Demography and intergenerational public transfers: a political economy approach

Résumé

This paper aims at studying how demographic changes impact the public provision of social security and publicly-funded education, when these policies are determined as the outcome of a vote that involves both contributory and beneficiary generations. To this end, I set up an OLG model with production and intragenerational heterogeneity, in which these two intergenerational transfers are funded through taxes on the working generation. Individual preferences for taxation are aggregated through probabilistic voting. Contrary to previous studies in the field, which need to posit the existence of successive contracts between generations, the emergence and continuation of intergenerational transfers only results here from the ability of each age group to tip the scales of redistribution to its side at each given period. Under the assumption of non-strategic voting, and picking specific functional forms, I derive predictions on the impact of fertility and mortality rate changes on the level and composition of public spending, as well as on the potential of the economy to accumulate physical and human capital. In particular, population ageing points out to a rising tax burden in the future. I put these predictions into perspective with historical data on the secular evolution of public spending.