Working Paper: CEPR ID: DP2202
Authors: Jose Ignacio Conde Ruiz; Vincenzo Galasso
Abstract: Why does the largest US welfare programme select its recipients by their age, rather than by their earnings or wealth? In a dynamic efficient overlapping generation economy with earnings heterogeneity, we analyze a welfare system composed of a within-cohort redistribution scheme and an unfunded social security system. The programme's size is determined in a bidimensional majoritarian election. For enough income inequality and elderly in the population, both welfare programs are supported as a structure-induced political equilibrium of a voting game played by successive generation of voters. Social security is sustained by a voting coalition of retirees and low-income young, intragenerational redistribution by low-income young. Two features are crucial: the retirees' political power, deriving from their homogeneous voting, and the intragenerational redistribution component of the social security. Therefore, to assess how changes in inequality affect the welfare state, the income distribution should be decomposed by age groups.
Keywords: social security; income equality; structure-induced equilibrium
JEL Codes: D72; H53; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| political power of retirees (J26) | support for social security (H55) |
| homogeneous voting behavior of retirees (J26) | political power of retirees (J26) |
| coalition of elderly and low-income young (J14) | sustain welfare system (I38) |
| changes in income inequality (D31) | political dynamics of social security support (H55) |
| elderly and low-income young coalition (I32) | support for social security (H55) |
| low-income young individuals (I24) | support for intragenerational redistribution (H23) |
| political sustainability of social security (H55) | intraregional redistribution component (R15) |
| localized increases in lower tail income inequality (D31) | increase in social security support (H55) |
| localized increases in lower tail income inequality (D31) | decrease in support for intragenerational transfers (D15) |