PENSION REFORMS ACROSS EUROPE:

challenges, institutions and innovation

David Natali

Facoltà R. RuffilliUniversità di Bologna-Forli’

Observatoire social européen, asbl

Pensions in Europe, European PensionsDavid Natali, P.I.E. Peter Lang, Brussels

Pension Reforms in Europe

Challenges Population ageing Budgetary strains New social risks EU integration

Institutions inherited from the past European pension models

Innovation (Convergence/Divergence?) Public/Private Mix Reforms

Pension Models in Europe (end 1980s)

Institutional design (Public/private Mix)

Policy Goals

Social Insurance Major role of the 1° Pillar (PAYGO)Minor role for supplementary pensions (2° and 3° pillar)

INCOME MAINTENANCE

Multi-pillar Basic role of the 1° PillarKey role for supplementary pensions (2° and 3° Pillar)

POVERTY PREVENTION

Soviet Public Pillar Monopoly BENEFITS EQUALITY

Pension Models in Europe (end 1980s)

2° and 3° Pillar

2° and 3° Pillar1° Pillar

1° Pillar

1° Pillar

Social Insurance

Multi-pillar Soviet

Convergence or Divergence between pension systems ?

Persistent divergence ‘Regime theories’

(Esping-Andersen; Pierson and Myles)

Renewed convergence ‘the spread of the multi-pillar paradigm’ (Bonoli;

Bonker; Arza) ‘Passive privatization’ (Bonoli et al; Bridgen and

Meyer) ‘Active or coordinated privatization’ (Leisering;

Barr)

Passive or Active Privatization?

Passive Privatization

‘to cut public protection against social risks without the parallel launch of an effective alternative provision’ (retirement-savings gap)

the ‘residualization’ of the role of the state

Passive or Active Privatization?

Active Privatization

the state reduces the direct provision of social benefits but maintains an active role in regulating and/or subsidizing the activity of non-governmental actors

New policy instruments for the state

Passive or Active Privatization?

extent of compulsion, voluntary or mandatory participation to supplementary pension funds

allocation of administration tasks, collecting contribution, paying benefits, managing state pension funds in competition with private funds

Last wave of reformsModel I Pillar II e III Pillar

Social Insurance

Cost-containment Tax incentives for voluntary pension funds

More binding participation

Multi-pillar Cost-containment and protection of new risks

Widening of supplementary schemes

Reform of benefit structure (defined-contribution)

Post-Soviet Increased spendingFollowed byCost-containment

Mandatory participation

Convergence or Divergence?

Convergence

Public pensions’ retrenchment

Increasing role for supplementary private schemes

Progressive abandoning of the single-pillar design

From income-maintenance to salary-savings

Towards one single European model ?Model Institutional

designPolicy goal (Public pillar)

Earnings-related schemes

Multi-pillar I generation

Multi-pillar(mandatory/quasi-mandatory)

Poverty-prevention

Private

Multi-pillar II generation

Multi-pillar(Mandatory)

Salary savings Private/Public

Social Insurance in transition

Multi-pillar(Voluntary with increased ‘soft-compulsion’)

Salary savings Public/Private

Convergence/DivergenceII and III Pillar

II and III Pillar

II and III Pillar

I Pillar

I Pillar

I Pillar

Social Insurance

in transition

Multi-pillarI gen.

Multi-pillar II gen.

Pre-reform Public/Private Mix

Post-reform Public/Private Mix

Passive or Active Privatization ? extent of compulsion

Multi-pillar I gen., (UK, auto-enrolment); collective bargaining

Multi-pillar II gen. (PL, EE) mandatory participation

Social Insurance in Transition (IT, BE; Sl) progressive abandoning of voluntary participation (auto-enrolment; collective bargaining)

Passive or Active Privatization ? administration tasks

Public collection of contributions (SWE, PL; EE)

Monitoring, collection of information (SWE, UK, PL)

Competition between private and public funds (default fund) (SWE, UK)

Future Risks: social adequacy of public/private mix

Gross replacement rates for workers

Pre-reform Post-reform

Men Wom. Men Wom.

France 64.7 51.2

Italy 90.0 80.0 67.9 52.8

Poland 62.2 57.3 61.2 44.5

Sweden 78.9 62.1

UK 30.8 30.8

Source, OECD (2007)

Future Risks: 3 scenarios for the future of pensions in Social Insurance systems

1. Transition to Multi-pillar systems Lower public protection will be supplemented by

widespread supplementary schemes (Multi-pillar system)

2. Transition towards the ‘Bismarckian Lite’ model, similar to that of the USA Lower public protection with uneven and limit private

pensions’ coverage

3. The future reverse of reforms introduced in the last twenty years

Pensions in Europe, European PensionsDavid Natali, P.I.E. Peter Lang, Brussels