Public Debt and Private Pensions: The Financialization of the State in the Late Twentieth Century

In this paper, it is argued that the financialization of the advanced political economies has fundamentally altered the relationship between public debt and private pension savings. Until the 1970s, pension funds invested their assets predominantly in bonds – an investment practice that was not only guided by prevailing financial norms at the time, but also by public statutes that listed permissible investments for pension funds. Pension savings were thus used to relieve the financial burdens of the state. Since the mid-1970s, the ties between public debt and private pensions have been loosened and equity has become the dominant investment category for both public and private pension funds. I explain this change in terms of the rising popularity of modern portfolio theory and the immense growth in pension capital in need of new investment objects. I show how today the roles have changed: as austerity politics has made governments more dependent on financial markets, pension funds have become more assertive in leveraging their assets and demanding pro-finance political reform. Financialization has thus radically altered the balance-of-power between the state and financial market actors. In this paper, a quantitative analysis of pension fund investments in 18 OECD countries will be combined with a comparative case study of the United States and the Netherlands to elucidate the underlying mechanisms described above.