Do elderly workers retire early voluntarily, or are they induced to retire by their employers? We consider an exogenous shock due to a trade agreement between Switzerland and the EU—the mutual recognition agreement (MRA), which improved access to the EU market for Swiss firms. A vast literature suggests that these trade liberalization episodes lead firms to relocate and to innovate in order to increase productivity. This may lead to lower demand of skill obsolescent elderly workers and to higher demand of skilled workers. We use a difference in differences approach on Swiss Labor Force Survey data to compare early retirement behavior in treated MRA and control (non-MRA) industries in three periods (pre-liberalization, announcement, and implementation). We find an increase in early retirement in the MRA sector during the announcement period, which is stronger for larger firms, for exporting firms and for firms with a large age wage gap. We also find an increase in the share of graduates in all age groups. Wages are largely unaffected.

We study how family culture has affected the adoption and generosity of public pension systems. Our theoretical framework suggests that inheritance rules shape filial obligations to parents, and thus the within-family intergenerational transmission of resources. In countries with egalitarian inheritance rules, inheriting children represent a large share of the population, and support generous pension systems; in countries with nonegalitarian inheritance rules, a majority of noninheriting individuals prefer basic pension systems. An empirical cross-country analyses using historical data on inheritance rules support these predictions. These results are robust to controlling for alternative legal, religious, demographic, economic, and political explanations. Evidence from individual (General Social Survey) data confirms our findings: US citizens whose ancestors came from countries featuring egalitarian inheritance rules rely more on the government as a provider of old age security income.

We study the patterns of political selection in majoritarian versus proportional systems. Political parties face a trade off in choosing the mix of high- and low-quality candidates: high-quality candidates are valuable to voters, and thus help to win elections, but they crowd out loyal candidates, who are most preferred by the parties. Under proportional representation, politicians’ selection depends on the share of swing voters in the entire electorate. In majoritarian elections, it depends also on the distribution of competitive versus safe (single-member) districts. We show that a majoritarian system with only a few competitive districts is less capable of selecting good politicians than a proportional system. As the share of competitive districts increases, the majoritarian system becomes more efficient than the proportional system. However, for a large enough share of competitive districts, a non-monotonic relation arises: the marginal (positive) effect of adding high-quality politicians on the probability of winning the election is reduced, and highly competitive majoritarian systems become less efficient than proportional ones in selecting good politicians. 

We analyze political selection in a closed list proportional system where parties have strong gate-keeping power, which they use as an instrument to pursue votes. Parties face a trade-off between selecting loyal candidates or experts, who are highly valued by the voters and thus increase the probability of winning the election. Voters can be rational or behavioral. The former cares about the quality mix of the elected candidates in the winning party, and hence about the ordering on the party list. The latter only concentrate on the quality type of the candidates in the top positions of the party list. Our theoretical model shows that, to persuade rational voters, parties optimally allocate loyalists to safe seats and experts to uncertain positions. Persuading behavioral voters instead requires to position the experts visibly on top of the electoral list. Our empirical analysis, which uses data from the 2013 National election in Italy—held under closed list proportional representation—and from independent pre-electoral polls, is overall supportive of voters' rational behavior. Loyalists (i.e., party officers or former members of Parliament who mostly voted along party lines) are overrepresented in safe positions, and, within both safe and uncertain positions, they are ranked higher in the list. 

Major economic crises may promote structural reforms, by increasing the cost of the status quo, or hinder them, by inducing more demand for protection. The ideology and political partisanship of the ruling government may be crucial in determining the prevailing course of action. In good times, conservative parties are typically pro-reform. However, do these parties try to exploit periods of crisis to carry out their reforms? Do social-democratic parties support even greater social protection? To answer these questions, this paper uses indicators of structural reforms in the labor, product, and financial markets for 25 OECD countries over the 1975–2008 period. The empirical analysis confirms the ambiguous effect of crises: product markets are liberalized, but financial markets become more regulated. Partisan politics also matters, as right parties are associated with more pro-market reforms. Yet, crises modify partisan politics: right-wing parties refrain from promoting privatizations, and oppose the introduction of greater financial market regulations. By contrast, center parties liberalize and trim unemployment benefits generosity, while left parties privatize. Furthermore, weak, fractionalized governments, which are associated with more regulated product markets, are also more likely to liberalize during a crisis. 

We provide a long-term perspective on the individual retirement behavior and on the future of retirement by emphasizing the role of (negative) income effects. We consider a political economic theoretical framework, with actuarially “fair” and “unfair” early retirement schemes, and derive a political equilibrium with positive social security contribution rates and early retirement. A reduction in the wages in youth, consistent with the recent labor market trends since the massive introduction of temporary jobs, induces workers to postpone retirement, and—in the “unfair” system—leads to lower contribution rates. A reduction in the growth rate of the economy has opposite effects on the retirement decisions, leading—in the “unfair” system—to more early retirement. Aging induces a negative income effect, but has also an opposite political effect on social security contributions and retirement decisions. For an actuarially “fair” social security system, we provide conditions for the political effect to dominate; in an “unfair” scheme, numerical simulations confirm a slight predominance of the political effect, as contribution rates increase. These results may shed some light on the future of early retirement in aging societies. 

We document the presence of a trade-off in the labor market between the protection of jobs and the support offered to unemployed people. Different countries’ locations along this trade-off represent stable political-economic equilibria. We develop a model in which individuals determine the mix of job protection and support for the unemployed in a political environment. Agents are heterogeneous along two dimensions: employment status (insiders and outsiders) and skills (low and high). Unlike previous work on the political economy of labor market institutions, we emphasize the role of job protection and unemployment benefits in the wage-setting process. A key implication of the model is that flexicurity configurations with low levels of job protection and high levels of support to the unemployed should emerge in the presence of a highly educated workforce. Panel regressions of countries’ locations along this institutional trade-off are consistent with the implications of our model. 

In a stochastic two-period OLG model, featuring an aggregate shock to the economy, ex-ante optimality requires intergenerational risk sharing. We compare the level of intergenerational risk sharing chosen by a benevolent government and by an office-seeking politician. In our political system, the transfer of resources across generations is determined as a Markov equilibrium of a probabilistic voting game. Low realized returns on the risky asset induce politicians to compensate the old through a PAYG system. This political system typically generates an intergenerational risk sharing scheme that is (i) larger, (ii) more persistent, and (iii) less responsive to the realization of the shock than the social optimum. This is because the current politician anticipates her transfers to the elderly to be compensated by future politicians through offsetting transfers, and hence overspends. 

In the last century, most countries have experienced both an increase in pension spending and a decline in fertility. We argue that the interplay of pension generosity and development of capital markets is crucial to understand fertility decisions. Since children have traditionally represented for parents a form of retirement saving, particularly in economies with limited or nonexistent capital markets, an exogenous increase of pension spending provides a saving technology alternative to children, thus relaxing financial (saving) constraints and reducing fertility. We build a simple two-period OLG model to show that an increase in pensions is associated with a larger decrease in fertility in countries in which individuals have less access to financial markets. Cross-country regression analysis supports our result: an interaction between various measures of pension generosity and a proxy for the  development of financial markets consistently enters the regressions positively and significantly, suggesting that in economies with limited financial markets, children represent a (if not the only) way for parents to save for old age, and that increases in pensions amount effectively to relaxing these constraints.

Conventional economic wisdom suggests that because of the aging process, social security systems will have to be retrenched. In particular, retirement age will have to be largely increased. Yet, is this policy measure feasible in OECD countries? Since the answer belongs mainly to the realm of politics, I evaluate the political feasibility of postponing retirement under aging in France, Italy, the UK, and the US. Simulations for the year 2050 steady state demographic, economic and political scenario suggest that retirement age will be postponed in all countries, while the social security contribution rate will rise in all countries, but Italy. The political support for increasing the retirement age stems mainly from the negative income effect induced by aging, which reduces the profitability of the existing social security system, and thus the individuals' net social security wealth. 

All OECD countries target a large majority of their welfare spending to the elderly, through public pensions and health care programs. Spending in both programs has largely increased in the past decades — often more than the share of elderly in the population. We suggest that these phenomena may be due to political complementarities between these two transfer programs. We show that these two programs may coexist, because public health care may increase the political constituency in favor of social security, and vice-versa. Specifically, public health decreases the absolute longevity differential between low and high-income individuals, therefore rising the retirement period and the total pension benefits of the former relatively to the latter. This effect increases the political support for social security among the low-income young. We show that in a political equilibrium of a two-dimensional majoritarian election, a voting majority of low-income young and retirees supports a large welfare state; the composition between public health and social security is determined by intermediate (median) income types, who favor the contemporaneous existence of these two programs, since public health increases their longevity enough to make social security more attractive. Technological improvements in health care strengthens this complementarity and lead to more welfare spending.

Ageing has opposite economic and political effects on the size of the welfare state. On one side, it tends to decrease the profitability of a welfare state that features a PAYG pension system, thus inducing individuals to prefer a smaller system; on the other side, the pivotal (median) voter becomes older (or poorer) and hence more willing to support a larger system. The overall effect is thus ambiguous. We show that specific features of the welfare system, such as its composition and the redistributive design of social security, may change the magnitude of the economic effect and thus of the overall impact of ageing on the size of the welfare state. 

This paper argues that social security enjoys wider political support than other welfare programs because: (i) retirees constitute the most homogeneous voting group, and (ii) the intragenerational redistribution component of social security induces low-income young to support this system. In a dynamically efficient overlapping generation economy with earnings heterogeneity, we show that, for sufficient income inequality and enough elderly in the population, a welfare system composed of a within-cohort redistribution scheme and an unfunded social security system represents the political equilibrium of a two-dimensional majoritarian election. Social security is sustained by retirees and low-income young; while intragenerational redistribution by low-income young. Unlike unidimensional voting model, our model suggests that to assess how changes in inequality affect the welfare state, the income distribution should be decomposed by age groups. 

Early retirement was introduced after the appearance of redundant middle-aged workers, not entitled to pensions. This distortionary policy reduces human capital accumulation and economic growth, but shifts part of the tax burden on future generations. Why was it adopted? Alternative policies, which do not introduce long-term distortions, but impose a larger cost on the current generation of workers, were blocked by a coalition of high income workers, who did not plan to retire early, but sought to reduce the current tax burden, and low income workers, who expected to retire early and to benefit from the early retirement pension. 

A reform process is underway in Italy. Achieving financial sustainability of the social security system has been the first objective characterizing the reforms of 1990s, but these have also introduced rules which aim at a more actuarially fair system. Indeed the social security system prevailing in Italy, financed on a PAYG basis, was, at the end of the 1980s, clearly unsustainable and also extremely unfair to some group of workers, enacting a form of perverse redistribution which is typical of ‘final salary’ defined benefit systems. It was also a system characterized by strong incentives to retire early. In this paper we briefly describe the different regimes of the Italian pension system in its recent history and focus on some aspects of the reform process taking place during the 1990s. Since economists and policy makers are still struggling to assess the results and the long-term effects of these reforms we provide both a survey of this debate and some fresh evidence on the evaluation of the policy changes. We carry out this analysis with a particular emphasis on two aspects which are relevant in the debate. On the one hand we stress the role of economic incentives and the overall fiscal implications of changing the systems as well as these incentives. On the other hand we emphasize the intergenerational considerations and the political implications of the ageing process of the Italian population. From our description it emerges that the overall design of the Italian reform is probably a good one, and yet some more steps need to be taken to speed up some of the positive effects of the reform process that, due the adverse demographic trends affecting PAYG systems as well as the political arena, could easily evaporate.

What is the future of social security systems in OECD countries? We suggest that the answer belongs to the realm of politics, and evaluate how political constraints and ageing shape the social security system. The increasing ratio of retirees to workers lowers the rate of returns of unfunded pay‐as‐you‐go social security, and induces citizens to prefer smaller such systems and a larger role for private savings. An ageing electorate, however, increases the relevance of pension spending on the agenda of office‐seeking policy‐makers and tends to increase the size of unfunded pension systems. Calibrating the strength of these effects for France, Germany, Italy, Spain, the UK and the US, we find that the latter political aspect always outweighs the former. The relative size of the effects depends on country‐specific characteristics and modelling details: when labour market distortions are accounted for the political effect still dominates but becomes less sizeable; the different redistributive character of pension systems and the strength of family ties also play a role in determining politico‐economic outcomes. A higher effective retirement age always decreases the size of the system chosen by the voters, often increases its generosity, and may be the only viable solution to pension system problems in the face of population ageing. 

The introduction of (inequity adverse) fair agents in a simple redistributive voting game reduces the political relevance of the middle class and increases the equilibrium level of redistribution. Interestingly, some of the predictions in Meltzer and Richard [J. Polit. Econ. 89 (1981) 914–927] are affected: a rise in the income inequality between poor and middle class may not decrease redistribution, because of the additional support for redistribution provided by the fair agents. 

Generous early retirement provisions account for a large proportion of the drop in the labor force participation of elderly workers. The aim of this paper is to provide a positive theory of early retirement. We suggest that the political support for generous early retirement provisions relies on: (i) the existence of a significant group of elderly workers with incomplete working history, who are not entitled to an old age pension; and (ii) the intragenerational redistribution built in this provision via the utility from leisure that induces low-ability workers to retire early. The majority which supports early retirement in a bidimensional voting game is composed of elderly with incomplete working history and low-ability workers; social security is supported by retirees and low-ability workers. 

We study the impact of fiscal constitutions on intergenerational transfers in an overlapping generation model with linear technology. Transfers represent outcomes of a voting game among selfish agents. Policies are decided one period at a time. Majoritarian systems, which accord voters maximum fiscal discretion, sustain all individually rational allocations, including dynamically inefficient ones. Constitutional rules, which give minorities veto power over fiscal policy changes proposed by the majority, are equivalent to precommitment. These rules eliminate fluctuating and dynamically inefficient transfers and sustain weakly increasing transfer sequences that converge to the golden rule. The golden rule allocation is the unique outcome of Markov constitutional rules.

Calculations of the median voter’s return from “investing” in Social Security suggest that for a majority of voters the U.S. Social Security system provides higher ex-post, or actual, returns than alternative assets. 

This paper surveys the literature on the political economy of social security. We review models that address the following questions: (i) Why do social security programs that transfer resources from young and middle-aged workers to the elderly exist? (ii) What are the economic and political interactions between social security systems and other redistributive programs of the welfare state? (iii) How does political sustainability shape social security systems in a dynamic economic and demographic environment, and which social security reforms are politically feasible? We characterize this literature along two lines: economic factors and political institutions. We then assess the empirical relevance of the models by comparing their implications to stylized social security facts. 

This paper examines how political constraints can shape the social security system under different demographics. A steady-state mapping between relevant economic and demographic variables and the social security tax rate resulting from a majority voting is provided. I calibrate an OLG model to the U.S. economy. Calculations using census population and survival probabilities projections and 1961–96 labor productivity growth deliver a social security tax rate of 13.3% (currently 11.2%) and a 54% replacement ratio (51.7%). This result reflects the median voter's aging, from 44 to 46 years, which dominates the decrease in the dependency ratio, from 5.45 to 4.72. 

This paper analyzes the impact of alternative political institutions on sustainable fiscal policies. We study the choice of intergenerational transfers as outcomes of an infinite social security game among successive selfish median voters. Majoritarian systems accord the current median voter maximum fiscal discretion but no direct influence over future policy. This political arrangement sustains, among others, dynamically inefficient transfers and volatile, non-stationary sequences. Constitutional “rules” award to the minorities veto power over fiscal policy changes proposed by the majority. This unanimity provision is equivalent to partial precommitment. Under constitutional “rules,” sustainable fiscal policies feature Pareto efficient, non decreasing transfer sequences.