Redistribution in the Welfare State: Between Income Groups or between Age-Groups?

Robert Gál, Hungarian Demographic Research Institute
Marton Medgyesi, TARKI Social Research Institute

The welfare state has multiple roles in developed countries. One role is to redistribute income over the life-cycle, which aims at financing human capital investment and consumption during inactive phases of the lifecourse (childhood and old age) from contributions of those in working age. Another aim of the welfare state is moderating poverty and decreasing income inequality by transferring income from the relatively well-to-do to the poor. Previous research has focused mostly on the role of government redistribution in reducing poverty and inequality. Here our aim is to describe the redistributive role of welfare state programmes by income and by age in the same time and to assess the relative importance of these two factors. Our data (based on Household Budget Surveys) covers government cash transfers as well as in-kind transfers and both direct and indirect taxes in Hungary and selected countries representing different welfare regimes. First we describe concentration of transfers and taxes by income and by age then we decompose net taxes by age and income using the regression-based inequality decomposition method proposed by Fields (2003) and Cowell and Fiorio (2011). Our results show that overall redistribution between age-groups is more important than redistribution between income groups. These results suggest that analysing redistributive role of the welfare state should also include the study of redistribution by age. This is all the more important since current patterns of redistribution between age groups might prove unsustainable in ageing societies.

Presented in Session 117: Pensions and Intergenerational Transfers