The Aging Population and the Size of the Welfare State

Abstract

Data for the United States and countries in Western Europe indicate a negative correlation between the dependency ratio and labor tax rates and the generosity of social transfers, after controlling for other factors that influence the size of the welfare state. This is despite the increased political clout of the dependent population implied by the aging of the population. This paper develops an overlapping generations model of intra-and inter-generational transfers (including old-age social security) and human capital formation which addresses this seeming puzzle. We show that with democratic voting, an increase in the dependency ratio can lead to lower taxes or less generous social transfers.

Redistribution and Insurance in Welfare States around the World

“…This can be explained by the growing share of elderly opting in favor of annually more redistributive systems, collecting social security contributions and taxes to fund public pensions. Reformulating the trade-off identified by Razin et al (2002), we conclude that a greater number of retirees increases the demand for insurance, but decreases the demand for long-run redistribution. Source: Own calculations, Cross-National Equivalent File (CNEF).…”

“…The negative association between long-run redistribution and elderly share which implies a positive assocation between income smoothing and elderly share corroborates Tabellini (2000) and Moene and Wallerstein (2001), who find a positive assocation between government spending for insurance and share of elderly. Reformulating the trade-off identified by Razin et al (2002), we might thus conclude that a greater number of retirees increases the demand for insurance. The only exception of a small positive effect arises for p = 4 using the Theil.…”

“…In contrast, migration Dahlberg et al (2012) and racial heterogeneity Luttmer (2001) is found to empirically reduce the demand for redistribution. Razin et al (2002) identify a redistribution trade-off in aging societies: The greater number of retirees increases the demand for benefits, but reduces the willingness of the working-age population to support redistribution as they are net loosers from increased benefits for the elderly. While Tabellini (2000) and Moene and Wallerstein (2001) find a positive association between elderly share and spending for social insurance, Razin et al (2002) show that an increasing elderly share can lead to lower taxes and less generous social transfers.…”

“…Razin et al (2002) identify a redistribution trade-off in aging societies: The greater number of retirees increases the demand for benefits, but reduces the willingness of the working-age population to support redistribution as they are net loosers from increased benefits for the elderly. While Tabellini (2000) and Moene and Wallerstein (2001) find a positive association between elderly share and spending for social insurance, Razin et al (2002) show that an increasing elderly share can lead to lower taxes and less generous social transfers. Our approach enables us to disentangle redistribution and insurance and to investigate potentially different directions of the elderly share effect on annual redistribution and long-run redistribution.…”

“…The theoretical and empirical literature on the effect of the elderly share on redistribution is ambiguous. Razin et al (2002) identify a trade-off due to aging: The greater number of retirees increases the demand for benefits, but reduces the willingness of the working-age population to support redistribution as they are net loosers from increased benefits for the elderly. Our results are in line with the positive effects found by Tabellini (2000) and Moene and Wallerstein (2001).…”