WHY THE SOCIAL INSURANCE BUDGET IS TOO LARGE IN A DEMOCRACY

Abstract

This paper develops a majority voting model to analyze the determination of taxes and transfers in a system of pay-as-yougo social insurance. The major implication is that the equilibrium size of the system is too large if votes are fully aware of the consequences of the policy. In addition, it seems likely that voters are rationally ignorant of a large portion of the cost of social insurance due to the hidden nature of the employer contribution and to the effect of the system on capital accumulatoin. This fiscal illusion works to exacerbate the overexpansion of the social insurance system.