Explaining pension reforms: an intertemporal veto-actors approach

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Department of Political and Social Sciences

Explaining pension reforms:an intertemporal veto-actors approach

Guest lecture

Issues in Comparative Politics

Tuesday 29 March 2011

Igor [email protected]

mailto:[email protected]

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SUBSECTION I The rise and fall of Bismarck and Beveridge

Nicholas BarrThe Welfare State as Piggy Bank: Information, Risk,

Uncertainty, and the Role of the State.

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What Do We Need Pensions For?3 primary objectives + 1 secondary

i) 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

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How to organize pensions?2 main ways

i) by storing current production

ii) 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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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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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 adjustments.

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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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SUBSECTION II:New Pension Orthodoxy:

the case ofCentral Eastern and Southeastern Europe

World BankAverting the Old Age Crisis

USAIDPension Reform in Eastern Europe and Eurasia:

Experiences and Lessons Learned

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New pension orthodoxyAverting 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

schemesform

PAYGstate-regulated

funded funded financing

1st public mandatory

2nd private mandatory

3° private voluntary

pillar

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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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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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Objectives and criticism

The primary goal of pension systems is to reduce poverty and provide adequate retirement income within a fiscal constraint.

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The ‘new pension orthodoxy’ has been criticized from within and without the World Bank.

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Despite systemic reforms, the newly instituted retirement schemes fail to fulfil their fundamental objectives.

The arguments on the political insulation of multipillar (especially private) schemes were falsified in practice.

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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 to reform will be high.” (Holzmann, 2009)

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SUBSECTION III:Frozen landscapes and immovable objects

Paul PiersonThe New Politics of the Welfare State

Kent WeaverPaths and Forks or Chutes and Ladders?:

Negative Feedbacks and Policy Regime Change

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Why is reform difficult? Misperception of risk

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Why is reform difficult? Concentrated interests

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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. BetamaxLarge 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 drawbacks later on.

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SUBSECTION IV:Challenging standard veto actors approaches

Scartascini, Stein and TommasiHow Do Political Institutions Work? Veto Players, Intertemporal Interactions, and Policy Adaptability

Gehlbach and MaleskyThe Contribution of Veto Players to Economic Reform

Guardiancich and OrensteinA Stable State? Political Cycles and Policy Stability in

the Implementation of Radical Pension Reforms in Central and Eastern Europe

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Studying policy stabilityStability 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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1989 1995 2000 2005 2010

NDC

Bismarckian

Bismarckian Lite

Universal

Mixed

Residual

Asterisk indicates that a country has added a small mandatory or quasi-mandatory defined contribution individual account tier.

Poland *Latvia *

SloveniaCzech

Estonia*Lithuania*

Kosovo*

HungarySlovakia

Croatia*

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Gross Replacement Rates

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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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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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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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Polarization and other indicators

Polarization 1990-2008

Freedom House Index during reforms

Change in government after pension reform

legislation

Policy reversals

Croatia 0,74PF (4/4) before 2000

F (2/3) after 2000, decliningYes 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

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 pro-democratic, 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

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Hungary

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 two-party 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

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Poland

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

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Slovenia

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

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Thank you very much

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Explaining pension reforms: an intertemporal veto-actors approach