Department of Political and Social Sciences
Explaining pension reforms:
an intertemporal veto-actors approach
Igor Guardiancich
igor.guardiancich@eui.eu
Guest lecture
Issues in Comparative Politics
Tuesday 29 March 2011
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Department of Political and Social Sciences
SUBSECTION I
The rise and fall of Bismarck and Beveridge
Nicholas Barr
The Welfare State as Piggy Bank: Information, Risk,
Uncertainty, and the Role of the State.
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Department of Political and Social Sciences
What Do We Need Pensions For?
3 primary objectives + 1 secondary
consumption smoothing over the life-cycle
PIGGY BANK OBJECTIVE
ii) insurance against various risks
DISABILITY, LONGEVITY, DEATH
iii) poverty relief
ROBIN HOOD OBJECTIVE
iv) economic growth
INCREASED NATIONAL SAVINGS and
LESS LABOUR MARKET DISTORTIONS
i)
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Department of Political and Social Sciences
How to organize pensions?
2 main ways
i)
ii)
by storing current production
by building a claim on future production
This can be financed in two ways:
i) funded schemes (401k plans)
ii) PAYG schemes (US Social Security)
These can pay benefits according to:
i) defined-benefit formulae
ii) defined-contribution formulae
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Department of Political and Social Sciences
The mythology of pensions
AVAILABILITY OF OUTPUT IS THE MAIN THING
i)
PAYG copes well with inflation
ii)
PAYG allows pensioners to share in post-retirement economic growth
iii)
PAYG allows a full pension to be paid immediately
iv)
FF is vulnerable to unanticipated inflation
v)
FF does not allow pensioners to benefit from post-retirement economic
growth
vi)
FF take a long time to build up rights for a full pension
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Department of Political and Social Sciences
The well-spring of immortality
ARE FUNDED PENSIONS REALLY IMMUNE TO
ADVERSE DEMOGRAPHICS?
A balanced PAYG requires that sWL=PN.
If there is a demographic shock, there are 2 scenarios: Static output
– a) pensions are reduced and the demographic burden falls on
pensioners; b) contribution rates are raised, imposing the cost on
workers.
Growing output – In a PAYG average wages increase, pensions do
not. The replacement rate declines, but crucially pensioners get the
real pensions they were expecting. There is no need for further 6
adjustments.
Department of Political and Social Sciences
Pension history:
Bismarck and Beveridge
Bismarck social policies (1889) are based on social insurance,
with earnings-related benefits for employees and entitlements
based on contribution records, and funded through employer
and employee contributions.
Beveridgean policies (1942) are characterized by universal
provision with entitlement based on residence and in some
cases on need, with benefits being flat-rate and financed
through general taxation revenue.
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Department of Political and Social Sciences
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Department of Political and Social Sciences
SUBSECTION II:
New Pension Orthodoxy:
the case of
Central Eastern and Southeastern Europe
World Bank
Averting the Old Age Crisis
USAID
Pension Reform in Eastern Europe and Eurasia:
Experiences and Lessons Learned
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Department of Political and Social Sciences
New pension orthodoxy
Averting the Old Age Crisis
-
World Bank’s blueprint 13 years after Chile
-
dual paradigmatic shift: from collective to individual risk bearing and
from state to market provision
redistribution,
coinsurance
savings,
coinsurance
savings,
coinsurance
objective
means-tested,
GMI, flat rate
individual or
occupational
schemes
individual or
occupational
schemes
form
PAYG
state-regulated
funded
funded
1st public
mandatory
2nd private
mandatory
3° private
voluntary
financing
pillar
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2000s
1990s
1980s
Department of Political and Social Sciences
Substitutive
Chile (1981)
Parallel
UK (1986)
Mixed
Bolivia (1997)
Mexico (1997)
El Salvador (1998)
Kazakhstan (1998)
Panama (1999)
Peru (1993)
Colombia (1994)
Nicaragua (2001)
Kosovo (2002)
Dominica (2003)
Nigeria (2005)
Lithuania (2004)
Argentina (1994)
Uruguay (1996)
Hungary (1998)
Denmark (1999)
Poland (1999)
Sweden (1999)
Bulgaria (2000)
Costa Rica (2000)
Hong Kong (2000)
Latvia (2001)
Croatia (2002)
Estonia (2002)
Russia (2003)
India (2004)
Slovakia (2005)
Macedonia (2006)
Romania (2008)
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Department of Political and Social Sciences
Socialist and post-socialist
pension systems
UNDER SOCIALISM
-
PAYG financing, but cross-subsidisation of other budget elements
-
de facto Bismarckian (employment-related, defined-benefit with last or
best year formulae), but increasing coverage
-
low replacement rates, but low retirement age
-
universalism betrayed by granting special privileges
DURING TRANSITION
-
early retirement, disability - great abnormal pensioner booms
-
overstretched to the point of breakdown (skyrocketing costs and system
dependency ratio)
-
3 reform phases: refinancing, retrenchment and restructuring
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Department of Political and Social Sciences
Reforms in Central and Eastern Europe
During 1998-2008 more than 10 CESE countries adopted the
privatization elements of the ‘new pension orthodoxy’
--Many also individualized their highly redistributive pension
systems by adopting
Notional Defined Contribution formulae (PL, LV)
Defined Benefit point formulae (EE, HR, RO, SK, SR)
flat rate benefits (KO)
benefits related to automatic stabilizers (FBiH, RS)
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Department of Political and Social Sciences
Objectives and criticism
The primary goal of pension systems is to reduce poverty and
provide adequate retirement income within a fiscal constraint.
--The ‘new pension orthodoxy’ has been criticized from within and
without the World Bank.
--Despite systemic reforms, the newly instituted retirement
schemes fail to fulfil their fundamental objectives.
The arguments on the political insulation of multipillar (especially
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private) schemes were falsified in practice.
Department of Political and Social Sciences
5 policy problems
- Fiscal sustainability
- Social adequacy
- Lacking administrative capacity and infrastructure
- Insufficient coordination with labour and financial market
reforms
- Vulnerability of policy to political interference
“Without parallel reforms in labor and financial markets, even the
best conceptualized pension reform may derail in political and
social policy terms. In turn, without a clear reform vision […] the
credibility of the reform will be low and, consequently, resistance
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to reform will be high.” (Holzmann, 2009)
Department of Political and Social Sciences
SUBSECTION III:
Frozen landscapes and immovable objects
Paul Pierson
The New Politics of the Welfare State
Kent Weaver
Paths and Forks or Chutes and Ladders?:
Negative Feedbacks and Policy Regime Change
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Department of Political and Social Sciences
Why is reform difficult? Misperception of risk
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Department of Political and Social Sciences
Why is reform difficult? Concentrated interests
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Department of Political and Social Sciences
Path-dependence?
Path dependence is best described as a
process of increasing returns, positive
feedback, self-reinforcing feedback – the
costs of exit augment at each step we take
on a given path increase.
Famous examples: QWERTY vs. Dvorak;
VHS vs. Betamax
Large fixed costs – they lower unit costs and people tend to stick to one option;
Learning effects – higher future returns;
Coordination effects – when others start using linked infrastructure (software
with hardware, complementary property rights);
Adaptive expectations – options that fail to win broad acceptance will have
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drawbacks later on.
Department of Political and Social Sciences
SUBSECTION IV:
Challenging standard veto actors approaches
Scartascini, Stein and Tommasi
How Do Political Institutions Work? Veto Players,
Intertemporal Interactions, and Policy Adaptability
Gehlbach and Malesky
The Contribution of Veto Players to Economic Reform
Guardiancich and Orenstein
A Stable State? Political Cycles and Policy Stability in
the Implementation of Radical Pension Reforms in
Central and Eastern Europe
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Department of Political and Social Sciences
Studying policy stability
Stability of public policy is a fundamental variable in the literature
on welfare state reforms. Analysts have emphasized the importance
of path-dependence, stressing that reforms skid on frozen
landscapes and collide with immovable objects.
However, path dependence applies far less to Eastern Europe. CEE
countries occupy a unique niche in welfare state policy in between
the developed West and the developing South.
They inherited from socialist times ‘pre-mature welfare states’
which display the fundamental characteristics of Western social
policy sophistication, but, are subject to the sort of policy
instability and to frequent systemic reversals that are more
characteristic of Latin American countries.
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Department of Political and Social Sciences
1989
1995
2000
2005
2010
NDC
Bismarckian
Bismarckian Lite
Latvia *
Poland *
Slovenia
Czech
Hungary
Slovakia
Estonia*
Lithuania*
Universal
Mixed
Residual
Asterisk indicates that a country has added a small mandatory or
quasi-mandatory defined contribution individual account tier.
Croatia*
Kosovo*
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Department of Political and Social Sciences
Gross Replacement Rates
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Department of Political and Social Sciences
Standard veto actors
Proposition 1: A more decisive polity must necessarily be
less resolute (Haggard and Mc Cubbins).
Proposition 2: As the effective number of vetoes
increases, the polity becomes more resolute and less
decisive (Haggard and Mc Cubbins).
Or equivalently: Many veto players make significant
policy changes difficult or impossible (Tsebelis).
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Department of Political and Social Sciences
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Department of Political and Social Sciences
Intertemporal veto actors I
Proposition 1: A more decisive polity not necessarily
must be less resolute. There are some forces (of different
equilibria in repeated-interaction contexts) leading to a
positive association between decisiveness and
resoluteness (adaptability and stability).
Proposition 2: Many veto players do not necessarily
make significant policy changes difficult or impossible.
There are some channels through which more veto
players increase policy adaptability.
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Department of Political and Social Sciences
Intertemporal veto actors II
The literature on intertemporal cooperation has focussed only on:
i) the number of veto players (Scartascini, Stein and Tommasi, 2008;
Gehlbach and Malesky, 2010);
ii) the probability that the policy distance a future veto player will be
great/small (Frye, 2010).
This paper combines the two.
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Department of Political and Social Sciences
Polarization and other indicators
Polarization Freedom House Index during
1990-2008
reforms
Change in government
Policy
after pension reform
reversals
legislation
Croatia
0,74
PF (4/4) before 2000
F (2/3) after 2000, declining
Yes
Yes
Hungary
0,79
F (1/2)
Yes
Yes
Poland
0,21
F (1/2)
Yes
No
Slovenia
0,21
F (1/2)
No
No
Sources: Armigeon and Careja (2008), Frye (2010), Freedom House, own calculations.
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Croatia
Department of Political and Social Sciences
Croatia is a relatively extreme case of reform under majoritarian
institutions and high polarization.
Croatia went through two periods in its post-communist political
development: the first, the semi-presidential rule of Franjo Tuđman
and his political party, the Croatian Democratic Union (HDZ), and
the second, a period of rapid democratization under prodemocratic, pro-EU governments starting in 2000.
Pension reform in Croatia took place under the first regime, while
implementation took place under the second. The majoritarian
institutional framework facilitated radical reform, but continuing
political polarization intensified instability in implementation.
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Croatia
Department of Political and Social Sciences
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Hungary
Department of Political and Social Sciences
Hungary has one of the least constrained executives in Central,
Eastern and Southeastern Europe.
After the ascendancy of the right party, Fidesz, in 1998, its twoparty system became so polarized that one analyst (Bozóki 2008:
224) writes that the country is in a civil cold war that violently
erupts during each election. Political business and policy cycles are
consequently extreme.
Similar to Croatia, the Hungarian case shows how policies adopted
by a small number of veto players are vulnerable to later policy
instability.
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Hungary
Electoral cycles and
coalition governments
Pressures and
policymaking
Department of Political and Social Sciences
Reform outcome
Disproportionalities/ reversals
Structural:
parametric reforms
in public DB pillar,
mandatory FDC
pillar
Concessions to MSzOSz
(political appointments and
control of the pension Insurance
Fund) and the financial service
lo b b y
Mandatory funded
pillar rendered
voluntary
Opt-outs from the mandatory
pillar allowed, contribution rates
frozen, MSzOSz eliminated from
the Pension Insurance Fund
Oversized twoparty centre-left,
liberal coalition
(Horn I)
1997
Opposition parties (Fidesz,
MDF), civil society at large
excluded
19982002
Two-party centreright coalition
(Orbán I)
1988 and 2001
Opposition parties (MSzP,
SzDSz), trade unions
(MSzOSz) and financial
service lobby excluded
20022006
Two-party centreleft, liberal
coalition
(Medgyessy I,
Gyurcsány I)
2002-2005
Mandatory funded
pillar returned to
Election promise to raise
benefits and reverse reforms original status
Ad hoc increases in pension
levels, introduction of the
thirteenth pension
20062010
Two-party centreleft, liberal
coalition
(Gyurcsány II,
Bajnai I)
2006-2007 and 2009
Crisis-related pressures on
debt and deficit,
EU and International
Organizations dictating the
pace of reforms
No major changes
Thirteenth pension eliminated,
price indexation introduced,
retirement age stepwise increased
2010now
Oversized twoparty centre-right
coalition
(Orbán II)
2010
Unilateral
Mandatory funded
pillar rendered
voluntary
All insured encouraged to switch
back, withdrawal of any
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government guarantee
19941998
Poland
Department of Political and Social Sciences
Poland stands in stark contrast to cases of divisive policy-making
and limited bargaining, such as Croatia or Hungary. Poland has far
more inclusive political institutions, a less polarized party system
with numerous groups represented, and a high level of civil society
involvement in politics.
Poland is often compared to Hungary, yet its affinities with
Slovenia are more marked.
The two countries’ executives were constrained in their choices
and legislated successfully only through inclusive policymaking.
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Poland
Department of Political and Social Sciences
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Slovenia
Department of Political and Social Sciences
Among the cases analyzed in this paper, neo-corporatist Slovenia is
the most consensual democracy.
Its political-institutional structure generates numerous veto points,
due to fragmented parties, proportional representation, and the
strongest labor movement in Central, Eastern and Southeastern
Europe.
Hence, Slovenian executives are continuously reminded that
divisive policymaking is rarely a feasible strategy, especially when
legislating complex socioeconomic policies
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Slovenia
Department of Political and Social Sciences
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Department of Political and Social Sciences
Thank you very much
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