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Oxford Economic Papers Advance Access published online on November 28, 2007
Oxford Economic Papers, doi:10.1093/oep/gpm043
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© Oxford University Press 2007 All rights reserved

Why are more redistributive social security systems smaller? A median voter approach

Marko Koethenbuerger*, Panu Poutvaara{dagger}, and Paola Profeta{ddagger}

* Center for Economic Studies (CES), University of Munich, Germany
{dagger} Department of Economics, University of Helsinki, P.O. Box 17 (Arkadiankatu 7), FI-00014 Helsinki, Finland and CEBR, Copenhagen Business School, Denmark; e-mail: panu.poutvaara{at}helsinki.fi
{ddagger} DIAPUM and Econpubblica, Università Bocconi, Italy


  Abstract

One of the stylized facts of unfunded social security programs is that programs are larger in size, measured relative to the GDP, the tighter the link between pension claims and past earnings. We provide a political economy explanation of this stylized fact in a median voter model, where people vote on the social security tax rate. We compare pension systems with flat-rate and earnings-related benefit formulas. Only flat-rate benefits redistribute within a generation from high to low income groups. If labor supply is endogenous, they also imply larger efficiency costs than earnings-related schemes. Using data on eight European countries, we find that the median voter is typically middle-aged with high income. For these voters, earnings-related systems are more attractive both because of less intragenerational redistribution and lower distortions in labor supply. The median voter model is also able to account for a considerable degree of cross-country variation in contribution rates.

Key Words: JEL classifications: • H55 • D72


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