Starting in the 1970s, governments authorized and promoted individual retirement accounts of various sorts. The commonly accepted explanation was that public pensions were no longer affordable and had to be supplemented or replaced by private saving. The truth, according to a revealing new paper, is that stock exchanges in developed countries promoted tax-advantaged private accounts as a quick way to build up domestic capital markets at a time of increasing global competition. The result has been an underfunded public sector—including cash-starved public pensions—and overfunded capital markets feeding unproductive financial speculation.
A wise person who had observed the private pension industry for many years once told me to remember that none of its structures—public pensions, employer-sponsored pensions, 401(k) plans, and every variation on these themes—are set up for the good of working people. They are products, designed to make money for the bank or insurance or mutual fund company that set it up and collects fees for managing and investing it.
That sensible, “follow the money” approach to understanding pensions informs an excellent new academic paper, “Feed the Beast: Finance Capitalism and the Spread of Pension Privatisation in Europe.” The authors, Marek Naczyk of Oxford University and Bruno Palier of the Centre d’Etudes Européenes at Sciences Po Paris, who first presented it at a conference last July, connect the dots to explain why the financial services industry in Europe first started pushing for pension privatization and why political leaders in these countries went along with the idea. Continue reading →