Political economy of pension reforms: an empirical investigation

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.