Political sustainability and the design of social insurance

Abstract

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.

Social insurance competition between Bismarck and Beveridge

“…It does not only concern tax and transfer policies per se, but extends to social insurance systems at least as long as they involve some redistribution. 1 Political scientists tend to classify social protection systems according to the relation between contributions and benefits. They distinguish three economic systems on the basis of their benefit rules.…”

“…A second reason why even a utilitarian social planner would be in favor of a mitigated system is the need of political support. In short, by involving the middle class in the social protection system, it is possible to obtain its support in favor of rather generous programs; see Casamatta et al [1]. 4 The benefit rule has also been shown to affect the equilibrium unemployment rate in the efficiency wage literature; see Goerke [9].…”

Means testing versus basic income: The (lack of) political support for a universal allowance

“…In this paper we leave the realm of normative public economics, and show that there is a purely positive explanation for the failure to implement a basic income scheme, namely the lack of political support. 2 This may at first sound surprising because universality of a system is often justified by the necessity to draw political support; see, e.g., Casamatta, Cremer and Pestieau (2000). We show in a very simple setting that if society votes on the type of system, its generosity as well as the "severity" of means testing (if any), a basic income system could only emerge in the political equilibrium under very strong and empirically implausible conditions.…”

“…As the indirect utility function of a type- agent is concave in , preferences 4 are single-peaked. 3 Solving equation (3.1) for the income tax rate yields…”

The political economy of mitigation and adaptation

“…Furthermore, we compare welfare levels under the different tax regimes and the social optimum. In this sense, the following analysis can be understood as an initial stage in which a constitutional planner (as in Cremer et al, 2000) chooses the regime that maximizes overall welfare, given that mitigation and adaptation levels are determined by majority voting.…”