Working Paper #2011-14 – Social Security: Universal vs. Earnings-Dependent Benefits

Department of Economics
University of Delaware
Working Paper #2011-14

Social Security: Universal vs. Earnings-Dependent Benefits

Jorge Soares

ABSTRACT

I compare the welfare implications of implementing Bismarckian and Beveridgean social security systems.

In an overlapping generations environment with intragenerational homogeneity, agents can be better off with a system with universal benefits than with a comparable system with earnings-dependent benefits because the latter generates a stronger decrease in net wages. Once I allow for intragenerational skill heterogeneity, agents are on average better off with the more redistributive universal benefits system.

I then let agents vote for the replacement rates in a democratic process. In the absence of intragenerational heterogeneity, a larger social security system is implemented when benefits are earnings-dependent than when they are universal resulting in a larger decrease in net wages; this makes young agents worse off with earnings-dependent benefits. In the presence of intragenerational skill heterogeneity, the reverse occurs and agents fare on average better in the long-run when benefits are earnings-dependent. However, because of its redistributional effects, agents born at the time of implementation are on average better off with an universal benefits system.

JEL Codes:E62, H55

Keywords:  social security, universal benefits, earnings-dependent benefits, Bismarckian social security system, Beveridgean social security system, voting, welfare.