Middle Class without a Net: Savings, Financial Fragility and Preferences over Social Insurance

Abstract

In this paper, we show that it is important to distinguish between liquid and illiquid wealth in order to understand how voters form preferences towards social insurance. Many households have high income and high total wealth, but low holdings of accessible or liquid savings. Since it is costly to extract illiquid wealth, consumption for these households potentially drops substantially in case of a temporary shock to income, for instance from being laid off. We hypothesize and show empirically that this implies that a substantial group of voters show strong support for social insurance policies despite being wealthy in terms of home equity and income, 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 combining 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.

Comparative Political Studies, forthcoming