New papers from the Social Science Research Network

"Feed the Beast: Finance Capitalism and the Spread of Pension Privatisation in Europe"

MAREK NACZYK, Sciences Po Paris - Centre d’études européennes, Sciences Po Paris - LIEPP
Email: marek.naczyk@sciencespo.fr
BRUNO PALIER, Fondation Nationale des Sciences Politiques (FNSP)

Why, since the mid-1980s, have so many European governments decided fiscally to support the development of private retirement savings accounts? Whereas analysts of pension reform in affluent democracies have traditionally considered the development of private pensions as a secondary outcome of welfare state retrenchment, we argue that governments have actively promoted their expansion as a result of financial industry lobbying. In the context of heightened competition between European financial centres that has accompanied the liberalisation and internationalisation of capital markets since the mid-1970s, stock exchanges, together with other financial services organisations, have started arguing that, by creating a vast and steadily growing pool of financial capital, private pension funds could play an essential role in strengthening the competitive position of their home country as a financial centre. Politicians have in turn been attracted to pension privatisation because a strong domestic financial sector could provide their country with greater investment capacities and help create new jobs at a time of deindustrialisation. As both market and political actors have observed policy developments in peer countries, the politics of pension privatisation has been marked by strong international interdependence and patterns of international diffusion. We support our argument through comparative process-tracing of pension reform in three very different cases, namely Great Britain, France and Germany.

"Aging and Pension Reform: Extending the Retirement Age and Human Capital Formation"
SAFE Working Paper No. 82

EDGAR VOGEL, Deutsche Bundesbank, Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)
Email: vogel.edgar@utanet.at
ALEXANDER LUDWIG, Goethe University Frankfurt - Research Center SAFE, University of Cologne - Faculty of Management, Economics and Social Sciences
Email: ludwig@safe.uni-frankfurt.de
AXEL H. BORSCH-SUPAN, Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA), National Bureau of Economic Research (NBER)
Email: AXEL@BOERSCH-SUPAN.DE

Projected demographic changes in industrialized and developing countries vary in extent and timing but will reduce the share of the population in working age everywhere. Conventional wisdom suggests that this will increase capital intensity with falling rates of return to capital and increasing wages. This decreases welfare for middle aged asset rich households. This paper takes the perspective of the three demographically oldest European nations — France, Germany and Italy — to address three important adjustment channels to dampen these detrimental effects of aging in these countries: investing abroad, endogenous human capital formation and increasing the retirement age. Our quantitative finding is that endogenous human capital formation in combination with an increase in the retirement age has strong implications for economic aggregates and welfare, in particular in the open economy. These adjustments reduce the maximum welfare losses of demographic change for households alive in 2010 by about 2.2 percentage points in terms of a consumption equivalent variation.

"Retirement Planning: Contributions from the Field of Behavioral Finance and Economics"
Investor Behavior: The Psychology of Financial Planning and Investing. H. Kent Baker and Victor Ricciardi, editors, 285-305, Hoboken, NJ: John Wiley & Sons, Inc., 2014

RASSOUL YAZDIPOUR, Financial Decision Making Institute- FDMI, California State University
Email: ryazdipour@aobf.org
JAMES P. HOWARD, University of Maryland University College, University of Maryland Baltimore County
Email: jh@jameshoward.us

An important challenge facing employees and societies is saving and investing sufficient funds for a comfortable retirement. Research shows that human financial decision-making behavior is not always rational and that public trust in the economy can be lost. Surprisingly, neither better disclosure of financial services and products nor education has had little discernible effect in motivating individuals to effectively plan and save for transitioning out of the workforce. The fields of cognitive psychology and neuroscience identify many behavioral obstacles individuals face in taking the needed steps to save and invest more for the future. A host of behavioral issues influence an individual’s decision making about retirement including biases, heuristics, framing, hyperbolic discounting, self-awareness, and self-control. The emerging works on trust also add to our understanding of the retirement planning system. Exploring these findings and strategies for mitigating financial decision-making errors can make a substantive contribution to achieving a more secure retirement.

"Pension Reforms and Incentives to Domestic Capital Markets: A Global Study"

MARIA NELA SEIJAS, Universidad de la República
Email: mseijas@ccea.com.uy
JUAN GABRIEL BRIDA, Universidad de la República, Free University of Bolzano
Email: JuanGabriel.Brida@unibz.it

Personal individual capitalization systems have experienced significant growth in recent decades, following the trend of aging populations and defined benefit pension crisis. This article investigates whether the implementation of funded pension schemes globally has prompted the development of domestic capital markets worldwide, considering 31 pension funds over the period of 1990-2011. The methodological strategy relies upon panel data regressions applied to depth and liquidity indicators of stock and bond markets. The analysis has revealed that individual capitalization pension funds have meant a stimulus to stock market depth. A negative causality with stock market liquidity is also evidenced, which is linked to the long-term profile of pension portfolio management, which privileges funding strategies on trading strategies. Given the structural diversity of pension systems studied, the article uses clustering classification tools for segmenting the population according to the importance of pension funds in the economy. This analysis shows that there are homogeneous groups whose members have similar age of the systems, but not a geographical proximity or type of system structure. It is found that the attribute of belonging to a cluster determines significant impacts of pension systems in relation to indicators of capital market development. Stock markets depth and liquidity indicators receive the positive impacts of greater magnitude from the systems included in the advanced maturation cluster. Pension funds belonging to the low gradual and incipient maturation cluster exert significant impacts on public bond markets depth. These findings are consistent with existing literature and with the investment portfolio, that usually characterizes pension funds in their earlier stages of life.