The financialization of US public pension funds, 1945–1974

Abstract

This article examines the transformation of public employee pension investment in the United States, from investing public funds in public infrastructure before the 1950s, to investing public funds in private securities in the years after. Three factors drove this change. First, motivated financial professionals convinced states to adopt the “prudent man rule,” a legal investment standard that emphasized professional management and maximum financial returns. Second, declining bond yields during World War II led public pension managers to reconceptualize the political goals of pension investment, from balancing retiree returns against low-cost public infrastructure, to maximizing employee benefits by achieving maximum returns in financial markets. Third, public officials hired private asset managers to undertake new investment strategies. These professionals then used their influence to pursue further pension liberalization. Ultimately, US financialization was not a break, but a continuous process through which government officials intentionally used financial markets to enhance public social provision.