The aging population and the size of the welfare state: Is there a puzzle?

Abstract

This paper tests several leading hypotheses on determinants of government expenditure. The purpose is to avoid omitted variables bias by testing the prominent theories in a comprehensive specification, to identify persistent puzzles for the current set of theories, and to explore those puzzles in greater depth by looking at the composition of government expenditure and the level of government at which it takes place as well as its magnitude. Using Global Financial Statistics data from the IMF covering over 100 countries from 1970-2000, I look at cross-sectional and inter-temporal variation in government expenditure and both individual categories of expenditure (such as defense, education, health care) and different levels of government (central, state, and local). Among other results, I find a new explanation for Wagner's Law, widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in expenditures, that a great deal of the expenditure associated with increased trade openness is not in categories that explicitly insure for risk, and evidence that both political access and income inequality affect the extent of social insurance. * I am endebted to Romain Wacziarg for multiple readings and to two anonymous referees for thorough and insightful comments.

Does aging affect preferences for welfare spending? A study of peoples' spending preferences in 22 countries, 1985–2006

“…Some of these studies rely on data from a single country, including the USA (MacManus 1995 (2002) argue that a higher old-age dependency ratio causes lower labor tax-rates and less generous social transfers. This result has been heavily criticized in several papers including Disney (2007), Simonovits (2007) and Shelton (2008). across all age-groups.…”

The political economy of public investment when population is aging: A panel cointegration analysis

“…A similar variable, using 70 instead of 65 as threshold age, has recently been employed by Krieger and Ruhose (2013) to study the impact of population aging on family benefits and educational expenditures. Related empirical studies have operationalized population aging using old-age dependency ratios (Shelton, 2008;Tepe and Vanhuysse, 2009) or the share of elderly to total population (Harris et al, 2001;Poterba, 1997;Sanz and Velázquez, 2007). However, we think that these indicators are less appropriate for our purposes, because they capture relative voting power of elderly citizens only indirectly.…”

“…In the last decades, empirical studies have demonstrated that population aging in fact influences government spending components including social welfare, health and education (Harris et al, 2001;Krieger and Ruhose, 2013;Poterba, 1997;Sanz and Velázquez, 2007;Shelton, 2008;Tepe and Vanhuysse, 2009). Furthermore, evidence based on survey data reveals age-specific preferences regarding welfare and educational spending (Boeri et al, 2001;Bonoli and Häusermann, 2009;Cattaneo and Wolter, 2009;Sørensen, 2013).…”

Extending the concept of the resource curse: Natural resources and public spending on health

“…Easterly and Levine (1997) report a strong negative correlation between ethnic fragmentation and the provision of public goods in African countries. Shelton (2008) finds that central government expenditures on health care are lower in countries with greater ethnic fractionalization. We control for this effect by adding an ethnic fractionalization index developed by Desmet et al (2012).…”