October 1, 2001
This paper analyses the political support for social insurance that includes elements of redistribution when there exists an imperfect private insurance alternative. Individuals differ both in their income and risk. The social insurance is compulsory and charges an income-related contribution with pooling of risks. The private insurance is voluntary and charges a contribution based on individuals. However due to the adverse selection problem, private insurance companies provide only partial insurance. Adopting a non-expected utility model, we show that there is a general majority support for social insurance and that this support is increasing with risk aversion and correlation between risk and income. We also show that a mixed insurance is politically impossible, regardless of the degree of redistribution of social insurance and the joint distribution of risk and income in the population. Lastly, we analyse how the political support for social insurance is affected by any change in its redistributive component and the possibility of using genetic tests.
J.E.L classification codes: H23, H50
Keywords:Majority rule, Social insurance, Redistribution, Adverse selection