By Charlotte Bartels and Dirk Neumann
In this blog post, the authors of a new Stone Center Working Paper discuss how long-run and annual redistribution diverge in various welfare states, and the implications for policymaking.
Welfare states around the world engage in a high level of income redistribution with the goal of reducing income inequality within their populations. In addition to redistribution, however, welfare states also insure their citizens against various risks, such as sickness, disability, unemployment, and loss of income after retirement, thus stabilizing their populations’ incomes over time.
Accordingly, a substantial share of annual redistribution will turn out to serve individual income stabilization in the long run. For instance, contributions to public pension systems reduce income differences in a society in a given year, but are paid back during retirement. However, these effects become evident only when properly measuring the extent of actual redistribution between citizens over a period longer than one year.
In our new Stone Center Working Paper, “Redistribution and Insurance in Welfare States around the World,” we investigate to what extent long-run redistribution diverges from annual redistribution in welfare states of different types. Exploiting panel data from the Cross-National Equivalent File (CNEF) for Australia, Germany, South Korea, Switzerland, the United Kingdom, and the United States, we find that welfare states like Germany, which typically engage in a high level of redistribution in an annual context, actually achieve relatively less redistribution between individuals in the long run than the United Kingdom or the United States.
Our findings lend support to the so-called “paradox of redistribution.” Given that we are analyzing democratic welfare states, we interpret redistribution measures as being — at least partly — the result of the populations’ demand for (long-run) redistribution. A high level of redistribution, for example, might be supported by the population if welfare states also offer high insurance. Particularly, the elderly might support more redistributive systems that collect social security contributions and taxes on an annual basis to fund their public pensions. We investigate the determinants for redistribution in the six selected countries and find support for the hypothesis that having a larger population of retirees increases the demand for annual redistribution and insurance but decreases the demand for long-run redistribution. On the other hand, comparably young populations, as in the United States, may show more support for long-run redistribution between individuals and demand less income stabilization.
About the Authors:
- Charlotte Bartels is an associated researcher with The GC Wealth Project, a central part of the Stone Center’s work, and is a research associate in the German Socio-Economic Panel (SOEP). Her work focuses on inequality and distribution.
- Dirk Neumann is an economist at the German Federal Ministry for Economic Affairs and Energy. His research focuses on the analysis of tax-transfer policies.
Related Research: “Redistribution and Insurance in Welfare States around the World,” by Charlotte Bartels and Dirk Neumann, Stone Center Working Paper Series. No. 22.