Social Security: Universal versus Earnings‐Dependent Benefits

Abstract

I compare the welfare implications of Bismarckian (earnings‐dependent benefits) and Beveridgean (universal benefits) social security systems. Agents are better off with a Beveridgean system than with a comparable Bismarckian system. In an environment with intragenerational homogeneity, the latter results in a larger decrease in net wages; with intragenerational skill heterogeneity, most agents benefit from the more redistributive Beveridgean system. When agents vote for the replacement rates, with intragenerational homogeneity, the resulting Bismarckian system is larger than the Beveridgean system. With intragenerational skill heterogeneity, the Beveridgean system is larger. Overall, agents are worse off with the larger system.