The Politics of Retrenchment in a Social Democratic Welfare State ...

COMPARATIVE Anderson / POLITICS POLITICAL OF RETRENCHMENT STUDIES / November 2001

What explains the origins and pattern of retrenchment dynamics in Swedish old-age pensions and unemployment insurance during the 1990s? Although the economic crisis created pressure to scale back both programs, the author argues that retrenchment only occurred when and where the Social Democratic Party and some segments of the labor movement supported change. This finding suggests that the political importance of organized labor in retrenchment politics depends on the relationship between welfare-state programs and interest group structure. When interest group structure is characterized by solidaristic, centralized, encompassing organizations, the old class-based power resource model has more explanatory bite than Pierson’s new politics of the welfare-state approach.

THE POLITICS OF RETRENCHMENT IN A SOCIAL DEMOCRATIC WELFARE STATE Reform of Swedish Pensions and Unemployment Insurance KAREN M. ANDERSON University of Twente

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he past two decades have been marked by far-reaching changes in the welfare states of the advanced capitalist countries. In the United States and Great Britain, conservative governments largely failed in their attempts to dismantle the welfare state, but substantial retrenchment occurred nonetheless (Pierson, 1994). In the Christian Democratic welfare states of Western Europe, governments also legislated sweeping reforms designed to transform “vices” into “virtues” by reversing the dynamic of welfare without work and restoring balance in the welfare states of the Netherlands, France, and AUTHOR’S NOTE: I thank the American Scandinavian Foundation and the Center for West European Studies at the University of Washington for financing field research in Sweden. For helpful comments on earlier drafts, I am indebted to John Keeler, Christine Ingebritsen, Diane Sainsbury, Rianne Mahon, Paul Pierson, Bruno Palier, Romke van der Veen, two anonymous reviewers, and especially Leslie Eliason and Herman Schwartz. COMPARATIVE POLITICAL STUDIES, Vol. 34 No. 9, November 2001 1063-1091 © 2001 Sage Publications

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Italy (Levy, 1999; Visser & Hemerijck, 1997). In the Social Democratic welfare states of Scandinavia, parliamentary coalitions, often including Left parties, have adopted reforms described as the “negotiated adaptation” of the welfare state to a changed economic and demographic context (Albæk, Eliason, Nørgaard, & Schwartz, in press). Explaining this seemingly ongoing process of restructuring and retrenchment has led to a critical reexamination of the mainstream literature on welfare-state development. Crucial to this reappraisal is the issue of whether existing theory can explain the mechanics of change or whether the dynamics of retrenchment constitute a new politics of the welfare state (Pierson, 1996) requiring the elaboration of a new analytical framework. Pierson’s (1994, 1996) work has emerged as central to this issue. He argues that the politics of retrenchment is very different from the dynamics of welfare state expansion. Whereas expansion policies are generally popular, retrenchment initiatives usually provoke public opposition. Thus retrenchment is politically difficult, largely because of the mobilizing potential of interest groups and policy advocates that previous policies helped to create. According to Pierson, these feedback effects of previous policies, rather than the influence of political parties, social movements, and labor organizations, are the crucial variable for explaining the institutional resistance of welfare states to change. Pierson’s new politics thesis provides a compelling explanation of retrenchment dynamics, but does the theory hold in additional empirical settings? Similarly, is existing welfare state expansion research as ill equipped to explain retrenchment dynamics and outcomes as Pierson argues (cf. Ross, 2000)? This article attempts to provide answers to these questions by investigating two related issues: the role of interest group structure in retrenchment processes and the political status of organized labor and left parties in shaping welfare state reform. The article makes two main criticisms of the new politics thesis. First, Pierson’s policy feedback model ignores differences in interest group structure that help to explain retrenchment dynamics. Because Pierson’s central cases are two pluralist political economies, the United States and Great Britain, his framework neglects aspects of retrenchment politics in corporatist polities. Where corporatist interest group structure exists, retrenchment may not be as difficult as Pierson suggests. Second, Pierson prematurely argues that unions and left parties no longer play a central role in welfare state politics because of the rise and increased influence of other client-based interest groups. Indeed, Pierson’s later work modifies this claim but does not elaborate the conditions under which labor influences retrenchment processes (Pierson, 2001). This article attempts to address this weakness in the new politics literature and finds that Social Democratic parties and labor unions are still central actors in political struggles about the welfare

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state, at least in corporatist states. These criticisms suggest that existing theory emphasizing Social Democratic corporatism and cross-class coalitions should not be discarded. Based on these criticisms, this article focuses on recent retrenchment politics in Sweden in two policy areas: old-age pensions and unemployment insurance. Although both programs experienced cutbacks, pension retrenchment was more successful than efforts to roll back unemployment insurance. A multiparty coalition including the Social Democratic Party (SAP) and the major nonsocialist parties agreed on a major pension overhaul. Behind this parliamentary alliance was a tacit agreement among employers, blue collar unions, and the SAP leadership about the necessity of reform. In contrast, the nonsocialist parties (backed by organized business) failed to weaken the union-administered unemployment insurance funds because of the opposition of the SAP and unions. To explain the varied fates of old-age pensions and unemployment insurance, I draw on Pierson’s central insight that the feedback effects of program structures channel retrenchment dynamics in distinctive ways. However, I extend the analysis of program structure beyond the issue of who benefits from existing social policies by also focusing on the groups that finance and administer social programs. These two aspects of program structure are largely ignored in Pierson’s analyses, and they are important for explaining part of the class character of retrenchment struggles. Consistent with the work of Esping-Andersen (1985, 1990) and others who stress the role of classes and coalitions, I emphasize the crucial role of unions and left parties in retrenchment politics (Clayton & Pontusson, 1998; Huber & Stephens, 1998; Schwartz, 1994, 1998; Swenson, 1992). I sketch the conditions under which unions and left parties matter and provide an explanation for why labor might not block retrenchment efforts. Although the Swedish case does not constitute a “critical case” in methodological terms, the recent wave of retrenchment in Sweden has important implications for constructing a comparative theory of welfare-state retrenchment and restructuring. The Swedish case merits analysis because class actors have dominated welfare-state politics since the 1930s. Thus close analysis of recent reforms provides an opportunity to investigate the role of labor movements and employers’ organizations in retrenchment politics. Given Pierson’s own recent modifications about the role of unions and left parties in retrenchment politics, the key issues are how and when labor matters and whether labor plays the same role in the reform of mature welfare states as it did in the expansion of welfare states. The 1991 to 1993 recession in Sweden largely explains the massive fiscal pressure on social programs. Between 1990 and 1993, Sweden went from

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budget surplus to a deficit of 12.3% of gross domestic product (GDP). During the same period, open unemployment climbed from 1.7% to 8.2%. The depth of this crisis can hardly be exaggerated. The recession undermined two crucial preconditions of the Swedish welfare model—full employment and stable growth—and prompted massive reductions in public spending (Huber & Stephens, 1998; Pontusson, 1992). The willingness of both nonsocialist and SAP governments to attempt retrenchment is explained by the crisis in state finances caused by the recession. However, large government budget deficits were a necessary, but not sufficient, condition for substantial retrenchment. Recent research demonstrates that seemingly powerful economic constraints do not necessarily lead to welfare state cutbacks (Weyland, 1996). Because the same time period (1991-1999) applies to both cases, national fiscal pressures are held constant. The first section critiques Pierson’s new politics thesis and examines class-based explanations of welfare-state development, presenting an alternative explanation for Social Democratic retrenchment. The second section applies the argument to two cases of social insurance retrenchment in Sweden during the 1990s: old-age pensions and unemployment insurance. The third section concludes the article with a discussion of the theoretical implications of the article’s findings.

THE NEW POLITICS THESIS The central claim of Pierson’s new politics thesis is that retrenchment is a “distinctive and difficult enterprise” that is likely to involve political dynamics fundamentally different from those associated with welfare-state expansion. The logic of collective action is central to Pierson’s argument about the difficulty of retrenchment; groups likely to suffer concentrated losses as a result of retrenchment are likely to engage in collective action and mobilize against retrenchment. In contrast, Pierson assumes that the benefits of retrenchment accrue to diffuse interests, primarily taxpayers, that are not organized and hence face considerable barriers to collective action in support of retrenchment. Moreover, voters tend to respond more strongly to potential losses than to the prospect of commensurate gains, so retrenchment is electorally risky. Thus retrenchment involves a politics of blame avoidance rather than the credit claiming that characterizes the extension of welfare-state policies. The upshot of the argument is that retrenchment is successful only when politicians are able to devise strategies that minimize popular opposition to proposed policy changes. Thus the new politics thesis portrays retrenchment


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as a politically risky process dominated by client-based interest groups rather than class-based actors (Pierson, 1994). This section critically evaluates the new politics thesis and highlights the undertheorized nature of Pierson’s arguments about the micro logic of retrenchment dynamics. Although Pierson (1994) devotes considerable attention to microfoundations, the theory provides an inadequate theoretical basis for predictions about which groups are likely to influence social welfare politics for major programs such as public pensions and whether they will act in a self-regarding or other-regarding manner. Pierson’s theory would be correct only if the structure of welfare-state programs always leads to retrenchment processes involving diffuse gains and concentrated losses and only if the process is dominated by client-based rather than class-based actors. However, the collective action literature and comparative welfare regime research suggest that Pierson’s theory examines only one of several potential logics of retrenchment, depending on the potential distribution of gains and losses among groups. The interaction of welfare regime type and interest group structure accounts for these additional logics of retrenchment and reveals the centrality of class politics under certain conditions. The discussion draws on collective action literature, welfare regime theory, and arguments emphasizing Social Democratic corporatism and cross-class coalitions to identify the conditions under which class actors rather than client groups dominate retrenchment processes. This section also lays out the sources of actors’ preferences and behavior. Thus this section addresses two related questions: When do class actors matter? and What are the goals and incentives driving their behavior? In particular, I emphasize the role of labor unions and left parties in influencing retrenchment outcomes. The micro logic of the new politics thesis implies that all interest groups with a stake in welfare-state policies are potentially important and will mobilize against retrenchment efforts unless they are unaware of potential losses, are compensated through side payments, or are too divided to mobilize effective opposition (Pierson, 1994, 1996). Thus, in the universe of potentially affected groups, it is not clear from the outset which groups are more important than others in influencing outcomes, and Pierson does not identify the logic underlying interest groups’ behavior and their interaction with politicians. Pierson’s insistence that retrenchment involves concentrated losses in return for diffuse gains appears to rest on the implicit assumption that the structure of all capitalist welfare states is broadly similar to the liberal welfare states of the United States and Great Britain. This liberal bias means that Pierson does not adequately investigate the ways in which program financing

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and administration influence retrenchment struggles. In most liberal welfare regimes, social programs are financed by a mixture of general revenues or by relatively low-earmarked payroll taxes shared by employers and employees. In addition, organized interests play almost no role in the administration of benefits. Thus welfare benefits accrue to concentrated groups of program beneficiaries represented by narrow interest groups while the diffuse interests (taxpayers) that finance benefits remain unorganized. Collective action is much more likely for the former group than for the latter. Pierson’s exclusive focus on the interest groups representing the beneficiaries of liberal welfare-state programs obscures potentially important retrenchment dynamics in welfare regimes with nonliberal financing and administrative structure. For example, employer financing of social insurance programs is substantial in most Social Democratic and corporatist welfare regimes. In some countries, including Sweden, employers’ share of financing exceeds 30% of payroll and sometimes finances 100% of program costs. This type of financing structure means that retrenchment efforts may involve specific and concentrated benefits rather than the diffuse benefits that Pierson claims. If employers are organized and face high levels of social insurance taxation, they are likely to lobby for a change in the distribution of financing, especially in periods of low economic growth. Thus retrenchment may result in concentrated benefits for employers, depending on the structure of financing. This illustrates an important point about Olsonian collective action. Most studies of Olsonian collective action stress the benefits accruing to small groups and consequently analyze rent-seeking behavior. However, retrenchment can also involve rent avoidance as groups such as employers try to minimize their financial contribution to the welfare state. The structure of social program administration also influences the distribution of the costs and benefits of retrenchment. As Mancur Olson (1965) argues, interest groups rely on the provision of selective incentives to members to increase their membership and organizational resources. Thus the question of who administers social welfare programs may be as politically important as who receives benefits. For example, unions administer unemployment benefits in several West European welfare states, including Sweden, and this arrangement provides powerful incentives for wage earners to join unions (Rothstein, 1992a). For governments intent on curbing union power, the decorporatization of such administrative arrangements may be a high priority even if the issue of benefits is not directly at stake. For employer organizations, the decorporatization of administration may bring concentrated gains in terms of reducing the bargaining power of unions as the capacity of unions to recruit members decreases. Similarly, we would expect labor


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parties to jealously guard existing administrative arrangements that enhance the organizational resources of unions. Pierson’s arguments about the salience of client-based interest groups and the declining significance of class actors such as labor also rest on the implicit assumption that the relationship between interest group structure and welfare-state structure in other welfare states is broadly similar to the pluralist systems of the United States and Great Britain (cf. Visser & Hemerijck, 1997). However, interest group structure varies widely among the advanced capitalist states. Both the United States and Britain are dominated by segmented interest groups that largely represent the narrow interests of their members. In contrast, other welfare states are characterized by a solidaristic system of interest intermediation in which peak-level union organizations are the principal defenders of the interests of welfare-state beneficiaries (Garrett, 1998; Katzenstein, 1985). This observation casts considerable doubt on Pierson’s conclusion about the declining significance of organized labor in retrenchment politics. Thus Pierson’s arguments are really a middle-range theory of welfare-state retrenchment in pluralist democracies, but this reveals little about nonpluralist democracies. Moreover, Pierson’s argument may not even apply to other Anglo-American democracies because Australia and New Zealand have, or have had, corporatist-style interest intermediation (Schwartz, 1998). Pierson’s analysis also implies that pro-welfare interest groups usually emerge separately and autonomously from trade unions. As welfare states mature, pro-welfare interest groups surpass unions as the principal defenders of the welfare state. As the preceding criticism indicates, however, this is not always the case. Where strong labor movements have influenced the development of social policy such that the emergence and/or influence of more narrowly organized interest groups is limited, the unions are likely to remain the primary defenders of existing social policy arrangements. In Social Democratic welfare states, client groups are weak and invisible because they have been co-opted into the apparatus of the labor movement. Thus even policy feedback processes can lead to the entrenchment of class politics rather than the emergence of clientele politics. Pierson is surely correct about the importance of policy feedback effects, but this claim is similar to arguments advanced by Esping-Andersen (1985, 1990). In Scandinavia, policy feedback led to the entrenchment of class politics, whereas in the already fragmented and pluralist United States and Britain, it reinforced pluralist politics. Thus policy feedback may simply be the path dependence that Pierson (1996) has analyzed in his other work.

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FOUR LOGICS OF RETRENCHMENT: WHEN CLASS ACTORS MATTER

This section examines the issue of which actors are likely to mobilize to support or oppose retrenchment initiatives. As noted, the collective action literature suggests that the new politics thesis explores only one of several potential logics of retrenchment. As portrayed by Pierson, retrenchment involves concentrated losses in return for diffuse gains. However, once we consider the role of financing and administration and the class character of welfare regimes in shaping the potential distribution of gains and losses among groups, three additional logics are possible. Table 1 shows four logics of retrenchment depending on the type (diffuse or concentrated) of costs and benefits as well as their distribution among affected groups. The costs of retrenchment are considered to be concentrated if potential losers are represented by organized groups or they form an important voting bloc. Costs are considered to be diffuse if potential losers are not identifiable, divided into rival groups, or not organized at all. The benefits of retrenchment are considered to be concentrated if potential winners are represented by organized groups or they form an important voting bloc. Benefits are diffuse if the group of potential winners is not identifiable, divided into rival groups, or not organized at all. For each of the four cells, an ideal typical description of program structure is identified. The table also identifies the type of political process associated with each of the four logics of retrenchment. Pierson’s conceptualization of retrenchment is labeled pluralist because it involves bargaining between client groups and politicians over concentrated costs and diffuse benefits. What is most relevant for this analysis is the corporatist political process that results when retrenchment involves concentrated losses in return for concentrated benefits. This type of retrenchment process is most likely when program structure relies heavily on employer financing or shared financing by employers and employees and benefits go to highly organized groups typically represented by labor unions and left parties. In corporatist retrenchment, organized labor and capital play a substantial if not dominant role, and this logic is most likely in Social Democratic and corporatist welfare regimes. The remaining two types of retrenchment appear to be less common in empirical terms because there are few actual program types that conform to either logic. For example, retrenchment involving diffuse costs in return for concentrated benefits is associated with programs financed by employer contributions, and potential losers are not identifiable and/or are not organized. French family allowances are a possible candidate for this logic of retrenchment because employers finance all program costs and beneficiaries are not organized. Finally,


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Table 1 Four Logics of Retrenchment Benefits of Retrenchment

Costs of Retrenchment Concentrated

Diffuse

Concentrated

Ideal type: Program financed by Ideal type: Program financed by employer payroll contributions employer payroll contributions where employers are organized; where employers are organized potential losers are highly organized and potential losers are not identior electorally important groups fiable, divided into rival groups, or Example: Swedish social insurance not organized Corporatism Example: French family allowances.

Diffuse

Ideal type: Program financed by general revenues where potential losers are highly organized or electorally important groups Example: U.S. Social Security Pluralism

Ideal type: Program financed by general revenues where potential losers are not identifiable, divided into rival groups, or not organized Example: Danish Health Insurance State autonomy

retrenchment in which state autonomy is expected to prevail is characterized by both diffuse costs and diffuse benefits. Because neither winners nor losers from retrenchment are concentrated, retrenchment is assumed to occur at the initiative of state actors. CORPORATIST RETRENCHMENT: THE GOALS AND INCENTIVES SHAPING BEHAVIOR

The previous section identified the conditions under which class actors matter in retrenchment politics. But how do actors define their preferences, and how do actors translate preferences into favorable policy outcomes? The literature on Social Democratic corporatism and collective action suggests that interest groups, especially labor unions, are capable of both self-regarding and other-regarding behavior. When will each type of behavior prevail? In other words, when are unions likely to accept retrenchment, and when is labor likely to mobilize opposition to cutbacks? Garrett (1998) argues that powerful left-wing parties allied with centrally organized labor movements promote policies resulting in economic efficiency and stability. Although this type of research has typically focused on labor unions’ cooperation in wage restraint in return for government policies that cushion the effects of markets and promote employment, the argument can be extended to explain the cooperation of unions and Social Democratic

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parties in welfare-state retrenchment. As Swenson (1992) argues, “Social Democratic labor unions and parties are likely to impose limits on the welfare state” (p. 46) when welfare-state growth harms economic performance. Just as labor has an interest in a universal, generous, publicly financed welfare state, it also has an interest in ensuring that existing welfare-state programs do not unduly burden public finances. As Schwartz (1998) argues, clean fiscal balance sheets were a “hidden precondition” for the Social Democratic welfare state. Thus rising deficits at both the program and central government level undermine the future solvency of the welfare state and cast doubt on the state’s ability to meet its future welfare commitments. Under these conditions, unions have an incentive to cooperate with politicians pursuing reforms designed to improve public finances and the performance of social programs. Indeed, governments planning retrenchment may ask for union support of reforms in exchange for union influence on the content of reforms as well as on measures that soften their negative impact (Ebbinghaus & Hassel, 2000). Olson’s (1984) distinction between interest groups with narrow versus encompassing interests helps to explain union behavior in retrenchment politics. Whereas organizations representing narrow interests have strong incentives to engage in rent-seeking behavior, encompassing organizations face different incentives. Because encompassing organizations by definition represent the interests of a large segment of society, their members share in both the benefits and the losses resulting from policies that affect their members. Thus encompassing organizations with rational leaders “will care about the excess burden arising from distributional policies favorable to its members and will out of sheer self-interest strive to make the excess burden as small as possible” (Olson, 1984, p. 48). A brief examination of interest groups affected by pension issues illustrates this logic. In the United States, the American Association of Retired Persons (AARP) is a powerful force in public pension politics, as Pierson (1994) makes clear. The AARP has a very large membership with significant electoral clout. However, the AARP represents the narrow interests of current pensioners and has few incentives to care about the impact of pension costs on the current workers and firms who finance public pensions. Thus the AARP has little incentive to cooperate in pension reforms that impose losses on current beneficiaries, even if maintaining benefit levels requires increases in payroll taxes or general tax increases required to fund rising pension costs. In contrast, the large union confederations in Sweden, such as the Landsorganisationen (LO), or Trade Union Confederation, represent the interests of both current pensioners and the workers whose contributions finance pensions. As such, the LO is an encompassing organization, in Olsonian terms.


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As a union confederation, the LO cares about wage levels, including current and future pensions, because they are a form of deferred wage. In addition, the LO cares about the overall level of employment in the economy and must balance its interest in rising real wages with concerns about the impact of pension financing on the overall health of the economy. Moreover, to the extent that public pensions are the main source of retirement income for retired and working LO members, the LO must be concerned about the overall stability of the pension system. Whereas the AARP views public pensions as earned rights, the LO views public pensions as deferred wages. Thus, in contrast to the AARP in the United States, the LO faces strong incentives to limit the distributional burden of the pension system on the overall health of the economy and the future stability of the pension system. However, the LO has no incentive to cooperate in retrenchment if potential losses are judged to be greater than the benefits of improving public finances and/or improving program performance. To summarize, unions pursue either self-regarding or other-regarding policy preferences depending on the structure of incentives they face. The type of incentive is shaped by program structure and the balance of costs and benefits associated with retrenchment initiatives. If unions accept that program cutbacks will result in improved program performance in the long run and contribute to the improvement of public finances, they have an incentive to cooperate in retrenchment to the extent that they are also invited to influence the content of retrenchment. However, the distribution of retrenchment costs and benefits may vary across different segments of organized labor. To the extent that retrenchment plans divide labor, retrenchment will be more difficult. The inverse is also true: When organized labor is unified in its preferences concerning retrenchment, its influence is that much greater. Thus we need to know the preferences of different segments of organized labor across different policy sectors. THE INTENSITY OF LABOR’S PREFERENCES

This section presents a simplified model for deriving union preferences in unemployment insurance and pension policy in Social Democratic welfare regimes. Here, social insurance is financed mainly by employer payroll contributions, and the private sector plays a minor role in ensuring against the risks of old age and unemployment. The state administers the pension system, whereas the unions administer income-related unemployment insurance benefits. Union preferences can be derived from the ways in which social policies contribute to union goals and resources. Unions’ central resources are their organizational strength, especially the size of their mem-

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bership, whereas their most important goals are to obtain rising real wages and favorable working conditions. The extent to which program structure contributes to these goals and resources shapes the intensity of union preferences regarding retrenchment. How does the intensity of union preferences vary with respect to old-age pensions and unemployment insurance, and how do preferences vary across different segments of organized labor? Both pensions and unemployment insurance can be seen as a form of wage. Pensions represent a deferred wage, whereas unemployment insurance represents a replacement or reserve wage. As the previous section argues, union confederations are concerned with both the current level of pensions, because these represent deferred wages, and the ability of the pension system to meet future pension obligations. Because of the substantial cost of pensions and the long-term commitment implied in accrued pension rights, unions must consider the capacity of the pension system to deliver both current and future pensions. In contrast, the level of unemployment benefits involves two separate considerations. First, if the unemployment insurance system is administered by the unions, workers have powerful selective incentives to join unions (Rothstein, 1992a). To the extent that unions want to maintain or increase membership, the retention of union administration is extremely important. Moreover, union administration means that unions control the decision-making process about what constitutes unemployment and which jobs the unemployed are required to take. Second, the level of unemployment benefits also determines the reserve wage, or the level below which workers cannot underbid wages. Hence the reserve wage has important implications for the overall minimum level of wages in the economy. To the extent that unions want to prevent wage levels from falling, they will oppose decreases in the benefit level (Rothstein, 1992b). This logic should apply for both white-collar and blue-collar union confederations. What does this mean in practice? Assuming that labor wants to maintain union administration and to prevent the reserve wage from falling, it will oppose retrenchment. If labor also wants to preserve pension levels because of their function as a deferred wage, labor will also oppose pension retrenchment. However, these conditions are relaxed under conditions of severe fiscal stress and program instability because labor may be inclined to cooperate to contribute to solving both kinds of problem. Thus what happens when labor faces the prospect of retrenchment in both programs? Arguably, union membership and control over the reserve wage are more important for workingclass strength than the level of pensions (Rothstein, 1992b), and this is especially true for the level of future pensions. Moreover, large public pension systems face demographic and financing challenges that are not as prevalent


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in unemployment insurance. Thus the stability of the pension system should be more important in labor’s calculations than the stability of the unemployment insurance system. Finally, labor may be inclined to accept some reduction in the reserve wage, but the retention of union administration can be expected to be labor’s top priority. In sum, labor may accept reductions in the reserve wage but is likely to oppose all attempts to weaken union administration of benefits. The picture is more complicated once we introduce the preferences of different segments of organized labor. In pension policy, blue-collar and whitecollar unions are likely to differ with regard to the benefit formula. In general, blue-collar workers spend little or no time in higher education, and their earnings profile is marked by long labor market participation with steadily rising wages. In contrast, white-collar groups typically spend several years in higher education such that they enter the paid workforce later, and their earnings profile rises more steeply at the end of their career. Whereas both bluecollar and white-collar unions are likely to prefer employer financing and state administration, blue-collar groups will be indifferent to the issue of whether higher education earns pension rights, whereas this is likely to be a crucial issue for white-collar unions. Thus the issue of how pension benefits are calculated is likely to be the chief dividing line between white-collar and blue-collar union pension preferences. In contrast, white-collar and blue-collar union preferences are likely to be similar regarding unemployment insurance. Both groups are likely to prefer union administration, employer financing, and income-related benefits. The final piece of the puzzle concerns the mechanisms through which labor pursues its policy preferences. Do unions participate in corporatist bargaining with the state and employers to influence the content of reforms? Or do they act primarily as a lobby group reacting defensively to retrenchment proposals after they are introduced? There is a large literature on the decline of corporatism, but this research focuses mainly on the decentralization of wage bargaining. Indeed, Swedish wage bargaining institutions demonstrate the decreasing salience of corporatist wage bargaining (Pontusson & Swenson, 1996). However, corporatist forms of political exchange exist outside the realm of wage bargaining and are still relevant regarding negotiations about welfare-state reform. There is no reason to expect that this type of corporatist exchange has lost importance simply because of the decline of corporatist wage bargaining. In fact, the loss of union influence in wage bargaining may heighten the significance of corporatist negotiations regarding the welfare state as unions seek to make up for loss of influence in wage setting with increased activity in bargaining over welfare issues.

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SOCIAL INSURANCE RETRENCHMENT 1990-1998 OLD-AGE PENSIONS

Until recent reforms, the outstanding features of the Swedish pension system were the dominance of the state and the significant role of the public pension funds in generating national savings. The pension system is the largest government program in terms of spending, and costs have risen dramatically. In 1965, pension spending totaled 4.3% of the GDP but had risen to 12.2% of the GDP in 1992. In 1992, the publicly controlled pension funds (AP funds) stood at 512 billion Swedish Kronor (SEK) or 35% of the GDP (Proposition 1993/94: 250, p. 16). The public pension system enjoys widespread support, but its large share of public spending makes it a natural target for cutbacks in periods of budgetary pressure. Between 1991 and 1998, governments of both the Left and the Right adopted sharp cuts in pension benefits to achieve immediate budget relief, and they legislated major structural reform to ensure the future sustainability of the system. These changes entail a significant decrease in nominal benefits for current pensioners, and future pensioners will be subject to a radically different set of rules governing financing, eligibility, and benefit indexing. As a result, the revamped pension system will lose much of its redistributive character and will play a much smaller role in generating publicly controlled national savings. In 1990, the public pension system consisted of two tiers: the flat-rate basic pension and the national supplementary pension (ATP). Both tiers operated as pay-as-you-go systems financed by earmarked employer contributions. In 1990, the basic pension contribution (7.45% of payroll) financed 85% of benefits (the state paid the rest), whereas the ATP contribution (13.5% of payroll) financed both current benefits and the accumulation of savings in the AP funds. For retirees with few or no ATP pension credits, the basic pension system provided a flat-rate benefit, whereas the ATP system provided income-related pensions calculated according to “defined benefit” principles. A full ATP pension pays 60% of average income for the best 15 years of at least 30 years of labor market participation up to the benefit ceiling. The 15-30 rule was the primary concession made to white-collar groups to gain the support of the Tjänstemännens Centralorganisation (TCO), or Central Organization of Salaried Employees, for the ATP reform in 1959 (Heclo, 1974). Both the basic pension and the ATP pensions are indexed to inflation every year. Despite widespread support for the pension system, the recession and shift to the right in electoral politics pushed the issue of pension reform to the


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140,000

SEK millions

120,000 100,000 80,000

revenues

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expenditures

40,000 20,000 0 1981

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Figure 1. National supplementary pension (ATP) revenues and expenditures, 1981-1998. Source: Riksförsäkringsverket (1994). Note: SEK = Swedish kronor.

top of the political agenda. Moreover, central features of the system were singled out as serious weaknesses after a series of expert studies published in the early 1990s triggered an intense policy debate. These studies identified four weaknesses: the sensitivity of the ATP system to economic swings and low growth, projected reduction of the AP funds, the weak link between contributions and benefits, and the rising cost of basic pensions (Bröms, 1990; Lindbeck, 1992; Olsson & Schubert, 1991; Söderström, 1991). Moreover, the Svenska Arbetsgivareföreningen, or Swedish Employers Federation (SAF), called for radical reform, arguing that the pension system adversely affected national savings, contributed excessively to nonwage labor costs, and reduced work incentives (Svenska Arbetsgivareföreningen, 1990). The design of the ATP system assumes a stable annual economic growth rate of 3% to 4% and full employment. When inflation began to exceed real wage growth in the 1980s, the indexing mechanism resulted in rising pension costs relative to payroll tax revenues, raising the specter of trust fund reduction. In 1982, AP fund strength was 7.4, and it had declined to 5.1 in 1992 (fund strength is the number of years the AP funds can finance benefits; Riksförsäkringsverket, 1994). Since 1982, ATP contributions have not covered expenditures, and the gap has increased because of the economic crisis. Figure 1 shows the growing gap between contributions and expenditures in the ATP system since 1981. Revenue shortfalls in the basic pension system also exacerbated central budget deficits as the state absorbed higher propor-

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80000 60000 40000 20000 0 1981

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contributions

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expenditures

Figure 2. Basic pension balance, 1981-1997 (Swedish Kronor millions). Source: Riksförsäkringsverket (1994).

tions of program financing. Figure 2 shows the rapid increase of state grants to the basic pension system between 1981 and 1998. Both political blocs struggled to control the pension reform debate. For the nonsocialist parties (and their allies in organized business), their tenure in office during an economic downturn provided the strategic opportunity to advocate changes only recently considered politically impossible. The maturity of the system made radical privatization impossible, but reform offered the promise of trimming the Social Democratic excesses from the system, especially the perceived disincentive to work and the accumulation of large public pension funds. For the SAP, retrenchment was a painful necessity brought on by the economic crisis and an opportunity to preserve the basic structure and scope of the pension system by correcting its perceived weaknesses. Between 1991 and 1998, policy makers legislated a complicated series of retrenchment initiatives affecting both current and future retirees. In terms of short-term cuts, politicians argued that retirees should shoulder part of the burden of deficit reduction, and they canceled the full up-rating of benefits. Between 1991 and 1998, the base amount used to calculate benefits did not keep pace with inflation. During the November 1992 currency crisis, the nonsocialist government and SAP opposition agreed to calculate pensions at 98% of the already reduced base amount, and this rule was extended in 1993, 1994, 1995, 1996, 1997, and 1998. In 1995, the SAP government adopted an indexing rule in which the base amount was increased by 60% of the consumer price index as long as the budget deficit exceeded SEK 100 billion. This cut also applied to pension payments that had already been reduced by


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2%. Between 1991 and 1995, downward adjustments reduced the value of the base amount by 11% relative to price increases (Folksam, 1996). In addition to these short-term benefit reductions, the five main political parties negotiated a substantial reform of the entire pension system. In 1991, the nonsocialist government appointed a working group composed of representatives from the parliamentary parties to formulate reform legislation. Unlike earlier pension investigations, the working group excluded members of the interest groups, including the union confederations TCO, Sveriges Akademikers Centralorganisation (SACO), or Confederation of Professional Associations, and LO. TCO, SACO, and LO were still consulted and their views were well known, especially to the SAP, but they could not directly influence the content of the reform. The working group issued a comprehensive report in early 1994, and parliament passed the initial reform legislation in June 1994. Between mid-1994 and mid-1998, an implementation group worked to finalize the details of the reform. By early 1999, nearly all aspects of the reform had been implemented. The new system departs from the existing system in several fundamental respects. First, ATP benefits will be based on lifetime earnings rather than the best 15 years of 30. Thus the link between pension contributions and benefits is made explicit, and the new system will lose much of its redistributive character. Second, pension contributions will be evenly divided between employers and employees. The switch to employee payroll taxes is intended to increase public awareness of the costs of retirement. Previously, employers paid the pension payroll tax, and it was not reported on wage earner’s paychecks. Third, a new index will link benefits to wage developments and real economic growth. Pensions will also be adjusted if average life expectancy changes. These changes mean that the pension system will be more resistant to economic swings and it will be self-financing regardless of the state of the economy. Fourth, pension rights may be shared by spouses and pension points will be earned for military service, child rearing, and education. Finally, the new system contains a premium reserve; of the total 18.5% in pension contributions, 2.5% will be placed in an individual investment fund. Thus the pension system is designed to be transparent in that individuals receive an annual statement about the size of their projected pension. In addition, the old basic pension and pension supplement will be replaced by a higher guaranteed pension financed by general revenues for those not eligible for income-related benefits. The transition to the new system will take 20 years (Proposition 1993/94: 250; Statens Offentliga Utredningar, 1994a). Unions’ responses to the proposals ranged from cautious acceptance to strong criticism. The LO’s main concern was the retention of a publicly financed, income-related system, so it accepted the main features of the

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reform in return for improved stability in the system. However, the LO had to compromise on two central issues: the premium reserve and, especially, shared employer-employee financing (LO, 1994). In contrast, TCO and SACO accepted the necessity of reform but argued strenuously that pension points for education were entirely too low. Both union confederations demanded the postponement of the reform until this issue was resolved (SACO, 1994; TCO, 1994). TCO and SACO also opposed the switch to shared financing. Significantly, LO declined to join with TCO and SACO in their opposition to the proposed method of pension credits for education. The pension reform is a complex set of new rules, and sorting out the effects on future retirees is difficult. There is no doubt, however, that the new system is a major departure from existing pension policy. In particular, the switch from defined benefits to defined contributions in the ATP system is a radical change. A study conducted by the National Insurance Board estimated that two thirds of those studied would be losers in the new system, mainly TCO members and women who work fewer than 40 years (Statens Offentliga Utredningar, 1994b). The biggest winners are those who work less than 20 years and receive the new higher guaranteed pension. To receive the same pension benefits under the new system, at least 40 years are required, but about 80% of the population loses about 7% to 8% in pension value because of the new index rules. In sum, the effects of the reform differ widely among social groups, but the overall impact is that of less redistribution. UNEMPLOYMENT INSURANCE

In contrast to pension politics, overhauling the unemployment insurance system was highly contentious, partisan, and difficult. Two features of the unemployment cash benefit system account for its divisiveness. First, unemployment insurance is not based on universal eligibility criteria. Rather, eligibility for most benefits is restricted to members of unemployment insurance funds administered by the trade unions. Alongside the union funds, a public cash unemployment assistance program, Kontant arbetsmarknadsstödet, provided flat-rate benefits for those not eligible for the union funds. In 1991, about 80% of the labor force belonged to a union fund, and the labor movement was not about to concede this recruitment incentive. Second, in practice, unemployment benefits last indefinitely because of complex rules governing requalification through participation in active labor market policy measures. As unemployment climbed, active labor market measures became chiefly a means of requalification. Critics called this aspect of the system the “endless carousel” of rotating between cash benefits and participation in labor market programs. Until the recession, neither aspect of the unemploy-


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12/31/89

6/30/94

SEK millions

40000 20000 0 -20000 -40000 -60000 12/31/93

6/30/93

12/31/92

6/30/92

12/31/91

6/30/91

12/31/90

6/30/90

6/30/89

12/31/88

7/1/88

Figure 3. Financial balance of the labor market fund, July 1, 1988 to June 30, 1994. Source: Riksförsäkringsverket (1994). Note: SEK = Swedish kronor.

ment insurance program attracted much criticism or policy action. As unemployment began to climb steeply, however, nonsocialist critics focused on reforming these two central features of the system. Like the pension system, the unemployment insurance system was based on trust fund financing, and this led to unanticipated pressure on public finances. Because it was designed to be self-financing at an average level of open unemployment of 2% to 3%, soaring trust fund deficits required massive borrowing, and the state has been responsible for the interest payments on the accumulated debt (see Figure 3). The deficit in the labor market fund was widely reported in the media, heightening awareness of the program’s precarious financial position. When the nonsocialist coalition government took office in 1991, unemployment insurance reform was a top priority. The government planned to increase individual contributions to the unemployment insurance system and end the union monopoly on income-related benefits. Skyrocketing program costs soon made benefit cuts another priority. As a minority government, the conservative-led coalition would either have to seek the support of the populist New Democracy Party or try to cooperate with the SAP. Because of the rapidly deteriorating fiscal situation, the SAP was willing to compromise on benefit cuts but refused to do so as long as the government persisted in its attempt to nationalize the system. Despite these obstacles, the nonsocialists introduced 5 waiting days, increased individual contributions, and reduced benefits from 90% to 80% of qualifying income. In contrast, the nonsocialists had difficulty abolishing union control of income-related benefits. The gov-

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ernment passed legislation abolishing the union monopoly in the summer of 1994 only to see the SAP reverse the measure a few months later. The 1994 election returned the SAP to power as a minority government. Soon after taking office, the SAP quickly restored the union-based system with the support of the Left party. However, the new government faced a twosided deficit problem. State finances continued to deteriorate, and the deficit in the labor market fund remained abysmal. In keeping with its election promise to reduce the deficit, the SAP looked for further savings in what was becoming a hugely expensive program. The SAP pursued this strategy despite the LO’s objections. Between 1994 and 1997, the SAP’s overall strategy was to tighten eligibility rules, retain the waiting days, and reduce benefit levels. The return to the old system also meant the reintroduction of liberal requalification rules; the “endless carousel” was back in operation (Proposition 1994/95: 99). In addition, the SAP reinstated the old financing rules; beginning in 1995, employers would finance most of the benefit costs. The SAP also cut benefits for youth and part-time workers and eliminated the Labor Market Fund as the organizational basis for financing. Recurring trust fund crises attracted attention to the unfinanced costs of cash benefits, and this was surely an issue the SAP wished to avoid. The Labor Market Fund was abolished on June 30, 1995, with an accumulated deficit of SEK 87 billion. The SAP also changed its position about the duration of benefits, declaring in 1995 that unemployment insurance should be viewed as a “temporary adjustment insurance,” meaning that benefits should not continue indefinitely. The SAP’s insistence on further benefit cuts triggered the breakup of the informal Left party–SAP alliance in the spring of 1995. The SAP shifted to cooperation with the Center party, and the two parties agreed on a further benefit reduction to 75% of qualifying income and tougher qualifying rules beginning January 1, 1996. Again, the dire state of public finances provided the SAP’s rationale for additional cuts, and reduced benefits were proposed as part of a comprehensive deficit reduction package. Predictably, the SAP’s sponsorship of benefit cuts led to conflict with the LO. As relations between the SAP and LO deteriorated, the party leadership proposed raising benefits to 80% of income in 1998, financed with benefit cuts (Proposition 1995/96: 150). However, the SAP’s most controversial proposal was to suggest a 3-year limit on benefits. Clearly, the raise in nominal benefits was a concession to the LO leadership as part of an overall strategy on the part of the SAP to maintain party cohesion and mend fences with the LO after so many benefit cuts. Despite the LO’s apparent victory on the issue of higher benefits, it nevertheless accepted the principle of a time limit on benefits.


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In the wake of these setbacks and continued criticism from the unions, the SAP initiated negotiations on the upcoming legislation with both the LO and the Center party in January 1997. An official commission of inquiry had just released its recommendation to combine the union funds with flat-rate benefits (Statens Offentliga Utredningar, 1996). The negotiators accepted the commission’s proposal, so discussion centered on three central issues: qualifying rules, the level of benefits, and the time limit on benefits. In February, the SAP, the LO, and the Center party agreed on the principles for the new system: the already negotiated increase in benefits to 80% of qualifying income in October 1997 and modifications in both qualifying rules and the time limit. The time limit would remain only in principle. The negotiators agreed to appoint a parliamentary commission to iron out the final proposals on the time limit. This move effectively prevented the implementation of a time limit for 5 years. Finally, the negotiators agreed on the introduction of a nonunion insurance fund (administered by the unions) to replace stateadministered cash benefits. Parliament passed the legislation in the spring of 1997 (Proposition 1996/97: 107). Negotiations concerning improved benefits and qualifying rules were relatively trouble free compared to the issue of the benefit time limit. The time limit has been the source of the most division between the SAP and the LO, and in the end, the LO prevailed in preventing the implementation of the benefit time limit. The LO has consistently opposed the time limit unless there were a specific plan for providing income support for those who lose unemployment insurance benefits. With the legislation presented in March, the reprieve will last at least until 2002. Clearly, both the LO and the SAP calculated that during these 5 years, improvements in the labor market would obviate the need for such a drastic measure. Indeed, the decrease in unemployment to 4.6% in 2000 would appear to lessen the probability of such an outcome. EXPLAINING OUTCOMES

Tables 2 and 3 summarize changes in both programs along three dimensions: benefits, financing, and administration. Although both programs sustained benefit cuts, only the structure of unemployment insurance remains virtually unchanged. In contrast, politicians cooperated on a major overhaul of the pension system involving significant changes in benefits, financing, and administration. The new system will pay benefits according to the “defined-contribution” principle, and a flexible index based on real economic growth replaces the old system’s price indexing. The shift to shared financing by employers and employees is also a major change. Finally, the

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Table 2 Summary of Changes in the Pension System, 1990-1999 1990 Benefits ATP benefit formula Basic and/or guarantee pension benefit formula Coverage (both tiers) Indexing

Financing ATP Basic and/or guarantee pension Administration Funding structure Role of funds

1999

Best 15 years of 30 Flat rate minimum

Lifetime earnings Flat rate minimum

Universal Annual adjustment to CPI

Universal Annual adjustment according to inflation and real wage growth

Employer: 13.00% Employee: 0.00% Employer: 7.45% Employee: 0.00%

Employer: 9.25% Employee: 9.25% General revenue financing

Public trust fund

Public trust fund and publicly regulated premium reserve Premium reserve replaces AP funds as major source of national savings

Substantial source of national savings

a

Note: ATP = the national supplementary pension; CPI = consumer price index; AP = publicly controlled pension funds. a. The guarantee pension is pension tested in that only pensioners who do not qualify for an income-related pension will receive it. If both tiers are considered, the pension system is still universal.

Table 3 Summary of Changes in Unemployment Insurance, 1990-1999

Benefits Replacement rate Waiting days Qualifying period Requalification rules Index Financing Contributions Extent of state contribution Administration Public or union

1990

1999

90% of lost income 0 4 months Generous Annual

80% of lost income 5 6 months Generous Annual

Employers: 2.16% Employees: 0.00% 15% of total costs

Employers: 5.42% Employees: 0.00% 30% of total costs

Unions

Unions


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introduction of the premium reserve amounts to de facto partial privatization and a substantial decrease in the size of the AP funds. What accounts for this difference in outcomes? Following Pierson, several differences in programmatic structure account for the moderate success of retrenchment in pension policy and the resilience of unemployment insurance. First, the ATP system is nearly mature and private pensions are relatively insignificant, so a radical departure from the system was politically impossible. However, significant losses have been imposed on future beneficiaries with the switch to the lifetime earnings principle and changes in indexing. Second, the indexing formula provided opportunities for large savings in both current and future pension payments. By making benefits equal to contributions, politicians could claim that the new system was more fair, thereby defusing opposition from those who would stand to lose in the new system. Indexing rules also offered a quick way to achieve large reductions in current pension payments as part of the deficit reduction program. Once in place, changed indexing rules could be relied on for yearly savings if deficits remained high. Third, the complexity of the system created opportunities to compensate those negatively affected by the new lifetime earnings principle. For example, the introduction of pension rights for education and child rearing was a compensatory method for minimizing opposition. More important, the technical complexity of the pension reform was so great that many, if not most, citizens were unable to follow all of the political discussions concerning reform. The media’s attempts to identify winners and losers in the reformed system only added to the confusion. Thus many of the more technical aspects of the proposed reform, such as the introduction of a life expectancy index, and the replacement of the current inflation index with the economic adjustment index were shielded from criticism. Fourth, the pension system involves much more extensive benefit commitments than the unemployment insurance system, so the need for a stable and predictable system is much greater in pension policy. As a result, reform of the pension system has been characterized by the conscious attempts of the five parties backing the agreement to depoliticize the issue. All parties agreed to compromise at an early stage, and they used the structure of the working group to strengthen their bargaining power vis à vis the unions. The LO, TCO, and SACO were consulted, and given the close contact between the SAP and the LO, the LO’s position was well known to the SAP. Of the three confederations, the LO had the most influence on the reform because of two factors: The president of the LO sits on the SAP’s seven-member executive committee and thereby participates in high-level SAP policy discussions, and the chairperson of the pensions working group was Anna Hedborg, formerly

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an LO economist. Despite these channels of influence, consultation was carefully controlled, thereby limiting the LO’s and especially the TCO’s and SACO’s influence. Several aspects of the Swedish reform process are not well explained by the new politics thesis, however, especially the role of the labor movement. Although both pensions and unemployment insurance have been cut substantially, retrenchment has occurred more or less on SAP terms. The SAP dominated the process, with the LO and, to a lesser extent, the TCO and SACO acting as junior partners. If the new politics thesis is correct, retrenchment is a political process dominated by client-based interest groups and not classbased actors. Thus Pierson’s theory would be corroborated only if neither business nor labor were involved in the bargaining that led to reforms or if their influence were less than that of other interest groups such as pensioners’ organizations. In other words, SAF, LO, TCO, and SACO should not have mattered. As the empirical analysis shows, however, business and labor were the central actors along with the political parties. There were simply no other important actors, and the occurrence of conflict between the LO and SAP regarding unemployment insurance and between the LO, TCO, and SACO concerning pensions further demonstrates the relevance of class actors. In other words, corporatist negotiations played a significant role in the reform of both the pension system and unemployment insurance. The type of union influence varied across policies, however. In the pension reform, peaklevel bargaining was more important, whereas in unemployment insurance reform, the process was characterized by both peak-level negotiation (between the SAP and the LO) and unilateral reform attempts, especially under the nonsocialist government. This difference does not, however, demonstrate the declining significance of corporatist politics. Unions may be less influential in corporatist bargaining than in the past, but their role can hardly be discounted. Unemployment insurance reform also highlights the importance of administrative program structure in retrenchment politics and the salience of class actors. The issue of state versus union administration of unemployment benefits had little to do with budget savings and everything to do with union power. By nationalizing the system, the nonsocialist government hoped to weaken one of the most important bases of union power: recruitment via membership in the union funds. Whereas the SAP was willing to cooperate on benefit cuts, it was unwilling to accept the nationalization of incomerelated benefits. The LO was not about to accept this outcome either. More than in any other welfare-state policy area, the LO mobilized its resources to ensure that the benefit funds remained firmly in union hands. In contrast to proposed changes in the unemployment insurance system, pension reform


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divided the unions and reduced the LO’s incentive to join with TCO and SACO to try to block the reform. For most LO unions, the reform would have a positive or neutral impact on member pensions. The Municipal Worker’s Union, the LO’s largest affiliate, supported the reform, as did the Metalworkers Union. In contrast, TCO’s and SACO’s opposition to central aspects of the reform appear to have fallen on deaf ears. The intensity of union preferences concerning unemployment insurance and pension reform helps to account for the LO’s acceptance of pension reform and its opposition to unemployment insurance reform. Unemployment insurance retrenchment threatened to seriously undermine LO goals and resources, whereas the pension reform would have only a slightly negative or neutral impact on LO interests. Similarly, the role of the pensions as deferred wages largely accounts for TCO’s and SACO’s opposition to the treatment of education in the reformed pension system. Unlike the majority of LO members, the deferred wages of TCO and SACO members will almost certainly decline under the reformed system. The differences in preference intensity also account for why similar financing structures produced different retrenchment processes. Whereas projected trust fund crises in the pension system facilitated reform, the presence of program deficits in the unemployment insurance system had the opposite effect. Huge program deficits should have created opportunities for policy makers to legislate deep cuts in unemployment benefits. Instead, the SAP abandoned the principle of program self-financing. In 1992, earmarked payroll taxes and individual contributions ceased to cover program expenditures; by the time this method of financing was abandoned in 1995, it covered only one third of program costs. That governments continued to permit extraordinary financing of unemployment benefits demonstrates the enduring political support for the program. The emergence of a veritable fiscal crisis of the state can hardly be overemphasized in accounting for the labor movement’s cooperation in retrenchment. Social democratic and union leaders realized that unsustainable budget deficits undermined the fiscal foundations of the welfare state. This is consistent with the work of Schwartz (1994, 1998) and Swenson (1992), which stresses the role of Social Democratic politicians and unions in promoting welfare-state cutbacks that help to restore economic health. To the extent that labor leaders wanted to maintain the system in its current form, deficit reduction was a top priority. Rising deficits would siphon resources from social welfare spending and, with a tax burden among the highest in the Organization for Economic Cooperation and Development (OECD), there was little scope for covering debt payments with increased taxes. In short, bringing the deficit down trumped concerns about maintaining benefit levels. Neverthe-

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less, considering the magnitude of the economic crisis, it is surprising that welfare-state programs have not been cut back even more radically. That both programs have been scaled back without seriously compromising the principles of public provision, universalism, and benefit adequacy demonstrates the influence of the labor movement on retrenchment processes.

CONCLUSION The aim of this article has been to evaluate the theoretical and empirical utility of Pierson’s policy feedback model for explaining retrenchment in a Social Democratic welfare-state regime. The central argument is that in Sweden, retrenchment was possible only when some segments of the labor movement supported change. This finding contradicts Pierson’s claim about the declining impact of unions and Left parties in retrenchment politics. Instead, the article argues that the political importance of organized labor in retrenchment politics depends on the relationship between welfare-state programs and interest group structure. As argued earlier, Pierson’s conclusion about the declining importance of organized labor in retrenchment politics is largely based on his selection of two countries characterized by segmented, pluralist, interest group structure. This article takes Pierson’s central insight about interest groups as mobilizers of opposition to retrenchment in a different direction. By choosing a case in which interest group structure is characterized by solidaristic, centralized, encompassing organizations, the article tries to identify the conditions under which left parties and unions will accept or oppose retrenchment. The retrenchment dynamics and outcomes analyzed in this article bear a striking similarity to the processes identified in an emerging literature about the mechanics of change in Christian Democratic and Social Democratic welfare regimes. In Denmark, the Netherlands, France, and Italy, welfarestate reform has occurred as part of a strategy of turning “vices” into “virtues” (Levy, 1999), as “corporatist adjustment” (Hemerijck & van Kersbergen, 1997; Visser & Hemerijck, 1997) or “negotiated adaptation” to harsh economic realities (Albæk et al., in press). In all of these cases, left-wing parties and unions were important actors in the political bargaining over how to reform the welfare state. Moreover, the desire to correct perceived weaknesses in existing welfare-state programs was a central motivation for reform. As Levy argues, there is a left-progressive approach to welfare reform that is distinctly partisan. In contrast to neoliberal restructuring, leftprogressive reformers pursue policies designed to correct inefficiencies in the welfare state without significantly compromising commitments to disad-


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vantaged groups. This approach to welfare-state reform tries to achieve both efficiency and equity and is characterized more by concertation and compromise than the confrontation associated with conservative attempts to roll back the welfare state. The reforms of the Swedish pension and unemployment insurance systems and the processes of reform in other previously cited countries suggest that there is reason to doubt the generalizability of Pierson’s new politics thesis. The new politics thesis works well in explaining conservative attempts at reform in liberal welfare states with pluralist interest group politics. However, the analysis in this article demonstrates that the policy feedback framework leads to biased conclusions about the nature of retrenchment because of Pierson’s (1994) inadvertent sampling on the dependent variable. By examining retrenchment politics in pluralist states, Pierson understandably finds pluralist political dynamics: clientele-based interest groups mobilizing to block government attempts to scale back social provision. Instead, this article argues that class-based interest groups (employers and unions) may join with reformist politicians to promote restructuring when restructuring enhances economic performance. The dynamics of this sort of political bargaining has much in common with “old” theories of welfare-state expansion that emphasize coalitional politics among class actors and reform-minded politicians (Clayton & Pontusson, 1998; Schwartz, 1998; Swenson, 1992), and it is consistent with a large literature on Social Democratic corporatism (Garrett, 1998; Huber & Stephens, 1998; Stephens, Huber, & Ray, 1999). Thus future research about the dynamics of welfare-state change would benefit from the insights of both “old” and “new” theory.

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Karen M. Anderson is a postdoctoral researcher at the University of Twente, the Netherlands. She received her Ph.D. from the University of Washington in 1998. Her current research focuses on social policy reform in general and local welfare-state restructuring in response to European integration in particular.