of social security induces low-income young to support this system. In a dynamically efficient overlapping generation economy with earnings heterogeneity, we show that, for sufficient income inequality and enough elderly in the population, a welfare system composed of a within-cohort redistribution scheme and an unfunded social security system represents the political equilibrium of a two-dimensional majoritarian election. Social security is sustained by retirees and low- income young; while intragenerational redistribution by low-income young. Our model suggests that to assess how changes in inequality affect the welfare state, the income distribution should be decomposed by age groups.

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Related works:
Journal Article: Positive arithmetic of the welfare state (2005)
Working Paper: Positive Arithmetic of the Welfare State (2000)
Working Paper: Positive Arithmetic of the Welfare State (1999)
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