Voting over social security with uncertain lifetimes
Paper number: 99/21
Paper date: June 1999
Paper Category: Discussion Paper
Philippe De Donder
GREMAQ, Universit de Toulouse I, France
University of Exeter, UK
This paper examines the intragenerational redistribution aspect of social security. The level of social security is determined by majority voting between individuals who differ (ex-ante) in their earning ability and life expectancy. Given incentive effects, the voting equilibrium depends on balancing the redistributive gains that social security provides to a majority against the efficiency costs of distorting economic behaviour. The impact of alternative benefit structures on the equilibrium level of social security is analysed. It is shown that the conventional wisdom stating that "tightening the link" between benefits and contributions will reduce the distortionary effect of social security does not survive the introduction of political economy considerations. We also show that the introduction of means-testing does not necessarily lead to a decrease in the size of social security. The impact on the equilibrium level of social security of a correlation between productivity and the probability of receiving benefits is also analysed.
JEL Classification Nos: D72, D78, H55
Keywords: Social security, public pensions, majority voting
Corresponding Author: Jean Hindriks, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 263237, fax (44) 1392 263242, email: Jean.Hindriks@exeter.ac.uk
An earlier version of this paper entitled "The Political Support for Means-Tested Social Security" has been presented at the "International Conference on Institutional and Financial Incentives for Social Security" held at CORE in December 1998. We would like to thank participants at this conference, at the 1999 CORE-FRANCQUI Summer School in Political Economy and at the "Axiomatic Resource Allocation Theory Conference" (Namur, July 1999) for their comments and encouragement.