Bismarkcian social security systems are associated with larger public
pension expenditures, a smaller fraction of private pension and lower
income inequality than Beveridgean systems. This paper introduces a
bidimensional voting model to account for all these features. Agents differ
in age, income and their ability to invest in the capital market. The voting
game determines the degree of redistribution of the social security system
- Bismarckian and Beveridgean - and the size of the transfer (for the
low-income retirees). In an economy with three income groups, a small
Beveridgean system is supported by low-income agents, who gain from
its redistribution feature, and high-income individuals, who seek to minimize
their tax contribution and to invest their resources in a private scheme.
Middle-income individuals favor a large earning-related (Bismarckian)
system. Hence large (small) inequality is associated with a small Beverigean
(large Bismarckian) system and a large (small) private system. Additionally,
a Beveridgean system is more likely to emerge when the capital market
provides high returns.