Financial Development and Pay-As-You-Go Social Security

Financial markets and pay-as-you-go social security are two alternative ways to provide for retirement. The size of social security programs could therefore be partly determined by the level of financial frictions. I explore this possibility by using legal origin as a proxy for financial frictions that may hold back financial development. The empirical analysis yields two main results. First, legal origin-driven differences in financial frictions are an important determinant of social security; in particular, common law countries exhibit significantly smaller public pension programs. Second, two-stage estimates suggest that legal origin impacts on social security through financial market development.