The Political Origin of Pension Funding

Abstract

The paper seeks to explain the historical origins of state oriented pension structure. It proposes a political explanation related to the Great Reversal argument in Rajan and Zingales (2003) and Perotti and von Thadden (2006). Large inflationary shocks in the first half of the XX century devastated middle class savings in some countries, where they shaped political support against capital markets and for social insurance, ahead of the establishment of universal pension systems after the Great Depression. We present evidence that reliance on state pensions is well explained by these wealth distribution shocks. The economic effect is huge: a large shock reduces the stock of private retirement assets by 58% of GDP. We verify that these price shocks were the outcome of exogenous war damages and were not related to institutional characteristics. The results stand after controlling for complementary explanations, such as original financial development, legal origin, past and current demographics, religion, electoral voting rules, national experiences with financial market performance, or other major financial shocks that were not specifically redistributive. However, it is hard to disentangle whether the change in political preferences is driven by a shift in economic interest or in ideological beliefs.

Keywords: Pension system, political economy, wealth distribution, investor protection, retirement finance

JEL Classification: J26, G23, G34, G38