Failure in Fully Funded Pensions: Voluntary Exchange and Coercion

Private pension failure for much of the economics mainstream would be regarded as an artifact of markets that are insufficiently regulated, such that suppliers are able to exploit monopoly advantages, and are free to make serious errors of judgment. Market failure analysis is flawed, however, by its own failure to acknowledge salient elements of the institutional context of private pension provision, which, while it has been regulated according to approved public interest ends, has been prone to suboptimal investment performance. Drawing on classical liberal political economy, an alternative account of private pension failure would emphasize the perverse consequences of state intrusion in the market for retirement income protection. The origins of regulation failure can be traced back to a combination of two policy decision dynamics, one of intentional rent creation, a second of imperfect knowledge and understanding of markets resulting in flawed regulatory arrangements. By stifling competition, regulation diminishes the capacity of pension markets to serve pension plan participants by means of improved investment performance. The prevalence of private pension failure is an artifact of regulatory intrusiveness. Given this direction of causality, a better approach to policy would rest centrally on the deregulation of pension markets.