Fiscal Constraints and Electoral Manipulation in American Social Welfare

American social welfare policy involves a politically significant fiscal interaction between short-run, pay-as-you-go constraints and long-run equilibrium constraints motivated by the contributory principle and the concept of actuarial soundness. The fiscal constraints induce conflict between benefit recipients and payroll-tax-payers. To support small election-year reductions in payroll taxes, means-tested program benefits are slightly reduced in election years (compared to non-election-year levels under similar economic conditions). The existence of the constraints and of the election-year changes is tested using a multivariate time series regression model of monthly transfer payments and contributions for social insurance during years 1948–87. Short-run dynamics are found to be weakly incrementalist, but otherwise the results support the argument. Extraordinary manipulations are identified during 1972. Special technical features of the econometric analysis are a nonlinear, dynamic specification; robust generalized method of moments estimation; and near cointegration.