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.     

From Austerity to Austerity: The Political Economy of Public Pension Reforms in Romania and Bulgaria

This article discusses the trajectories of pension system reforms in two of the latecomers to the EU: Bulgaria and Romania. It finds that over the past two decades, the two countries pursued increasingly dissimilar public pension reforms for managing their respective public pay‐as‐you‐go pension systems. Using a political institutionalist theoretical framework, I argue that the divergence between the two cases is attributable to multiple factors. First, different temporary political compromises between national and international actors generated reforms that retrenched public pensions and introduced mandatory private accounts. Second, pension reforms often had unintended consequences that limited their intended impact. Third, incremental adjustments introduced by governments in response to political pressures caused alternating phases of austerity and generosity that catered to different constituencies in each country. In Romania, reform outcomes amounted to a moderately generous pension system, financed through relatively high contribution rates with a small funded component, while in the case of Bulgaria, the pension system evolved into a meagre programme, financed through low contribution rates and a larger private pillar.     

The 2022 Greek pension reform: The rebirth of carve-out privatization in Eastern Europe

After a decade of unprecedented austerity, Greece abruptly changed the course of pension consolidation in 2022 and implemented the controversial carve-out pension funding approach, whereby a portion of existing pay-as-you-go (PAYG) contributions are diverted to fund individual pension savings, thus undermining the financing of existing PAYG pensions. Although inspired by the World Bank’s 1994 pension privatization blueprint, the Greek 2022 reform features a major policy shift by entrusting the management of individual pension savings to a dedicated government body, ostensibly to try to remedy inherent market failures in private pension provision. Like earlier reforms in Eastern Europe, the multi-decade transition costs of carve-out funding have been vastly underestimated in Greece, which will give rise to fiscal distress in the coming years when annual transition costs become sizeable and favourable international financing terms start to change. Unless firm political commitment is established to implement the measures necessary to finance the transition costs, Greece may have to resort to reform reversals similar to those already implemented across Eastern Europe.     

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.     

Second‐pillar pensions in Central and Eastern Europe: Payment constraints and exit options

During 1998–2007, a majority of Central and Eastern European (CEE) governments enacted laws obligating workers to save for retirement in privately managed individual accounts. The governments funded these accounts with a portion of public pension revenues, thus creating or increasing deficits in public systems. After the onset of the global financial and economic crisis (2008), most CEE governments reduced these funding diversions and scaled back the accounts. Now, a decade after the crisis, this article examines the benefits that the accounts are beginning to pay retiring workers. In general, these benefits are shown to be disadvantageous compared with public pensions. Some pay lump sums in lieu of regular monthly benefits, most fail to adjust pensions regularly for inflation, and some pay women less than men with equal account balances. In several countries, pensioners with individual accounts receive lower benefits than those without them. To enable retiring workers to avoid these disadvantages, several CEE governments have allowed them to refund their account balances and receive full public pensions. Yet while this strategy diffuses worker dissatisfaction, it also places strains on public pension finance. To assist second‐pillar account holders without weakening public pensions, governments should consider making private pension savings voluntary and financing these schemes independently of public pensions – i.e. by worker and employer contributions and, possibly, direct state support.     

利益、博弈与养老金改革:对养老金制度的政治社会学分析

本文运用新多元主义理论探讨养老金改革中的利益博弈和私有化改革的发展趋势。对拉美和中东欧国家的研究表明,养老金的改革得益于其特殊的政治体制、外生行动者的支持和政府的强力推动,而否决点的缺失和社会组织力量的弱小又减少了养老金改革的阻力。但对美国、英国和欧洲的分析表明,由于利益的多元化、否决点的分散,以及强大的工会力量,社会保障私有化的改革困难重重。     

A macro‐financial analysis of pension system reforms in emerging Europe: The performance of IRAs and policy lessons for Serbia

The article explores the initial macro‐financial performance of partial pension system “privatizations”— involving privately‐managed individual retirement savings accounts (IRAs) — undertaken in many emerging European countries. Using empirical data for a period of close to a decade, the evidence shows that returns on privately‐managed IRAs have been below the implicit rate of return of public pay‐as‐you‐go (PAYG) systems. High operating costs and undeveloped capital markets are identified as major contributing factors to the failure of privately‐managed IRAs to meet reform expectations. In light of empirical evidence, Serbia is advised to focus on parametric PAYG reforms and to avoid reforms that involve the partial “privatization” of the pension system.     

The retrenchment of second‐tier pensions in Hungary and Poland: A precautionary tale

In 1997, Hungary and Poland led Central Europe in partially privatizing their national pension systems, diverting a portion of public pension contributions to privately‐managed individual investment accounts. In the aftermath of the global economic crisis, both governments retrenched these second‐tier schemes: Hungary (December 2010), by ceasing to fund the accounts and recouping most workers' existing balances; and Poland (April 2011), by reducing the diversion of contributions to the second tier. The factors that drove these retrenchments are traced to the original 1997 second‐tier designs, which omitted key specifications related to financing the accounts, private benefit design, and the regulation of private management fees. While both governments tried to compensate for the missing design specifications during implementation, the results were limited. By reducing investment returns and raising borrowing costs, the global economic crisis brought the problems to a head. The conclusion highlights some outstanding issues whose resolution will shape the retrenchments' long‐term impacts.     

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.     

Pension Reform in the EU Accession Countries: Challenges, Achievements and Pitfalls

Like the current member States of the European Union (EU), the 13 accession countries have diverse pension systems that vary in the adequacy of benefits, the degree of solidarity, and the roles of government, workers, employers, and pension funds in scheme management. Since the mid-1990s, nearly all have increased their pensionable age and adopted new systems for voluntary supplemental pension savings. Five have scaled down their social insurance schemes in favour of new systems of commercially managed individual savings accounts. The article discusses these reforms and their match with key elements of the countries' political and economic environments, financial markets and regulatory experience. It highlights alternative approaches to pension protection for retired workers in conditions of ageing populations.     

Social Security at The Crossroads: Toward Effective Pension Reform in Latin America

Individual pension savings accounts in Latin America promised to improve compliance and raise benefits in a cost‐effective manner, while at the same time raising savings rates, which would in turn promote economic growth. A review of the evolution of pension reform in Latin America shows results to have been mixed. Analyses of the recent reforms generally fail to consider the extent to which the success or failure of pension systems is driven by exogenous factors, including macroeconomic and labour market conditions, and institutions. A number of recent studies have issued a reassessment of the region's reforms that stresses the importance of a basic guaranteed pension benefit and recognizes that a range of alternatives are viable in the region. Pension systems based on individual accounts are undergoing a thorough reevaluation.     

Pension financialization and collective risk sharing in Canada and Finland

This article contributes to the debate concerning pension financialization and how countries are adapting their pension systems to respond to demographic ageing. We do so by examining the statutory pension systems of Canada and Finland, which diverge interestingly from current international trends. The Canadian and Finnish public pension schemes reflect two tendencies often associated with pension financialization: an increasing reliance on financial markets and an investment policy with a diversified asset allocation. However, unlike in many other countries, this has not resulted in heightened individual risks in old-age income security caused by a shift from defined benefit to defined contribution pensions – an otherwise common trend internationally.     

Voluntary affiliation to Peru's individual accounts pension system

One important aspect in the design of social protection is coverage. In Peru, as in most Latin American countries, social security coverage is mandatory only for workers in the formal sector. This article investigates the determinants of voluntary affiliation to Peru's individual accounts pension system. It is found that married males with more than high-school level education living in high income households and with other family members already affiliated to the individual accounts pension system have a higher likelihood of voluntary affiliation. Although the results suggest that family-based safety nets might be substitutes for voluntary participation in the individual accounts pension system, nonetheless, extending pension coverage and addressing poverty remain as challenges for government involvement.     

An International Comparative Study on Women's Pension Rights and Their Economic Risks

This article examined the theoretical meanings of pension rights and analyzed their effects on women's economic risks in developed countries. First, based on the status of a citizen, worker, parent, and spouse, this study investigated how pension benefits are guaranteed as a citizen regardless of work history, the degree to which women's disadvantageous situations in the labor market and unpaid work are compensated by public pension as workers and parents, and how marital status is treated in the different pension systems. Second, analysis of the effect of pension rights showed that individual rights is a significant factor to prevent economic risks of elderly women. Derived rights did not seem to secure the economic welfare of elderly women, at least in a comparative context. This finding suggested that developing individual rights, rather than derived rights, is the way to guarantee long‐term elderly women's economic welfare.     

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.     

Private Pensions — a Viable Alternative? Their Distributive Effects in a Comparative Perspective

Pension reforms have been on the political agenda of governments and international organizations like the OECD and the World Bank for some time. The strengthening of private elements in pension systems is often believed to intensify existing inequalities in the distribution of pensions among the population and to contribute to the marginalization of large groups of older people. This paper explores the distributive effects of private pensions on the basis of Luxembourg Income Study microdata for 12 industrialized welfare states. While confirming that private pensions indeed tend to produce specific inequalities, its results also emphasize the importance of policy factors in mitigating the distributive effects.     

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.     

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”.     

National pension systems and mass opinion: a case study of confidence, satisfaction and political attitudes in Norway

It is commonly assumed that popular support for national pension systems depends on widespread satisfaction with projected benefit levels among the working age population, and in particular that public support for the system will be jeopardised if the taxpayers do not feel confident about eventually receiving the promised benefits. On the basis of Norwegian survey data, two sets of questions are addressed in the article: (1) Is there a widespread lack of confidence in and satisfaction with the Norwegian National Insurance pension scheme? and (2) Is there an association between confidence and satisfaction and people's political attitudes towards the National Insurance pension scheme? Although we do not find any signs of a dramatic erosion of confidence towards the system, we do find that overall satisfaction with projected benefits is low among the working age population. Contrary to what one might expect, however, confidence and satisfaction from the point of view of individual interests appear not to be associated with a political preference for privatisation.     

The distributive impact of private pensions in the context of the institutional designs of public pension systems across OECD countries

Income inequality has been increasing across the developed world for the last few decades. The welfare state has played an important role in reducing income inequality, but it has now entered into an era of transformation. The shift from public to private pension schemes is one of the main policy instruments in this shift. An increase in private pensions is expected to create an increase in income inequality. Therefore, using data from OECD SOCX, this study examined how the effect of private pensions on income inequality might be changed by the institutional design of public pension systems. The results suggest that the effect of private pensions differs when the institutional design of the public pension system is considered. An increase in private pensions is related to an increase in income inequality when the public pension has a low level of coverage and a high level of earnings‐relatedness.