Working Paper: CEPR ID: DP6100
Authors: Enrico C. Perotti; Armin Schwienbacher
Abstract: The paper seeks to explain the huge cross country variation in private pension funding, shaped by historical choice made when universal pension systems were created after the Great Depression. According to Perotti and von Thadden (2006), large inflationary shocks due to war damage devastated middle class savings in some countries in the first half of the XX century. This shaped political preferences over the role of capital markets and social insurance, and contributed to the Great Reversals documented by Rajan and Zingales (2003). Wealth distribution shocks are indeed strongly related to private pension funding, as a large shock reduces the stock of private retirement assets by 58% of GDP. The results are robust to controlling for other explanations, such as legal origin, original financial development, past and current demographics, religion, electoral voting rules, redistributive politics, national experiences with financial market performance, or other major financial shocks that were not specifically redistributive. Corroborating evidence indicates that such redistributive shocks help explain the cross country variation in social expenditures, state ownership of industry, and employment protection measures along the lines predicted by a political shift in affected countries.
Keywords: Inflationary shocks; Pension; Political economy; Redistribution; Retirement finance
JEL Codes: G21; G28; G32; J26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hyperinflationary shocks (E31) | lower levels of funded pension assets (G23) |
| hyperinflationary shocks (E31) | financial losses for the middle class (G50) |
| financial losses for the middle class (G50) | shift in political preferences towards corporatist policies (P16) |
| shift in political preferences towards corporatist policies (P16) | preference for state funding of pensions (H75) |
| loss of savings during inflation (D14) | increased support for labor protection and social insurance policies (J89) |
| financial participation by the middle class (G59) | favoring investor protection and market-oriented pension systems (G23) |