Article on the Political Economy of Redistributive Pensions

Together with Michael Neugart, University of Darmstadt, I published an article in Review of Development Economics (early view) on the political economy of redistributive pensions in ‘developing’ countries. We use the recent rise in so-called social pension systems (see figure below), that is minimum pensions for the elderly that are entirely tax-financed, to motivate why many poor countries increasingly seem to switch (back) to redistributive forms for old age provision. As an example, take the case of the Chinese rural pension scheme of 2009 which, in a matter of few years, almost doubled old-age coverage in pension systems from 30 to 55% of the elderly population.

figure1new

We (that is mainly Michael) develop a formal model based on the fact that many of these programs were initially designed for rural sectors and against the backdrop of constant urbanization processes. We argue that the rising gap in wages between rural and urban sectors adds to the erosion of traditional, nonformal family schemes and creates more demand/ need for public pension provision. We show some analytic results and some stylized facts to back up this claim. The model also has interesting applications for other dimensions such as the gap between the formal and informal sector in such economies.

 

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