Age Bias in Fiscal Policy: Why Does the Political Process Favor the Elderly?

Abstract

Across countries, government expenditures tend to favor the elderly. This paper provides a political economy explanation for this phenomenon. I consider the classic problem of dividing a fixed payoff in an overlapping generations setting. Any share of the payoff can be given to any generation. Using a new solution concept for majority rule in dynamic settings (Bernheim and Slavov, 2006), I demonstrate that policies favoring the old are easier to sustain politically than other policies. This result appears across a broad class of majoritarian institutions and thus reflects general forces at work in the political process. Age bias arises because it is easy to induce the young to support policies favoring the elderly by promising them large rewards later in their lives. On the other hand, older generations cannot be rewarded in a similar manner. This asymmetry helps to generate broad political support for large transfers to older individuals.