Positive Arithmetic of the Welfare State

This paper argues that social security enjoys wider political support than other welfare programs because: (i) retirees constitute the most homogeneous voting group,\ and (ii) the intragenerational redistribution component of social security induces low-income young to support this system. In a dynamically efficient overlapping generation economy with earnings heterogeneity, we show that, for sufficient income inequality and enough elderly in the population, a welfare system composed of a within-cohort redistribution scheme and an unfunded social security system represents the political equilibrium of a two-dimensional majoritarian election. Social security is sustained by retirees and low- income young; while intragenerational redistribution by low-income young. Our model suggests that to assess how changes in inequality affect the welfare state, the income distribution should be decomposed by age groups.