The Aging of the Population and the Size of the Welfare State

Data for the United States and countries in Western Europe indicate a negative correlation between the dependency ratio and both labor tax rates and the generosity of social transfers, after controlling for other factors that influence the size of the welfare state. This is despite the increased political clout of the dependent population implied by the aging of the population. This paper develops a model of intra-and inter-generational transfers and human capital formation which addresses this seeming puzzle. We show that with democratic voting, a higher dependency ratio can lead to lower taxes or less generous social transfers.Aging;tax rate, dependency, dependency ratio, unemployment, social security, welfare state, tax rates, social transfers, labor income, unemployment rate, retirement, payroll tax, health care, social benefits, labor force, social security systems, pension, payroll taxes, social insurance, pensions, social security system, social security benefits, unemployment rates, pay-as-you-go system, welfare system, dependents, individual retirement, retirement period, social pension, old-age pensions, labor input, individual retirement accounts, retirement accounts, elderly, retirement income, social security tax, unemployment benefits, welfare benefits, unemployment insurance, disability