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

The welfare state has multiple roles in developed countries. Welfare programs redistribute income among overlapping generations in order to finance human capital investment and consumption of people in the inactive phases of their lifecycle from contributions of those in working age. Also, the welfare state alleviates poverty and mitigates inequality by transferring income from the relatively well-to-do to the poor. In this study we propose a cross-sectional framework to analyze redistribution by age and income simultaneously and assess the relative importance of these two variables in explaining the access and contribution to public benefits. Our data from 2010 (based on EU-SILC and Household Budget Surveys) covers government transfers (cash and in-kind) and both direct and indirect taxes in selected countries representing different welfare regimes (Sweden, France, Spain, Hungary and the UK). First, we describe graphically concentration of transfers and taxes by age-income groups. Then we compare the importance of age and income in explaining government transfers and taxes in a regression-analysis framework. We assess both causal importance (via comparison of coefficients) and dispersion importance (using the Shapley-value decomposition) of age and income in explaining transfers and taxes. Our preliminary results show that redistribution between age-groups is more important than redistribution by income position. The welfare state dominantly finances benefits for age groups in inactive age from resources collected from the well-to-do in working age. Our results call for a revision of the image of the welfare state in general and questions traditional approaches to the analysis of welfare state efficiency.