November 2005

IZA DP No. 1831: Why Are More Redistributive Social Security Systems Smaller? A Median Voter Approach

published in: Oxford Economic Papers, 2008, 60 (2), 275-292

We suggest a political economy explanation for the stylized fact that intragenerationally more redistributive social security systems are smaller. We relate the stylized fact to an "efficiency-redistribution" trade-off to be resolved by political process. The inefficiency of social security financing is due to endogenous labor supply. Using data on eight European countries, we find that the stylized fact and a considerable degree of cross-country variation in contribution rates can be explained by the median voter model.