Review section - Semantic Scholar

Journal of European Public Policy 8:5 October 2001: 853–861

Review section

Edited by Thomas Christiansen

THE POLITICAL ECONOMY OF PENSIONS: WESTERN THEORIES, EASTERN FACTS Pieter Vanhuysse Esping-Andersen, G. (1999) Social Foundations of Postindustrial Economies (Oxford: Oxford University Press) ISBN 0 19 8742010 0 (hbk); 0 19 874200 2 (pbk) (SF) Müller, K. (1999) The Political Economy of Pension Reform in Central-Eastern Europe (Cheltenham: Edward Elgar) ISBN 1 84064 2386 (PEPR) Müller, K., Ryll, A. and Wagener, H.-J. (eds) (1999) Transformation of Social Security: Pensions in Central-Eastern Europe (Heidelberg: Physica Verlag) ISBN 3 7908 1210 2 (TSS) Pierson, P. (ed.) (2001) The New Politics of the Welfare State (Oxford: Oxford University Press) ISBN 0 19 829753 X (hbk); 0 19 829756 4 (pbk) (NPW) Stranovnik, T., Stropnik, N. and Prinz, C. (eds) (2000) Economic Well-Being of the Elderly: A Comparison Across Five European Countries (Aldershot: Ashgate) ISBN 0 7546 1623 1 (EWE) For students of pensions and welfare states, these are exciting times. In the past few decades, a number of social and economic trends have radically redrawn the road map of contexts and constraints according to which politicians in advanced market democracies can steer their social policies. At the same time, new theses have been put forward to advance our understanding of the political economy of contemporary welfare states. Two in particular have been very in uential. Paul Pierson (1994, 1996) famously proposed that we now experience a ‘new’ politics of welfare retrenchment – an entirely different ball game from the ‘old’ politics of expansion. And in a now near-classic thesis, Gøsta Esping-Andersen (1990, 1996) argued that, when analysed (as they Journal of European Public Policy ISSN 1350–1763 print/ISSN 1466-4429 online © 2001 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/13501760110083545

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should be) along multiple dimensions other than mere spending effort, welfare states converge into three distinct clusters, or ‘worlds’. NPW and SF offer longawaited restatements and extensions of these seminal approaches. WESTERN THEORIES Both NPW and SF start from the observation that the post-war ‘industrial’ premises upon which Western welfare states were built no longer obtain today. In most countries, welfare states have matured, the demographic composition of the population has worsened, and women have massively entered the labour market. Importantly, Western economies are increasingly becoming ‘postindustrial’, that is, service-based. Following Baumol’s (1967) cost-disease hypothesis, this may have signi cant long-term nancial consequences. As Pierson (NPW, p. 84) notes, while between 1960 and 1994 Organization for Economic Co-operation and Development (OECD) employment in services has grown much more than in manufacturing (2.2 compared to 0 per cent), productivity in services has grown much less (1.6 compared to 3.6 per cent). In increasingly service-based economies, lower productivity may lead to slower gross domestic product (GDP) growth, which, in turn, may endanger welfare state revenues. SF (implicitly) and NPW (most explicitly in contributions by Schwartz, Iversen, and Pierson) make a compelling case that these post-industrial developments, and the institutional ways in which national policies have responded to them, are far more important than the oft-invoked ‘globalization’ trends for understanding the political economy of welfare today. The proactive and adaptative decision-making of key national-level actors other than politicians, and the ways in which they interact with welfare policies, matter crucially. Stronger still: it is argued that welfare states would still be facing serious strains now even if, counterfactually speaking, international economic integration had remained constant over the last few decades. As Esping-Andersen reiterates, the central analytical focus ought to be on welfare regimes. They form complex inter-causal ‘triads’ composed of the labour market, the family, and the welfare state. While acknowledging that his earlier analysis actually lacked systematic attention to the family, the author now explicitly suggests that ‘the household economy is alpha and omega to any resolution of the main postindustrial dilemmas’ (SF, p. 6). In the same vein, chapters by Huber and Stephens, Manow, and Rhodes (in NPW) re-analyse the role of two interest groups central to labour markets: the power of organized labour both in necessitating and in forging negotiated or ‘pacted’ welfare reform, and the production decisions made by rms, in line with recent ‘varieties of capitalism’ insights. Neatly corroborating both Pierson’s (1994, 2000) emphasis on path dependence and Esping-Andersen’s (1990) original typology, the three worlds of welfare capitalism turn out to have responded in very distinct ways to the new post-industrial challenges (see also Iversen and Wren 1998). The liberal regime

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relies on exible and deregulated markets. While creating service-sector employment and affordable household services for middle-class families, this strategy also leads to high wage and income inequalities. Because of Baumol costdisease, a large proportion of new jobs require low skills, resulting in a lowskill/low-wage trap for many service-sector employees. The conservative-corporatist regime promotes the interests of an insider labour force (highly skilled and highly paid male workers), while reducing the participation for outsiders (young and unskilled workers, elderly workers, and women). This regime also puts a maximal burden of family obligations on women’s shoulders. For instance, the high cost of child-care makes it expensive to combine work with children. This may result in a low-fertility equilibrium, which further reduces the tax base, in combination with already low participation rates and ageing populations. In the social-democratic regime, ‘de-familialization’ is the key. Governments try to maximize women’s economic independence from the family. For instance, extensive day-care facilities are provided, the cost of child-care is kept low, and female employment is stimulated by public-sector absorption and active labour market programmes. While costly in the short run, this strategy may prove self-sustaining in the long run. By actively enabling women to ‘square the caring–work circle’, long-term welfare dependency is reduced, fertility is encouraged, and the tax base is enlarged. Pensions provide another test case for analysing the new politics of welfare – a singularly crucial one to boot, not least nancially. As Pierson notes (NPW, p. 88), public pension expenditures in the OECD constitute by far the lion’s share (roughly 40 per cent) of total social protection expenditures. In recent decades they have also come to absorb a rapidly increasing share of GDP, jumping from 4.6 to 8.5 per cent between 1960 and 1990. In the case of payas-you-go, payroll- nanced public pension systems, the basic nancial logic is simple: current workers’ contributions are used to fund current pensioners’ bene ts. Hence the pension programme’s linkages with the other components of the welfare triad are straightforward. The nancial viability of pay-as-you-go pensions systems is a function of a number of key household and labour market factors. Decreasing fertility, labour market participation and employment rates reduce the (potential) number of contributors to pensions, while increasing life expectancy and lower effective retirement ages enlarge the number of bene ciaries. Slow real wage growth, in turn, decreases the size of payroll revenues per contributor. These are the contextual parameters within and around which the politics of pensions can play. If the parameters are advantageous and/or the pay-as-yougo systems are young (contributors have not yet built up pension entitlements over long periods), the ‘old politics’ can reign supreme. Large and growing pools of workers then contribute to still small pools of bene ciaries, so politicians can afford to offer generous eligibility conditions and bene t levels,

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in an effort to build up electoral support (Pierson 1996) or to purchase labour peace now with the promise of ‘deferred wages’ later (Myles 1989). In contrast, when the nancial conditions are worsening and the system is mature, entirely different political conditions arise. Workers approaching retirement will then typically have paid contributions for many years, and will expect generous pensions when they themselves retire. Moreover, when shrinking pools of contributors need to nance large and growing pools of pensioners under conditions of slow wage growth, the nancial balance of the pay-as-yougo system is at risk. But attempts to switch to fully-funded arrangements, whereby current workers contribute to their own future pensions, will run into an additional obstacle: such shifts require workers to nance both current pensioners and their own future pensions at the same time. In Myles and Pierson’s view, this ‘ “double-payment problem” . . . is likely to present an insurmountable barrier to privatisation or the capitalisation of existing public schemes’ (NPW, p. 313; my emphasis). In reality, by 1980, the golden age of welfare capitalism was running on its last legs with respect to pensions as well. Unemployment levels continued to increase, averaging respectively 8.5, 10.1 and 7.5 per cent in the socialdemocratic, liberal and conservative-corporatist regime by the early 1990s, up from 1.6, 4.3 and 1.9 per cent in the 1960s. Yet, because of increasing female participation rates, the ratio of working to non-working (unemployed and inactive) population still went up in the rst two regimes, while decreasing slightly in the third. But from 1980 onwards, real per capita GDP growth started to decline everywhere, fertility declined, and populations were ageing. The share of the population over 65 in OECD countries increased from 9.4 to 13.9 per cent between 1960 and 1990 (NPW, pp. 93, 123, 129, 137). The latter-day political economy of pensions is thus one where governments are picking up the bills of generous past commitments while the system’s nancial viability is worsening. In short, it is a context of permanent austerity, where, in Pierson’s (1998) words, ‘irresistible forces’ of a demographiceconomic kind are meeting ‘immovable objects’ of a political-electoral kind. Reviewing the reform efforts that have followed in virtually all OECD countries, Myles and Pierson (NPW) distinguish two broad clusters of nations, precisely on the basis of whether or not signi cant pay-as-you-go earningsrelated pension programmes were fully established by the end of the golden age. In a rst cluster of seven ‘latecomer’ countries (Australia, Ireland, the Netherlands, New Zealand, Denmark, Switzerland and Britain), this was not the case. In a second, ‘mature’, cluster (consisting of continental Europe and the Nordic countries, and including the US and Canada), it was. The nature of the reform efforts undertaken in these two clusters seems to be in line both with the path dependence and the negotiated change theses. Consistent with the path dependence thesis, capitalization schemes proved politically feasible in the latecomer, but not in the mature, cluster. Govern-


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ments in the former cluster now no longer bear much direct responsibility for meeting future earnings-related pensions obligations. In contrast, Myles and Pierson assert that ‘none of the nations where extensive, mature pay-as-you-go systems were in place by the late 1970s, are moving towards full funding’ (NPW, p. 318; my emphasis). Reform here took the form of modest measures to reduce generosity, often phased-in very gradually and affecting future rather than current generations. Arguing that ‘the embeddedness of current pension commitments (or lack thereof ) tells us more . . . than any other analytic frame’, the authors conclude that ‘pension policy is a locus classicus for the study of “path-dependent” change’ (NPW, pp. 331, 306). Consistent with the pacted change thesis, in both clusters, the most signi cant pension reforms were implemented through inclusive strategies – seemingly paradoxically often with the explicit co-operation of organized labour. For instance, governments in Switzerland (1995) and New Zealand (1997) held referenda. In Italy and France, the Dini (1995) and Balladur (1993) governments, by obtaining labour’s consent, succeeded where the Berlusconi (1994) and Juppé (1995) governments failed (Bonoli, NPW). In going along with such changes, labour aimed to shift the responsibility for redistributive (as opposed to earnings-related) expenditures away from payroll taxes and towards the general budget, while at the same time retaining its own stake in the running of occupational pension plans. EASTERN FACTS There is a further reason why these are exciting times. In the formerly communist Central and Eastern Europe, the past decade has been marked by the ‘systemic’ paradigm shift towards democracy and the market. What we have here is no less than a half-continent of countries whose welfare regimes (in Esping-Andersen’s sense) have undergone among the most turbulent structural and nancial changes in the entire 1990s capitalist world. But more than eleven years after the start of this process, our theoretical understanding of post-socialist welfare is still in dire need of further development. Thus far, research on this region has been predominantly descriptive or normative rather than positive-theoretical, and country-speci c rather than general. Post-socialist Eastern Europe, of course, is still in many ways a positive theorist’s nightmare. Statistical data on the region are often unavailable, unreliable, or non-comparable. By its very nature, early transition was characterized by a higher-than-average degree of institutional ux, uncertainty and sheer chaos. However, this context also provides an excellent opportunity for testing existing theory. Political and economic legacies, policy contexts and governmental and social priorities all differed in crucial respects from those prevalent in advanced industrial democracies, thus raising a host of important theoretical and comparative-empirical questions regarding the nature, pace, tactics and design of welfare reforms.

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In this light, it is, to say the least, somewhat puzzling that both SF and NPW, despite their seemingly general focus on post-industrial ‘worlds’ of welfare, altogether skip over Eastern Europe, without much justi cation. EWE, TSS and, especially, PEPR, by offering sustained empirical analysis of pensions developments in 1990s Central Europe, go some way towards starting the integration of Eastern facts within Western theory. As I argue below, such cross-fertilization may prove fruitful in both directions, leading to a number of mutual additions, modi cations and puzzles. PEPR provides the most rigorous account to date of the political economy of post-socialist pensions. Empirically, Müller complements the use of uniformly calculated data from Schrooten, Smeeding and Wagner (in TSS) with a remarkably thorough factual knowledge of her three cases, Hungary, Poland and the Czech Republic. Theoretically, the approach is based on ‘actor-centred institutionalism’. This approach applies game theory to analyse the modes of interaction between given actors in a given structural-institutional context. In capable hands (e.g. Scharpf 1997), this has proved to be a powerful and parsimonious tool for reaching non-self-evident insights. However, Müller acknowledges in passing (p. 59, fn. 34) that the ‘transitional ux’ conditions preclude the use of game theory. While this is an altogether sensible point, it also produces results that are more descriptive and deterministic than counterintuitive. Nevertheless, in the light of Western theory, the Eastern ndings are striking in more than one respect. The Central European pay-as-you-go pension systems, having been set up shortly after World War II, had reached maturity by the 1980s. As Müller shows (pp. 62, 95, 128), between 1960 and 1980, replacement rates (average pension divided by average wage) converged to high levels in Hungary (from 32 to 55 per cent), Poland (from 40 to 46 per cent) and the Czech Republic (from 60 to 54 per cent). System dependency rates (pensioners divided by economically active population) also increased signi cantly, going from 24 to 43 per cent in Hungary and from 20 to 35 per cent in the Czech Republic. And yet, jumping to the mid-1990s, one sees that governments in Poland and Hungary, but not the Czech Republic, have implemented, in a short period of time, quite radical switches from a pay-asyou-go to a three-tiered approach, including a signi cant compulsory fullyfunded pillar. Viewed from the path dependence and retrenchment perspectives discussed above, this is in itself a remarkable observation. While these perspectives seem capable of shedding light on some aspects of the Central European reform cases (such as the gradual phasing-in of costly effects and other obfuscation strategies), on crucial other aspects they do not. Despite a joint socialist legacy, Hungary and Poland followed a different post-socialist reform path from the Czech Republic. Despite the maturity of existing systems, reforms in the former two countries were to a much larger extent radical and fully-funded (rather than incremental) and implemented ‘top-down’ by governments (rather


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than socially negotiated) than could be expected based on the Western experience. In a nutshell, Müller argues that the greater budgetary and debt problems in Hungary and Poland allowed actors who were ideologically or nancially interested in fully-funded reform options to gain greater leverage. In particular, the national Ministries of Finance enjoyed increasing in uence over the more status-quo-oriented Ministries of Welfare, and international nancial institutions such as the World Bank could step in to in uence policy through agendasetting and shifting. Now, this account ts the post-1996 developments very well. But it essentially shifts the explanatory burden one stage back in time. DIGGING DEEPER Exactly why did Hungary and Poland, pre-1996, follow different labour market and pensions paths compared to the Czech Republic? Between 1989 and 1996, system dependency rates simply skyrocketed in Hungary (from 51 to a staggering 84 per cent) and in Poland (39 to 61 per cent), but not in the Czech Republic (54 to 61 per cent). Both numerator and denominator were adversely affected: the number of pensions bene ciaries increased by respectively 22, 35 and 4 per cent, while the number of contributors dropped by 25, 14 and 7 per cent (PEPR, p. 152). The sheer number of people who retired in the rst two countries was breathtaking. Yet at the same time, the number of elderly people remained virtually constant. Hence, one might aptly label this a Great Abnormal Pensioner Boom, consisting overwhelmingly of ‘young’ workers going on early and disability retirement (Vanhuysse 2001). Moreover, as a number of contributions to TSS and EWE indicate, despite the rapidly worsening nancial precariousness of the pensions system, pensioners’ relative welfare, if anything, went up, not down. For instance, pensioner poverty decreased signi cantly in both countries at a time of rising overall poverty rates. Of course, the retrenchment perspective teaches that cutting down on pensions generosity or shifting from mature pay-as-you-go to fully-funded systems may be politically very dif cult, even if such actions would be welfareenhancing. However, it is one thing to predict that politicians may nd it hard to retrench pension systems in nancial troubles. It is quite another to predict that they will actually add to the already existing troubles by expanding rather than retrenching the systems – in a period, moreover, of tighter-than-ever budget constraints. Yet that is precisely what happened in the rst seven years of transition. In many ways, this period is best seen not as an instance of the ‘new’ politics of welfare, but as a peculiar and novel instance of ‘old’ welfare expansion despite conditions for retrenchment. Myles and Pierson identify the double-payment problem as a strong barrier to fully-funded reform in the mature Western cluster. Nevertheless, in the mature Hungarian and Polish systems, comparatively radical reforms were initiated from 1996 – incidentally, by ex-communist political parties, and just

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before, not after, general election periods. Stranger still: system dependency rates increased further in early transition, thus creating, as it were, a ‘double double-payment problem’. Where, strictly speaking, no immediate old age crisis existed in 1990, the rst post-socialist governments had nevertheless managed to create an impending nancial crisis by 1996. The accounts in PEPR, TSS and EWE heavily underplay the fact that these abnormal retirement policies were not purely an exogenous characteristic of the transition, but, rather, consisted of policy parameters that were still largely at the governments’ discretion. The political motives ascribed to these hugely costly policies, if any at all, are vague and off-hand. Müller asserts repeatedly that the pension system ‘was used to a considerable extent’ as a substitute for unemployment bene ts (p. 96, my emphasis; also pp. 63, 130, 150). Similarly, she joins the received academic wisdom in agreeing that pension reforms until the mid-1990s ‘were slow, piecemeal, and not sweeping enough’, thus leading to a nancial crisis that ‘did not stem from population ageing but was transformation-induced ’ (PEPR, pp. 71, 150, my emphasis; TSS, p. 282). Spéder actually argues that the nancial consequences were ‘unplanned . . . [their] signi cance was not only underestimated but also recognised rather late by policy-makers’ (EWE, pp. 53-4; my emphasis). Yet this begs more questions than it answers. The structural bias of such explanations is top-heavy, to the extent of hollowing out almost entirely the notion of rational actors making conscious policy decisions. Such views of incumbents’ behaviour are especially unsatisfactory if one considers the fact that the skyrocketing social expenditures that followed from their policies were subject to yearly budgetary revision by governments, while the laws that made them possible often still had to be written from scratch, and approved by majority in parliaments. The sheer availability of the economic incentive and of the legal opportunity to retire, and the unprecedented scale of this Great Abnormal Pensioner Boom, all call for deeper theoretical analysis. My own hunch is that ascribing unawareness or inertia to incumbents, even if partly true, has little predictive and explanatory power (were Czech incumbents smarter than their Hungarian and Polish counterparts?). Instead, incumbents, in all three cases alike, may be better viewed as using public spending for selective social groups as part of a strategy designed to achieve very urgent goals: political peace and patience during protracted socially costly reform periods (Vanhuysse 2001). All books reviewed here make an important contribution to our understanding of post-socialist pension politics. As I have argued, they also leave ample scope for providing a still better t between messy empirics and positive theory. Address for correspondence: Pieter Vanhuysse, Department of Government, London School of Economics, Houghton Street, London WC2A 2AE, UK. Tel: + (44) 207 574 4721. Fax: + (44) 207 278 2068. email: [email protected]


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ACKNOWLEDGEMENTS The author is af liated to the Fund for Scienti c Research (FWO), Flanders, and the Department of Economics of the Katholieke Universiteit Leuven (KUL). He gratefully acknowledges support from both institutions. REFERENCES Baumol, W. (1967) ‘The macroeconomics of unbalanced growth’, American Economic Review 57: 415–26. Esping-Andersen, G. (1990) The Three Worlds of Welfare Capitalism, Cambridge: Polity Press. Esping-Andersen, G. (ed.) (1996) Welfare States in Transition, London: Sage. Iversen, T. and Wren, A. (1998) ‘Equality, employment, and budgetary restraint: the trilemma of the service economy’, World Politics 50: 507–46. Myles, J. (1989) Old Age in the Welfare State. The Political Economy of Public Pensions, Boston: Little, Brown & Co. Pierson, P (1994) Dismantling the Welfare State? Reagan, Thatcher, and the Politics of Retrenchment, Cambridge: Cambridge University Press. Pierson, P. (1996) ‘The new politics of the welfare state’, World Politics 48(2): 143–79. Pierson, P. (1998) ‘Irresistible forces, immovable objects: post-industrial welfare states confront permanent austerity’, Journal of European Public Policy 5(4): 539–60. Pierson, P. (2000) ‘Increasing returns, path dependence, and the study of politics’, American Political Science Review 94(2): 251–67. Scharpf, F.W. (1997) Games Real Actors Play: Actor-Centered Institutionalism in Policy Research, Boulder, CO: Westview Press. Vanhuysse, P. (2001) ‘Divide and muddle: procuring postsocialist peace and patience’, London: London School of Economics, manuscript (available on request).