The implementation and the sustainability of intergenerational redistributive programs are crucial issues in the current political debate. On the one hand, demographic changes alter the economic nature underlying the enforcement of redistributive welfare programs; on the other hand public policies can be manipulated for political purposes, turning out to be more responsive to political pressures than to changes in economic environment. For this reasons, it becomes critical to explore the conditions under which intergenerational transfers, as outcome of a political voting game, can be implemented and why the welfare system developed so far has became a stable institution if modern society.
In most developed democracies the political balance between different age-cohorts has shifted in favor of the elderly. Between 1975 and 1990, the average OECD age of median voter has increased three times faster than in the previous 30 years (OECD, 2007). One of the main implications of this trend is that the conflicts over the public resources allocation arise not only on the economic characteristics and political affi liation but also on the evolution of socio-demographic aspects. Starting from this stylized fact, we focus on the difference in age as the relevant source of heterogeneity to analyze the implementation of intergenerational redistributive programs in democratic societies.
The conflicts between age-classes arise not only because of different lifetime span but also for the difference in ownership of productive factors as well as in sources of income. While elderly are mainly endowed with physical capital, working-age adults own human capital accumulated when young. As a consequence, the conflict between age-classes is likely to arise on a broad set of fiscal instruments generating different configurations of welfare programs in which economic and political factors may interact as complement or substitute.
Given the special focus of our analyses on the age-class heterogeneity and the inter-classes political conflicts, among all the redistributive programs, we point out the relevant role played by two critical age-target policies: public higher education spending and PAYG social security. These intergenerational redistributive programs, strongly interrelated each other, have deep redistributive impact and have recently even more experienced strong political support in modern democracies. Following the terminology adopted by Rangel (2003), we refer to public higher education spending as forward (i.e. productive) intergenerational transfers and to unfunded pension as backward (i.e. pork barrel and log-rolling) intergenerational transfers.
The former are transfers going forward in time generating a cost for the present generation and a benefit for the future one, being crucial for future productive capacity through human capital production. By contrast, the latter are transfers going backward generating a cost for the present generation and a benefit for the past one, giving adults a claim on the future productivity of their young. This different timing of exchange generates different incentive problems. Furthermore, the aging of population plays a relevant role in stressing even more the timing of the intergenerational bargaining from both a demographic and a political point of view.
On one hand, demographic aging has a direct economic impact on the financial solvency of the public system, since the fraction of recipients the retirees tends to increase, while the share of contributors the workers tends to decrease. On the other hand, the political ideology influence of the elderly age-class in the electoral competition process (i.e. political aging) has an indirect economic impact through the electoral vote. As the population ages, so do the voters. In democratic society population aging leads to an increase in the political representation of the elderly agents, who gather a larger share of voters1. As politicians seek re-election, they will try to address the needs of the crucial voting group the old with generous social security policies.
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A Dynamic Politico-Economic Model of Intergenerational Contracts
