A Probabilistic Voting Model of Social Security: The Role of Myopic Agents

Wen, Xue A Probabilistic Voting Model of Social Security: The Role of Myopic Agents. Working Paper # /2012 (Unpublished)

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Abstract

This paper investigates the political incentives for the design of social security policy in competitive democracies with both far-sighted and myopic households. The social security scheme depends on both a payroll tax rate which determines the size of the pension and a Bismarckian factor that represents its redistributive component. By considering a probabilistic voting setting of electoral competition, we analyze the political game between office-seeking politicians and self-interested citizens. Politicians can win the election by targeting the voters in each group by trading off the generosity and the redistribution degree of the public pension system. In the political equilibrium, the contribution rate is U-shaped with respect to the Bismarckian factor. Moreover, the equilibrium Bismarckian factor unambiguously decreases with the proportion of myopic agents, whereas the equilibrium payroll tax rate curve is U-shaped with respect to the proportion of myopic agents.

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