The Redistributive Design of Social Security Systems

Abstract

Countries with low intragenerational redistribution in social security systems (Bismarckian) are associated with larger public pension expenditures, a smaller fraction of private pension and lower income inequality than countries with more redistributive social security (Beveridgean). This article introduces a bidimensional voting model to account for these features. Agents different in age, income and in their ability to invest in the capital market vote on the degree of redistribution of the social security system and on the size of the transfer. 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 minimise their tax contribution and to invest in a private scheme. Middle‐income individuals instead favour a large Bismarckian system.