The Political (In)stability of Funded Pension Systems
50 Pages Posted: 7 Apr 2020
Date Written: March 25, 2020
We analyze the political stability of capital funded social security. In particular, using a stylized theoretical framework we study the mechanisms behind governments capturing pension assets in order to lower current taxes. This is followed by an analysis of the analogous mechanisms in a fully-edged overlapping generations model with intra-cohort heterogeneity. Funding is efficient in a Kaldor-Hicks sense. Individuals vote on capturing the accumulated pension assets and replacing the funded pension pillar with a pay-as-you-go scheme. We show that even if capturing assets reduces welfare in the long run, it always has sufficient political support from those alive at the moment of the vote.
Keywords: Funded pensions, asset capture, majority voting, welfare
JEL Classification: H55, D72, E17, E27
Suggested Citation: Suggested Citation