US regulatory incentives for equity financing ? The essential role of public pension plans
Bulletin No. 260, article 3. The US economic model based on equity financing contrasts with the European model which relies predominantly on debt financing; at the end of 2024, in the United States, corporate equity amounted to over 210% of gross domestic product, compared with around 90% in Europe. Since the 1980s, US pension funds, which manage part of the country’s pension system on a capitalisation basis, have played an essential role in providing firms with equity capital. This article describes the rules that have encouraged state and local government pension plans to invest in equity, and especially in firms in the early stages of development (venture capital) and not listed on the stock market (private equity).
1 In the United States, pension funds play an essential role in providing equity financing to firms
The United States has a mixed pension system, combining distribution and capitalization
A pension system can be financed through distribution or capitalisation. The distribution (or pay-as-you-go) model is based on the principle of intergenerational solidarity: contributions paid in by employees are immediately paid out to retirees in the form of pensions. The sums paid in are not recoverable, but employees acquire retirement rights that entitle them to a pension when they retire. In the capitalisation (or funded) model, employees’ contributions are placed in an investment fund, called a pension fund or pension plan (collective capitalisation), or deposited in a personal account (individual capitalisation). The money is then invested in stocks, bonds, other financial assets or real estate. When they retire, employees recover their contributions – plus any dividends, interest, rents or capital gains on the investments – in the form of an annuity or capital sum.
The United States has a three-tier pension system consisting of social security distribution, collective capitalisation in the form of occupational pension schemes, and individual savings. Since 1935, the country has had a single pay-as-you-go scheme, operated by the social security administration and funded by income from labour. For the majority of American retirees, social security makes up more than half of their total income.
This pay-as-you-go scheme is topped up with complementary occupational pensions that operate via capitalisation. This form of capitalisation is known as “collective” as it is set up by the employer for all of its staff. There are two types of pension plan:
- Defined benefit: the employer guarantees a set pension level on retirement, based on criteria such as salary and length of service.
- Defined contribution: the amount of the pension is not guaranteed and depends on the accrued capital (employee contributions, possible top-up payments by the employer) and any returns on investment.
The public sector relies mainly on defined benefit schemes, such as CalPERS (California Public Employees’ Retirement System), the pension plan for California state employees. In contrast, the private sector tends to prefer defined contribution schemes, particularly 401(k) plans, where staff choose from the investment options offered by their employer. These plans may include target-date funds, which automatically adjust the level of risk to the employee’s age. …
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Updated on the 12th of November 2025