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Social
Security
Reasons for
altruism?
In many countries social security accounts for a substantial
proportion of the government budget, but the number of recipients of
social security benefits at any given time is smaller than the number of
contributors.
In Discussion Paper No. 394, Research Fellow Guido Tabellini
presents a simple theoretical model that seeks to explain why a large
majority of citizens are prepared to support a system that redistributes
to a minority, and how the size of social security provision is
determined.
A social security programme redistributes both across and within
generations, and the contributions to the system are linked to wage
income, but the benefits are not, so the system also redistributes from
high to low income households. Hence poor workers/taxpayers may be
expected to favour the programme, since the gain to their retired
parents is larger than the cost to themselves.
Tabellini presents a simple political-economic equilibrium model in
which the social security programme is chosen in each period by a
majority vote of all citizens currently alive, who are divided into two
generations: `old' and `young'. Thus the social security legislation can
be repealed in any period, and the link between current contributions
and future benefits is broken. In any period, a vote on the social
security programme determines how much to transfer from the current
young to the current old, with no repercussions on future legislation.
The model allows a degree of reciprocal altruism within families, so
that parents care about their children, and children care about their
parents. This altruism is relatively weak, however, so that no private
transfers occur in equilibrium, and altruism plays a role only in the
political equilibrium. Young voters trade off the tax burden they incur
in financing the programme against the benefits received by their
parents.
Tabellini's main analytical result is that, if there is a sufficient
degree of inequality in labour income, a social security programme will
receive the support of a majority of the voters in equilibrium. His
analysis also implies that the extent of social security provision will
increase both with pre-tax income inequality and with the proportion of
`old' people in the population. In the empirical part of the paper he
compares the size of the social security programmes in 63 developing and
industrialized countries, and finds that cross-country differences in
the size of social security are explained well by the inequality of
pre-tax income and the age composition of the population, as predicted
by the theory. This finding is robust to alternative specifications and
to the possibility of measurement error in the explanatory variables.
A Positive Theory of Social Security
Guido Tabellini
Discussion Paper No. 394, April 1990 (IM)
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