Demographic shock and social security: A political economy perspective

We assume that individual voters differ not only according to age but also productivity. In the steady state, workers with wages in the intermediate r ange join the retired persons to form a majority and vote for a positive le vel of social security. When a shock decreases population growth, entrenche d interests can constrain majority voting decisions and prevent reforms in the name of entitlements. We show that from a Rawlsian viewpoint it may be desirable to rely on these entitlements to protect the low wage earners of the transition generations. However, when the possibility of fixing a basic pension is introduced, it constitutes a better instrument than entitlement s.