Middle Class Without a Net: Savings, Financial Fragility, and Preferences Over Social Insurance

• Author: Jacob Gerner Hariri,Amalie Sofie Jensen,David Dreyer Lassen
• DOI: 10.1177/0010414019879718
• Published date: 01 May 2020
• Date: 01 May 2020

https://doi.org/10.1177/0010414019879718

Comparative Political Studies

2020, Vol. 53(6) 892 –922

© The Author(s) 2019

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DOI: 10.1177/0010414019879718

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Article

Middle Class Without a

Net: Savings, Financial

Fragility, and Preferences

Over Social Insurance

Jacob Gerner Hariri1, Amalie Sofie Jensen2,

and David Dreyer Lassen1

Abstract

In this article, we show that it is crucial to distinguish between liquid and

illiquid wealth to understand how voters form preferences toward social

insurance. Many households are financially fragile despite having high

incomes and wealth, because they hold little liquid savings. We hypothesize,

and show empirically, that this implies that a substantial group of voters

show strong support for social insurance policies despite being wealthy and

having high incomes, because of their limited ability to self-insure through

own savings in case of an income shock. Our empirical analysis is based on

a novel dataset from Denmark, which combines administrative data with

high-quality measures of individual financial assets and survey measures of

political preferences. Using data for other countries from the European

Social Survey, we find evidence that our results hold more generally and are

not specific to the Danish context.

Keywords

political economy, social welfare programs, public opinion

1University of Copenhagen, Denmark

2Princeton University, Princeon, USA

Corresponding Author:

David Dreyer Lassen, Department of Economics and CEBI, University of Copenhagen, Øster

Farimagsgade 5, 1353 Copenhagen, Denmark.

Email: ddl@econ.ku.dk

879718CPSXXX10.1177/0010414019879718Comparative Political StudiesHariri et al.

research-article2019

Hariri et al. 893

Introduction

Social insurance and redistribution are defining features of the welfare state,

and a vast literature in political economy investigates the individual-level

determinants of social policy preferences. Recent work has emphasized the

importance of economic self-interest, including portability of skills (Iversen

& Soskice, 2001), labor market risk (Rehm, 2009), wealth holdings (Ansell,

2014), and economic worries more generally (Hacker, Rehm, & Schlesinger,

2013), for understanding political preference formation. However, the focus

on formal social insurance arrangements is incomplete—and recognized as

such: In an influential analysis of social insurance and redistribution, Moene

and Wallerstein (2001, p. 871) note that “[t]heoretically, the largest gap in our

approach is the absence of a private alternative to publicly provided insur-

ance. We have concentrated on the loss of income, a risk that cannot be

insured privately.” But private supplements and alternatives to social insur-

ance of income risks do exist, partly because formal social insurance pro-

grams often offer only partial income replacement and, in the case of

unemployment insurance (UI), only for a limited time. Therefore, people’s

reliance on formal social insurance is in practice widely supplemented by,

and sometimes secondary to, informal self-insurance, of which the most

important component is drawing on private savings (Gruber, 2001).

Yet, the availability of private savings and credit market opportunities dif-

fer considerably across individuals. The middle class is now becoming more

financially fragile (Lusardi, Schneider, & Tufano, 2011) and heterogeneous

(Atkinson & Brandolini, 2011). Many households with medium or high

incomes are increasingly characterized by limited savings and accumulated

debts, which leaves them “no margin for error in their financial lives”

(Sullivan, Warren, & Westbrook, 2000, p. 250). Across industrialized coun-

tries, wealthy “hand-to-mouth” households—households that have positive

illiquid wealth, typically from housing equity, but little or no liquid savings—

constitute between 30% and 40% of the population (Kaplan, Violante, &

Weidner, 2014). One consequence of this is that economic vulnerability, mea-

sured by a lack of access to economic buffers, is also common among mid-

dle-class and rich households and, thus, largely unrelated to current income.

Following the literature on the economics of consumption and savings, we

refer to people who are unable to access economic buffers to maintain current

consumption as liquidity constrained.

In this article, we examine whether the presence of such liquidity con-

straints increases individual-level demand for social insurance and redistribu-

tion. Liquidity constraints is a core concept in economic theory, necessary to

understand the link from current income to consumption. By introducing it