Political complements in the welfare state: Health care and social security

Abstract

All OECD countries target a large majority of their welfare spending to the elderly, through public pensions and health care programs. Spending in both programs has largely increased in the past decades — often more than the share of elderly in the population. We suggest that these phenomena may be due to political complementarities between these two transfer programs. We show that these two programs may coexist, because public health care may increase the political constituency in favor of social security, and vice-versa. Specifically, public health decreases the absolute longevity differential between low and high-income individuals, therefore rising the retirement period and the total pension benefits of the former relatively to the latter. This effect increases the political support for social security among the low-income young. We show that in a political equilibrium of a two-dimensional majoritarian election, a voting majority of low-income young and retirees supports a large welfare state; the composition between public health and social security is determined by intermediate (median) income types, who favor the contemporaneous existence of these two programs, since public health increases their longevity enough to make social security more attractive. Technological improvements in health care strengthens this complementarity and lead to more welfare spending.