Political Economy of Pension Reform: an Empirical Investigation

Rok Spruk (Utrecht University)
Miroslav Verbic (University of Ljubljana - Laibach)

Abstract: Why some countries fail to reform their pension systems in spite of the rapid population ageing? This paper sets to examine the effects of political institutions on the probability of introducing pension reforms. A new dataset is constructed which tracks the systematic development of pension legislation in 34 countries for the period 1970-2013 by focusing on mandatory PAYGO pension system reforms and supplementary pension reforms stimulating the transition from unfunded to funded pension schemes. The evidence highlights the fundamental importance of political institutions in shaping the probability of introducing pension reforms when the potentially confounding effects of demographic structure, life expectancy and macroeconomic fundamentals are controlled for. Countries with stronger constraints on the chief executive, greater political competition and fiscal federalism are significantly more likely to reform the old-age PAYGO law and initiate the transition to funded pension scheme while the effects of de jure electoral rules are weak. The beneficial effects of executive constraints, political competition and interjurisdictional federalism on pension reforms are robust across multiple sub-samples when the potential reform outliers are excluded from the core sample, and are not susceptible to country-level heterogeneity bias.

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