What Social Security: Beveridgean or Bismarckian?
Bismarckian social security systems are associated with larger public pension expenditures, a smaller fraction of private pension and lower income inequality than Beveridgean systems. This paper introduces a bidimensional voting model to account for all these features. Agents differ in age, income and in their ability to invest in the capital market. The voting game determines the degree of redistribution of the social security system -Bismarckian or Beveridgean- and the size of the transfer (for the low-income retirees). In an economy with three income groups, a small Beveridgean system is supported by low-income agents, who gain from its redistributive feature, and high-income individuals, who seek to minimize their tax contribution and to invest their resources in a private scheme. Middle- income individuals favor a large earning-related (Bismarckian) system. Hence, large (small) inequality is associated with a small Beveridgean (large Bismarckian) system and a large (small) private system.
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