We consider a two-period overlapping generations model in which individual voters differ by age and by productivity. In such a setting, a redistributive pay-as-you-go system is politically sustainable, even when the interest rate is higher than the rate of population growth. The workers with medium wages (not those with the lowest wages) and the retirees form a majority which votes for a positive level of social security. This level depends on the difference between the rates of population growth and interest as well as on the redistributiveness of the bene®t rule.

We consider social insurance schemes with a two-part benefit formula: a flat (constant) term and a variable term which is proportional to individuals' contributions. The factor of proportionality defines the type of social insurance. We adopt a two-stage political economy approach. At the first, constitutional stage, the type of social insurance is chosen "behind the veil of ignorance", according to the Rawlsian or the utilitarian criterion. At this stage, private insurance can also be prohibited or allowed. At the second stage, tax rate and benefit level are chosen by majority voting. Three main results emerge. First, it may be appropriate to adopt a system which is less redistributive than otherwise optimal, in order to ensure political support for an adequate level of coverage in the second stage. Second, supplementary private insurance may increase the welfare of the poor, even if it is effectively bought only by the rich. Third, the case for prohibiting (supplementary) private insurance may become stronger when the efficiency of private insurance markets increases.

No abstract