Enrico Perotti
The Political Origin of Pension Funding
Abstract:
This paper studies the determinants of the modern variation in pension funding structure, and specifically why some countries have pre-funded systems and some do not. We argue that historical choices on pension funding depended on political considerations at the time, and were
correlated to political choices about the role of capital markets. These initial choices became persistent because the diffusion of shareholdings had reinforcing political effects, as pre-funded pension systems created
a large political constituency interested in protecting minority investor protection and thus created the conditions for good financial returns on security markets. Political economy models indicate that wealth and income
concentration would affect the median voter's view of capital markets and social insurance. We provide supportive evidence that the degree of pension funding is affected by the variation in wealth distribution shocks in the interwar period, which affected political preferences around the
time when most countries set up their pension systems. The effect of such shocks on the degree of pension funding is both economic and statistically very significant in a sample covering almost all democratic countries where the median class is likely to have been critical. The result is
robust to introduce legal origin, past and current demographic controls, and to measures of stock market performance or past shocks. Understanding the political determinants of pension structure is essential for any
pension reform process to be politically sustainable.
(joint with Armin Schwienbacher)
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Information: Adam Booij: a.s.booij@uva.nl
