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Positive Arithmetic of the Welfare State

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  • Conde-Ruiz, José Ignacio
  • Galasso, Vincenzo

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.

Suggested Citation

  • Conde-Ruiz, José Ignacio & Galasso, Vincenzo, 1999. "Positive Arithmetic of the Welfare State," CEPR Discussion Papers 2202, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2202
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    More about this item

    Keywords

    Income Equality; Social Security; Structure-Induced Equilibrium;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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