A Probabilistic Voting Model of Social Security with Myopic Agents

Abstract

This paper investigates the political incentives for the design of a Pay-as-you-go public pension system in a probabilistic voting model with both far-sighted and myopic agents. People vote for a payroll tax rate determining the size of the pension system and a Bismarckian factor representing the redistribution degree of the system. The pension system acts as a redistribution mechanism and a commitment device. The far-sighted households prefer a contributive social security system. The myopic households prefer a more redistributive pension system but not necessarily a more generous pension system due to the trade-off between redistribution and efficiency. Office seeking politicians can target the far-sighted and myopic groups by leveraging the generosity and the redistribution degree of the social security system. In the political equilibrium, the payroll tax rate is U-shaped with respect to the Bismarckian factor, which can partially explain the political puzzle that why, in practice, Bismarckian pension systems tend to be associated with a larger pension base.

Keywords: Myopia, Social Security, Probabilistic Voting

JEL Classification: H55, D91, H30