Reforming against all odds: Multi‐pillar pension systems in the Czech Republic and Romania

Attempts to replace pay‐as‐you‐go pension schemes with private funded systems came to a halt in Central and Eastern Europe after 2005. However, more recently, the region has witnessed two belated reformers: the Czech Republic and Romania. Both countries decided to partially privatize pensions despite the rising tide of evidence concerning the challenges associated with the policy. We argue that while part of the domestic political elite remained supportive of private funded pensions, the difficulties experienced by earlier reformers and reduced support from International Financial Institutions led to the adoption of small funded pension pillars. Such cautious attempts at privatization might become more common in the future as large reforms have proven politically unsustainable.     

The performance of social security contributory and tax‐financed pensions in Central America,and the effects of the global crisis

Over the last 30 years, Latin America has pioneered structural pension reforms. This article focuses on a representative regional sample of seven Central American countries with diverse levels of development (Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama) studying contributory and tax‐financed pensions as well as recent pension reforms. It comparatively assesses system performance regarding five social security principles: unity; universal coverage; adequacy of benefits; equal treatment, solidarity and gender equality; and financial sustainability. It also evaluates the impact of the world crisis on these pension systems, highlighting the differences between public and private pensions, and extracts lessons and suggests policies for the future.     

When Past Reforms Open New Opportunities: Comparing Old-age Insurance Reforms in Bismarckian Welfare Systems

France, Italy, Germany, Austria and Spain have all gone through several waves of pension reforms both in the 1990s and in the early 2000s. Comparing the politics of these reforms shows some similar trends: reforms were usually postponed until European integration and/or economic recession forced governments to act. Before the first wave of reforms, the main form of ‘action’ had been to increase payroll taxes to finance pensions. In the 1990s, reforms were usually negotiated on the basis of a quid pro quo: benefits were intended progressively to decrease in exchange for non-contributory pensions being financed from general tax revenues instead of through the insurance schemes. The second wave of reforms (during the 2000s) seems to have brought more innovation, with new goals such as the development of voluntary private pension funds and the need to increase employment rates among the elderly and to stop early retirement. The article aims, first, to trace the political processes leading to these reforms; second, to reveal the commonalities in these processes between the various cases; and third, to highlight the differences between the first and second waves of pension reform. It will emphasize the role of ‘sequencing’ and demonstrate how each pension reform facilitates the adoption of the next one.     

A State‐centred Explanation of the Finance‐Pension Nexus: New Zealand's Pension Reforms as a Typical Case

This study analyses the decision‐making processes that led to the introduction of the New Zealand Superannuation Fund (a public pension reserve and investment fund), as well as the KiwiSaver Scheme, which is New Zealand's first soft‐compulsory private pension scheme. Why and how are governments engaged in the development of funded pensions? These are the questions this study addresses. In analyzing the finance‐pension nexus in New Zealand, this article adopts a state‐centric approach. It argues that pension funding reforms are shaped by state officials who pursue their own motives because policymakers frame funded pensions as an instrument for achieving broader fiscal, economic and financial policy outcomes. Because New Zealand is a typical case of a state‐centric explanation, a study of its pension funding reforms helps in finding causal links between finance and pensions.     

The effects on intra‐generational inequality of introducing a funded pension scheme: A microsimulation analysis for Estonia

This article uses a single male cohort microsimulation model to analyse the intra‐generational and distributional effects of a shift in Estonia from a defined benefit pay‐as‐you‐go (PAYG) pension system to a multi‐pillared system with a PAYG scheme with contribution‐based insurance components and a funded pension scheme. We contribute to the literature on microsimulation by showing how introducing contribution‐based insurance components and compulsory defined contribution (DC) schemes can increase pension inequality. Our results show that in the case of a high level of inequality in labour earnings and high long‐term unemployment rates, such as in Estonia, the introduction of a very strong link between contributions and future benefits leads to considerably higher inequality in pension incomes as measured by the Gini coefficient. Simulation results for Estonia suggest that inequality in old‐age pension incomes more than doubles when the reforms mature. In contrast, the inequality in replacement rates decreases.     

The Politics of Public and Private Pension Generosity in Advanced Democracies

The quantitative strand of social policy research suffers from a triple deficit: analyses of aggregate expenditure dominate, most of the few studies of replacement rates focus on unemployment or sickness benefits while pensions are excluded, and the interdependence between public and private pension plans is often ignored. This article addresses the said deficits, first, by discussing the pension sectors' theoretical peculiarities and by proposing two hypotheses: one on the role played by political parties in implementing public pension retrenchment, and the second on their role in extending private pension plans. Second, the article presents regression results of public pension replacement rate changes in 18 developed democracies. The findings show considerably smaller cuts to pensions than to unemployment or sickness benefits, and striking differences regarding partisan effects between the sectors. Lastly, the article assesses partisan effects on private pension plans, detecting some rather surprising effects. Most noteworthy is the fact that those parties which reduced public pension generosity during the 1990s (i.e. Social Democrats) cannot claim responsibility for compensating these cuts by eliciting higher private engagement.     

Pension reform in the Baltic States: Convergence with “Europe” or with “the world”?

Abstract The Baltic States – Estonia, Latvia and Lithuania – join the European Union in 2004. This paper examines pension reform in the three countries over the past decade in the light of the “European social model” and the “World Bank model”. Part one seeks to define these two models. It shows how the former emphasizes income adequacy and solidarity while the latter stresses fiscal sustainability, savings and economic growth. Part two looks at reforms made and proposed. Initial reforms involved raising the retirement age and relating benefits more closely to earnings and service. This resulted in the establishment of pension systems similar to those in many European countries. Subsequent reforms involved attempts to shift from a publicly financed, purely “pay‐as‐you‐go” system to one based upon “funding” and private, individual accounts. Such systems have been promoted by the World Bank. The appropriateness of this approach – its high transition costs, potentially high administration costs, and longer‐term implications for the relative income status of retired people – is questioned. Part three draws conclusions. In the short and medium term, policymaker should safeguard income adequacy rather than seek the doubtful advantages of funding – in other words, look more to “Europe” than to “the world”.     

Assessing the pension reform potential of a notional defined contribution pillar

Abstract As some of the limitations of the traditional pay‐as‐you‐go defined benefit public pension model have become more evident in recent years, pension experts have begun searching for alternative models. The notional defined contribution model, also financed on a pay‐as‐you‐go basis, has emerged as one of the major new approaches. Drawing on evidence from schemes in six countries (Sweden, Italy, Poland, Latvia, Kyrgystan and Mongolia), this article aims to describe the notional defined contribution model and to review its strengths and limitations relative to the major alternatives, the pay‐as‐you‐go defined benefit model and the funded defined contribution model. A four‐pillar pension model is proposed.     

Rate of return guarantees for mandatory defined contribution plans

Many mandatory defined contribution systems provide a rate of return guarantee. The guarantees provided have generally been backed by a sequential combination of two or more of six different financing sources. Those sources are (1) reserve funds established within the pension fund, using investment earnings on the fund; (2) reserve funds established using funds provided by the owners of the pension fund management companies; (3) a defined benefit plan associated with the defined contribution plan; (4) central guarantee funds financed by contributions from pension funds; (5) funds provided by employers; and (6) the government. Nearly all the guarantees are first backed by a limited liability guarantee derived from investment earnings that would otherwise accrue to workers. In some instances, the guarantee may be funded by employers. Then they are backed by a guarantee financed by capital market institutions — pension fund managers directly or a central guarantee fund. Lastly, they are backed by an unfunded governmental guarantee with unlimited liability that is contingent on the insufficiency of private sector guarantees.     

The interaction of pillars in multi‐pillar pension systems: A comparison of Canada,Denmark, Netherlands and Sweden

Canada, Denmark, the Netherlands and Sweden have advanced multi‐pillar pension systems. Using micro‐simulations, this article presents a close examination of the interaction of pillars in these countries. The relative importance and the role of the different pension pillars vary from country to country, and according to age, income, gender and socio‐economic dimensions as well as between generations. A further area of investigation is the mitigation capacity of the four pension systems. On the one hand, adverse labour careers lead to lower life‐time earnings and lower private pension accruals. On the other hand, these effects are mitigated through the design of pillars and their interaction. Mitigation is important to income security and stability in retirement and to post‐retirement income distribution. However, mitigation mechanisms come at the cost of incentives. Moreover, in many countries, the generosity of public benefits is set to decrease – increasing the importance of private pensions. This will shift risk and uncertainty from employers and pension institutions to individuals. Thus, risks and uncertainties related to private pensions will become more important, raising questions about the division of responsibilities between public and private pensions, and about the potential of mitigating such risk through pillar interaction. These concerns are further reinforced by labour market changes. Although a pension system free of distortions is inconceivable, this article seeks to contribute to addressing how mitigation should be designed, and how mitigation and risk sharing should be balanced against incentives, challenges which are as much political as technical.     

Lessons from China on different approaches to pension coverage extension

Achieving universal pension coverage is both an aspiration and a challenge for many developing economies. Traditional contributory schemes are less effective in extending pension coverage to workers who are not in the formal sectors of the economy. As an alternative, non‐contributory schemes have gained popularity in recent years. China’s pension reforms mirror this global trend. The introduction of a contribution‐based pension scheme for urban employees (Employees’ Pension) was followed by a scheme for rural and urban residents (Residents’ Pension), which is partly government financed and partly contributory, with multiple options for premium payment. This study uses nationally representative survey data collected in 2016 to compare the inclusiveness of the two schemes. It finds that access to the Residents’ Pension scheme is more equal than the Employees’ Pension. Lower status workers in terms of education, employment, income and hukou‐migration are more likely to participate in the Residents’ Pension as opposed to the Employees’ Pension, compared with higher status workers. The Chinese experience suggests that a workable solution for pension extension in low‐ and middle‐income countries is to have a scheme that is flexible, affordable and responsive to the diverse needs of the population.     

A comparative analysis of pension reforms and challenges in Ghana and Nigeria

Ghana and Nigeria recently joined a number of countries that have incorporated fully‐funded defined contribution pension programmes into their national social security arrangements. Contemporary analyses of pension reforms, however, continue to focus on middle‐income countries in Latin America and Central and Eastern Europe, as well as on Member States of the Organisation for Economic Co‐operation and Development, thereby marginalizing recent pension policy reforms in sub‐Saharan African countries. This article examines the complete and partial shifts to defined contribution pension programmes in Nigeria and Ghana respectively, and points to a number of contextual and contingency factors that challenge the use of defined contribution schemes as a means to address problems of benefit adequacy in the sub‐Saharan African context.     

Three Routes to Pension Reform: Politics and Institutions in Reforming Pensions in Denmark,Finland and Sweden

By analysing pension reforms in three Nordic countries – Denmark, Finland and Sweden – that apply different institutional solutions in their old‐age security programmes, this article argues that the political processes that shaped the country‐specific pension set‐ups in the 1950s and 1960s had important ramifications for subsequent reform possibilities. A high degree of inertia exists not only in the institutions themselves but also in the political reform options and the ways in which pensions were reformed. The analysis shows that the ‘new politics’ was not new in any of the three countries. Furthermore, given the differences in the three cases, the analysis questions the nature of pension reform. The Swedish reform in the late 1990s was a ‘big bang’ that eliminated the old and changed everything; the Finns built on piecemeal reforms of conversion that gradually changed the whole system; and, while the Danish story appears to be one of stability and status quo, the drift of Danish policy ultimately changed the basic characteristics of the system. Although all three countries have more or less thoroughly reformed their pensions, the reform processes have differed according to both historical legacies and institutional frameworks.     

Pension policy design changes in EU countries since the mid‐1990s

Recent decades have been characterised by significant pension reforms. This article reviews this process, focusing on five policy design issues that have concerned policymakers: optimising poverty alleviation effectiveness; redefining the state's role in smoothing incomes over the life‐course; balancing contributions to benefits; adjusting the system to respond to demographic, economic and social changes; and ensuring that reforms will be long‐lasting. While the role of state pensions is diminishing, there is a growing realisation of the need to ensure that they remain adequate, reigniting interest in minimum pensions and contribution credits. The expanding role of private pensions has led governments to intervene more in their operation. Policymakers have shown interest in automatic adjustment mechanisms to bring about required economic changes. However, there is greater understanding that for these to happen, the state has to engage more with its citizens.     

The Impact of Neo-liberalism on South Korea's Public Pension: A Political Economy of Pension Reform

This article examines the recent Korean pension reforms from a political economy perspective. It argues that these reforms are of particular interest because, unlike major pay-as-you-go pension schemes in Europe, the Korean pension scheme is a funded one and, therefore, is subject to market exposure. Also in contrast to the problems that public pension reforms have encountered in European and other OECD countries, especially 'blame avoidance', the more radical Korean reforms were implemented without significant challenge or resistance. First of all, the National Pension Scheme is described prior to the 1997 Asian economic crisis. Then the impact of this crisis on the Korean welfare state and, especially, its pension system are analysed. The main part of the article consists of a political economy of the pension reform process, in which the key roles of the international governmental organizations and the domestic neo-liberal policy elite are pinpointed. This neo-liberal ideology was critical in developing and sustaining an influential discourse on the 'crisis' in Korea's national pension fund. The article concludes by arguing, against the neo-liberal tide, for the inclusion of a pay-as-you-go element in the national pension in order to tackle escalating poverty in old age.     

Political risk and pension privatization: The case of Argentina (1994-2008)

Proponents of pension privatization in Latin America argued that systems of private fully pre-funded defined-contribution individual accounts would be better insulated from politics than was the case with public pay-as-you-go pension systems. However as the Argentinean case demonstrates, most recently with the 2008 nationalization of its private individual accounts system, transferring pension management and investment to the private sector does not necessarily reduce or eliminate political risk. In fact, the implementation of systems of individual accounts creates a new set of political risks, in part because they are a potential financial resource for governments, especially during times of economic stress. This article describes the range of political risks inherent to individual account pension systems, with specific reference to Argentina's 1994-2008 experience with privatization.     

Developing countries and systemic pension reforms: Reflections on some emerging problems

Since 1981 close to forty countries have introduced systemic pension reforms that have replaced all or part of prior pay‐as‐you‐go (PAYG) schemes with privately managed funded defined contribution (FDC) pillars or systems. However, over the past decade about half of these countries have subsequently cutback on, or entirely eliminated, these FDC schemes. In this article we explore some of the reasons why this reversal is often taking place in developing countries. As part of our analysis we propose a new pension reform typology that goes beyond the commonly used dichotomy between PAYG and pension privatization. We identify and discuss four factors that are of particular relevance to those seeking to understand the pension policy reversals that have been taking place in many developing countries: low pension coverage and incentive incompatibility, triple burden costs, tradeoffs between pension reforms and social pensions, and difficulties with annuitization.     

Shifting the Pension Mix: Consequences for Dutch and Danish Women

All European countries are aiming to reform their pension systems in line with two conceptual ideas: firstly, that systems should combine public, occupational and private pensions; secondly, that entitlements should be individualized. The Dutch and the Danish pension systems already consist of these three different pensions with relatively individualized entitlements and in a way form an ideal type of pension system. However, these systems are far from ideal since they are deeply gender biased. The positive effects of citizenship‐based state pensions conceal the negative ones. In addition, recent developments in the combination of the pension schemes counteract the positive effects. Given the male‐oriented norm when it comes to full pension entitlements, and given the fact that life courses are still gendered, these countries’ systems and developments have negative effects for women.     

Pension privatization in crisis: Death or rebirth of a global policy trend?

From 1981 to 2007, more than thirty countries worldwide fully or partially replaced their pre‐existing pay‐as‐you‐go pension systems with ones based on individual, private savings accounts in a process often labelled “pension privatization”. After the global financial crisis, this trend was put on hold for economic, ideational, and institutional reasons, despite a rise in critical indebtedness that has facilitated pension privatization in the past. Is the global trend towards pension privatization dead or in the process of being reborn, perhaps in a somewhat different form? Several recent trends point to rebirth as policy‐makers scale back public and private pension systems, attend to minimum pensions and “nudge” rather than mandate people to save for retirement.     

Privatization, provision, and targeting: Trends and policy implications for social security in the United States

This paper examines several important trends in the changing structure of social security in the United States and their impact on the elderly in different income groups. These trends involve the shifting public/private mix of retirement income, the declining replacement rates of public benefits, and reforms for targeting benefits by age. An analysis of these trends suggests that (a) social security will provide declining economic support for those most in need; (b) middle- and upper-income groups will have a diminished stake in social security, reducing the programme's political base of support; (c) increasing reliance on occupational pensions will heighten the need for greater public regulation of private schemes; (d) an unplanned two-tiered system of pensions will emerge, with the first tier consisting of a whittled-down version of social security to provide a predominant source of retirement income for low-income wage earners and the second tier consisting of private pensions for middle- and upper-income groups.