Rethinking the Welfare State under Political Constraints in a Changing World

forthcoming

Initially intended to shield individuals from adverse macroeconomic shocks, welfare programs such as social security have grown significantly over time, evolving into politically entrenched entitlements. Demographic changes, including declining fertility rates and increasing life expectancy, have further fueled their expansion, raising fiscal pressure. While retrenchment reforms are recognized as essential for economic sustainability, strong public support for welfare programs often renders them politically unviable. How should an optimal welfare state be designed in a changing world to balance economic sustainability and political viability? RESTATE will develop a new theoretical framework to rethink the design of an optimal welfare state, accounting for intergenerational redistribution and addressing political frictions that arise from the fiscal authority’s limited ability to enforce participation, thus departing from traditional frameworks that assume mandatory programs. The optimal welfare state must balance a fundamental trade-off between maximizing welfare, incentivizing participation, and honoring entrenched entitlements. RESTATE will tackle this complex trade-off across diverse fiscal domains explored in three interconnected work packages, combining theoretical and empirical analysis. Work Package 1 will study how optimal social security systems can address the long-term sustainability challenges posed by demographic aging while mitigating political frictions. Work Package 2 will examine the optimal management of public debt, emphasizing its role as a hedge under political limits on raising primary surpluses. Work Package 3 will analyze the role of optimal public investment in securing the fiscal sustainability of social security systems and public debt. By providing a foundation to address the complex challenges of welfare state design in a changing world, RESTATE will aspire to advance academic debate and equip fiscal authorities with actionable insights.