In many countries. social security is a large fraction of the
government budget. Why is it, given that at any moment in time the number
of recipients of social security benefits is smaller than the number of
contributors? Kore generally, what determines the size of social security?
To answer these questions, this paper studies an overlapping generations
model in which all individuals currently alive vote on social security.
There is no commitment to preserve the legislation inherited from the past.
Voters are weakly altruistic and there is heterogeneity within each
generation. The paper shows that in equilibrium the size of social security
is larger the greater is the proportion of elderly people in the population,
and the greater is the inequality of pre-tax income. Both predictions of
the theory are supported by the empirical evidence in cross-country data.
*Published:
With Alberto Alesina, published as "A Positive Theory of Fiscal Deficitsand Government Debt", Review of Economic Studies, Vol. 57, no. 191 (1990):
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