A Positive Theory of Social Security

In many countries, social security accounts for a large fraction of the government budget. Why is this so, given that at any point in time the number of recipients of social security benefits is smaller than the number of contributors? In the overlapping‐generations model studied in this paper, all individuals currently alive vote on social security in every period. In equilibrium, the size of social security is larger, the greater is the proportion of elderly people in the population, and the greater is the inequality of pre‐tax income within each generation. Both predictions of the theory are supported by the empirical evidence in cross‐country data.