Social Consensus and Pension Reform
5. Societal Consensus and Pension Reforms in Sweden, Germany, Italy and Denmark
5.3 The Design of Existing Pension Schemes: Policy Legacies
Historical choices structure the menu of pension options available in reform discussions and past policy decisions shape the preferences of social groups (Pierson 1994, 2001; Myles and Pierson 2001). As Myles and Pierson (2001) argue, pensions are a classic case of path dependent change. Because pensions usually entail long-term, costly benefit commitments to large groups of voters, the structure of existing policies seriously constrains the prospects for reform. Moreover, the groups with a large stake in existing policies have an important impact on reform, not least because of the enormous political risks involved in scaling back and/or re-organizing pension arrangements (Pierson 1994; Weaver and Pierson 1993).
Myles and Pierson (2001) argue that the maturity of a public pension system is a critical variable influencing reform outcomes.
The longer a country has had a pay-as-you-go (PAYG) pension system in place, the more difficult it is to reduce or privatize public pension commitments. The "double payment" problem makes it extremely difficult to reduce/privatize public pensions. Large, PAYG public pension schemes that cover all or most of the workforce generate commitments over many decades that are similar to property rights. In order for privatization to be possible, current workers would have to pay twice: once for current pensioners in the public scheme and a second time for their own private pensions. Because the political costs of such a strategy are extremely high, full-scale privatization of public PAYG pensions is nearly impossible, unless reformers can find a source of financing to fund the transition to a new partially privatized system. Sweden and Italy were able to do this, as the short discussions below will demonstrate.
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For countries with mature, PAYG public pension schemes (Germany, Sweden, France, Italy, the Netherlands,106 among others), past policies are highly constraining; policymakers and affected social interests make their policy choices in a context in which large scale privatization is nearly impossible. The main options available are "parametric" reforms that introduce changes within the existing public pension structure. For example, benefit formulae can be made less generous, contributions can be raised, partial privatization can be introduced to supplement public benefits, etc.
A second group of countries did not legislate earnings-related, PAYG public pensions during the decades immediately following World War II. This cluster includes Denmark, the Netherlands, Switzerland and the Southern European welfare states. Here there is usually a basic form of public provision, and earnings-related benefits are organized collectively, usually as occupational pensions negotiated as part of collective wage agreements (Myles and Pierson 2001). Although earnings-related pensions are organized by the market and not the state, the role of the state is still crucial in terms of regulation. However, the provisions of specific pension schemes (premiums; benefit formula, indexing, etc) are left to corporatist pension fund boards.
In both clusters of pension systems, organized labor plays a crucial role in decision-making about pension policy and in administration.
IV. Stakeholders and Mechanisms/strategies for promoting societal consensus
Unions as Stakeholders
A number of scholars trace differences in the willingness of key interest groups to accept reform to variations in policy feedback effects. This type of argument is an important amendment to Paul Pierson’s “new politics” approach because it highlights the conditions under which key stakeholders are willing to accept retrenchment. Anderson (2001) compares the politics of welfare state retrenchment across different policy areas in Sweden in the 1990s—notably pensions and unemployment benefits—and argues that variation in the intensity of labor preferences concerning reform is an important variable for explaining differences in reform outcomes across policy sectors. Retrenchment in Sweden was possible only when important union groups supported reform, and
106 The Netherlands is a difficult case to categorize because it has a fairly generous public flat-rate pension and quasi-mandatory private occupational pension schemes.
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this pattern of support depended on how highly unions valued core features of the programs targeted for retrenchment. Differences in preference intensity are linked to different feedback processes generated by different types of social policies. The key insight here is that different types of social policies provide different types of benefits and resources to unions as organizations. Pensions can be conceptualized as “deferred wages,” which helps explain the sources of union pension policy preferences. Seen this way, unions may be willing to accept modest cuts in future pensions that reduce privileges to well-protected groups if these reductions enhance the financial sustainability of the pension system and its capacity to deliver on its deferred wage promise. Specific aspects of program design also provide organizational resources to unions, particularly arrangements that give unions an institutionalized role in administration. This explains the resistance of Swedish unions to retrenchment in union-administered unemployment insurance at the same time that they accepted cuts in future pensions. Similarly, in other nations, self-administration may be a source of jobs for union officials, as in France (Bonoli and Palier 1997; Béland 2001), or provide union leaders with a power base for political influence, as well as a means of administrative influence, as in Germany (Ebbinghaus and Hassel 2000).
Finally, in line with the blame avoidance thesis, union cooperation and a conciliatory government stance towards unions may be a critical element in successful reforms. Italian policy-makers and politicians that cooperated with the unions in drafting reforms may have been more successful in bringing the legislative process to a successful close than those that pursued a combative course. More generally, Rhodes and Ferrera (2000) have pointed to the resurgence of “corporatism” in Southern Europe, with intensified union-government-employer cooperation through
“social pacts.”
The implication of these arguments about the centrality of labor for the politics of welfare state reform is clear. In the corporatist political economies of Western Europe, organized labor is still a major actor in the politics of welfare state reform, not least because of the effects of policy legacies. In many Western European countries, unions are still the main defenders of the pension policy status quo, even if they face competition from “new” interest groups like pensioners’ organizations.