The Financialization of U.S. Public Pensions, 1945-1974

This article examines a major transformation public employee pension investment in the United States, from investing public funds in public infrastructure in the 1940s and 1950s, to investing public funds in private securities—corporate bonds, stocks, and mortgages—in the 1960s and 1970s. Three factors drove this change. First, in the adjacent field of professional asset management, motivated financial elites orchestrated a shift in state-level trust law, from legally-sanctioned investment lists, which encouraged amateur investment and safety, to the “prudent man rule,” framed by professional risk-taking and discretion. Second, declining municipal bond yields during World War II led public pension managers to gradually reconceptualize the political goals of pension investment, from balancing retiree returns against low-cost public infrastructure, to maximizing public employee benefits at minimal taxpayer cost by achieving maximum returns in financial markets. Professional asset managers, who joined pension policy networks in the 1950s, encouraged this change. Third, when state and local governments liberalized investment rules to allow public investments in private securities, public officials hired these same asset managers to make these investments. These relationships created new channels for ideology and influence to move from financial elites to state policymakers, through which financial elites continuously pushed for further liberalization. Ultimately, this article argues, financialization was not the product of a radical break or crisis in the 1970s, but was a continuous process in the post-World War II era, one initially pursued by state and local government officials in service of welfare liberalism