Pay-as-you-go pensions and the political power of the retirees

In this paper, we explain why the old manage to obtain favourable pension policies whereas they belong to a minority in the population. The argument relies on the multidimensional nature of the political process. Indeed, we consider a two-dimensional collective choice problem. The first of these choices is the level of the contribution rate to the Pay-As-You-Go pension system. The second is a non economic decision, unrelated to the pension system. Using a political agency model, we show that, as soon as the retirees are sufficiently numerous, the equilibrium tar rate may be higher than the tax rate preferred by the young, who yet constitute a majority in the population. Classification JEL : D72, H55.