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Demographic Shock and Social Security: A Political Economy Perspective

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  • Georges Casamatta
  • Helmuth Cremer
  • Pierre Pestieau

Abstract

We assume that individual voters differ not only according to age but also productivity. In the steady state, workers with wages in the intermediate range join the retired persons to form a majority and vote for a positive level of social security. When a shock decreases population growth, entrenched interests can constrain majority voting decisions and prevent reforms in the name of entitlements. We show that from a Rawlsian viewpoint it may be desirable to rely on these entitlements to protect the low wage earners of the transition generations. However, when the possibility of fixing a basic pension is introduced, it constitutes a better instrument than entitlements. Copyright Kluwer Academic Publishers 2001

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  • Georges Casamatta & Helmuth Cremer & Pierre Pestieau, 2001. "Demographic Shock and Social Security: A Political Economy Perspective," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 417-431, August.
    • Handle: RePEc:kap:itaxpf:v:8:y:2001:i:4:p:417-431
    DOI: 10.1023/A:1011214823251
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    1. Cremer, Helmuth & Pestieau, Pierre, 2000. "Reforming our pension system: Is it a demographic, financial or political problem?," European Economic Review, Elsevier, vol. 44(4-6), pages 974-983, May.
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    6. Georges Casamatta & Helmuth Cremer & Pierre Pestieau, 2000. "The Political Economy of Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 503-522, September.
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    8. Boadway, Robin W & Wildasin, David E, 1989. "A Median Voter Model of Social Security," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 307-328, May.
    9. Browning, Edgar K, 1975. "Why the Social Insurance Budget Is Too Large in a Democracy," Economic Inquiry, Western Economic Association International, vol. 13(3), pages 373-388, September.
    10. BOLDRIN, Michele & RUSTICHINI, Aldo, 1994. "Equilibria with Social Security," LIDAM Discussion Papers CORE 1994060, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Richard Disney, 1996. "Can We Afford to Grow Older?," MIT Press Books, The MIT Press, edition 1, volume 1, number 026204157x, April.
    12. Georges Casamatta, 2003. "The Political Power of the Retirees in a Two‐Dimensional Voting Model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(4), pages 571-591, October.
    13. Mulligan, Casey B. & Sala-i-Martin, Xavier, 1999. "Gerontocracy, Retirement, and Social Security," Working Papers 154, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
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    Cited by:

    1. Cremer, Helmuth & Pestieau, Pierre, 2003. "Social insurance competition between Bismarck and Beveridge," Journal of Urban Economics, Elsevier, vol. 54(1), pages 181-196, July.
    2. Isilda Mara & Edlira Narazani, 2011. "Labour-incentive reforms at preretirement age in Austria," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(4), pages 481-510, November.
    3. Beetsma, Roel & Komada, Oliwia & Makarski, Krzysztof & Tyrowicz, Joanna, 2021. "The political (in)stability of funded social security," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    4. Ryo Arawatari & Tetsuo Ono, 2008. "Aging, Inequality and Social Security," Discussion Papers in Economics and Business 08-19, Osaka University, Graduate School of Economics.
    5. Christian Keuschnigg & Mirela Keuschnigg, 2004. "Aging, Labor Markets, and Pension Reform in Austria," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 359-392, September.
    6. Michael Berlemann & Marco Oestmann & Marcel Thum, 2014. "Demographic change and bank profitability: empirical evidence from German savings banks," Applied Economics, Taylor & Francis Journals, vol. 46(1), pages 79-94, January.
    7. Marko Koethenbuerger & Panu Poutvaara & Paola Profeta, 2008. "Why are more redistributive social security systems smaller? A median voter approach," Oxford Economic Papers, Oxford University Press, vol. 60(2), pages 275-292, April.
    8. Beate Henschel & Carsten Pohl & Marcel Thum, 2008. "Demographic Change and Regional Labour Markets: The Case of Eastern Germany," CESifo Working Paper Series 2315, CESifo.
    9. Krzysztof Makarski & Joanna Tyrowicz, 2015. "Political (In)Stability of Social Security Reform," Working Papers 2015-21, Faculty of Economic Sciences, University of Warsaw.
    10. Montén, Anna & Thum, Marcel, 2010. "Ageing municipalities, gerontocracy and fiscal competition," European Journal of Political Economy, Elsevier, vol. 26(2), pages 235-247, June.
    11. Mauro Visaggio, 2019. "Extending the retirement age for preserving the costitutive pension system mission," Public Finance Research Papers 40, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.
    12. Georges Casamatta, 2003. "The Political Power of the Retirees in a Two‐Dimensional Voting Model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(4), pages 571-591, October.

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