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Political economy of pension reforms: an empirical investigation

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Abstract

We examine effects of political institutions on the probability of introducing pension reforms. A novel dataset is constructed that tracks the systematic development of pension legislation in 36 countries for the period 1970–2013 by focusing on mandatory pay-as-you-go, occupational, and supplementary pension reforms. The evidence highlights the fundamental importance of political institutions in shaping the probability of pension reforms, after controlling for potentially confounding effects of demographic structure, preferences for redistribution and macroeconomic fundamentals. Countries with stronger constraints on the chief executive, non-fractionalized political competition with moderate political power of government and opposition parties with centrist parties in power, and fiscal federalism in the presence of electoral rules with vote sharing thresholds and a high degree of regional autonomy are significantly more likely to introduce pension reforms. The beneficial effects of executive constraints, political competition and inter-jurisdictional federalism on reforms are robust to several misspecification checks, unobserved heterogeneity, and country-specific time trends. We show that when pension reforms occur, some layers of political institutions strengthen public and private pensions relative to GDP while others tend to weaken it.

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Notes

  1. There have been numerous typologies of retirement income system. The World Bank's three-pillar classification comprises (i) a publicly managed system with mandatory participation and the limited goal of reducing old-age poverty, (ii) a privately managed system with mandatory savings system and (iii) voluntary savings.

  2. Due to data limitations, we cannot analyze the impact of reforms on the share of occupational pensions in GDP.

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Acknowledgements

The authors would like to thank Giovanni Batista Ramello for excellent editorial guidance, two anonymous referees for the very helpful comments, Thorsten Beck, James Brown, Marcus Drometer, Libor Dušek, Chukwunonye O. Emenalo, Robert Fleck, Tobias Hlobil, Mitja Kovač, Pierre-Guillaume Méon, to the participants of the 20th Annual Conference of the Society for Institutional and Organizational Economics at Sciences Po (Paris), and to the participants of 33rd Annual Meeting of European Association of Law and Economics for comments, feedback and discussion.

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Authors and Affiliations

  1. Faculty of Economics, University of Ljubljana and Institute for Economic Research, Kardeljeva ploščad 17, 1000, Ljubljana, Slovenia

    Miroslav Verbič

  2. Faculty of Economics, University of Ljubljana, Kardeljeva ploščad 17, 1000, Ljubljana, Slovenia

    Rok Spruk

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Appendices

Appendix A1: Mandatory and supplementary pension laws across countries

See Table 7.

Table 7 Overview of mandatory old-age and disability laws and voluntary pension laws by country, 1970–2013.
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Appendix A2: Political institutions across and within countries, 1970–2013

See Figs. 2, 3, 4, 5 and 6.

Fig. 2
figure 2

Chief executive constraints across and within countries, 1970–2013

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Fig. 3
figure 3

Political competition across and within countries, 1970–2013

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Fig. 4
figure 4

Electoral rules across and within countries, 1970–2013

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Fig. 5
figure 5

Federalism across and within countries, 1970–2013

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Fig. 6
figure 6

Power of Veto players across and within countries, 1970–2013

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Verbič, M., Spruk, R. Political economy of pension reforms: an empirical investigation. Eur J Law Econ 47, 171–232 (2019). https://doi.org/10.1007/s10657-018-9606-7

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