Recasting Pensions in Europe: Policy Challenges and Political Strategies to Pass Reforms

Abstract

While the Swiss case shows some peculiarities, both in terms of pension policy and politics, it is not exceptional when compared to other European countries. Socio-economic challenges (e.g. ageing, labour market transformation, technological innovation) provide an impulse for reforms, but recasting pensions is always a complex political process. The design and implementation of the reform package proves difficult to arrange. Through a comparative perspective, the present paper sheds light on recent policy trends and political strategies to reform pensions in Europe. Pension reforms are a risky process. Even when reforms pass, their implementation is uncertain. Risks of partial or total reversal are always present. After the brief introduction, Section one provides a comparative review of the measures passed in different European countries in the aftermath of the recent economic downturn. Many of these measures resemble what was included in the Swiss Old Age Security 2020. The increase of the pensionable age, its equalization between men and women, and the increase of the system revenues have been part of many reform packages across Europe. While in the following we refer to broad reform trends, we mainly focus on three cases: Denmark, Germany and Italy. They are representative of different pension models and different political contexts2. All have passed major reforms in the last two decades – before and after the spread of the financial crisis – with different processes of implementation. The key concepts we use to assess policies are reform reversal and stability. In the following we focus in particular on the reform priority represented by ‘estending working life’. Section two focuses on the main traits of the politics of pensions. Through the analysis of the same three countries we see that reform packages are often politically fragile. Many European countries have experienced contingent agreements - between political and social forces - that tend to be contested in the longer-term. We refer to few major challenges to pro-reform consensus. The changing economic conditions, the emergence of new political forces, and the ongoing re-framing of policy priorities may weaken the pro-reform consensus. On top of that, reform packages are complex deals that are difficult to design and implement. Their multi-dimensional nature does often lead to problems of incoherence that weaken the political support for reform and provide room for further contestation. Here the key concepts we propose are those of inclusion or insulation as typical traits of the policymaking process. The brief comparative analysis seems to prove that the more inclusive is the policymaking, the lower is the risk of contestation in the longer-term. In the concluding section, some final remarks address the prospects for pension policy and politics in the context of population ageing and austerity. Pension policy has been at the core of the intense reform process of the last decades as a consequence of massive socio-economic transformations. Population ageing is the most obvious challenge to old age security programmes. Ageing is the result of three basic phenomena: the progressive increase in longevity; the continuing growth in the number of workers aged over 60, at least until 2030, when the so-called “baby-boom” generation will become elderly; and low birth rates. Due to these dynamics (and migration), the age structure of the European population will change strongly in the coming decades. The overall size is projected to be slightly larger by 2060 but much older than it is now with potential destabilizing effects on old age security. In parallel, labour markets in Europe have seen a set of important transformations: deindustrialization and the tertiarization of employment, the massive entry of women into the labour force, and the de-standardization of employment (related to technological innovations). The result of these transformations may, if pension systems are not adapted, be the translation of the labour market and working poor problems of today into a poverty problem for older people in thirty or forty years’ time. Demographic and labour market trends have been further aggravated by the most recent Great Recession (started in 2007). The latter has firstly consisted of the collapse in the stock markets which had a profound effect on private pensions in many countries. Furthermore, the financial crisis then spawned an economic crisis: output has fallen and unemployment has risen fast. The pressure on earnings from wage cuts and shorter working hours has resulted in reduced revenues from pension contributions (Natali 2017). In such a context, the pension reform process of the last decade in Europe has been intense. Between 2009 and 2010, many countries experienced counter-cyclical measures to improve the adequacy of pension benefits. But afterwards austerity measures gained centre-stage. By looking at the measures targeted on first pillar schemes, between 2011 and 2014, the agenda shared by many European countries consisted of the containment of pension spending (through stricter links between contributions and benefits and more meagre indexation of pensions) and prolonging working life (through higher pensionable age, and the stricter regulation of early retirement) (Ebbinghaus 2015). These packages proved innovative in many respects. First, some of the reforms had an immediate effects or a very short phase-in period. Second, some of the cost-containment was implemented through automatic mechanisms that in the future will revise the ‘pension promise’ in line with the socio-economic and demographic factors. This is the case with the automatic increase of the pensionable age according to the expected increase in life expectancy. Above all, prolonging working life has become a must for policymakers. Legal pensionable age has been increased in many countries. Parallel with this, access to early retirement has been largely restricted (Natali 2017). Beyond such a common reform trend, European countries have also maintained some peculiarities. In what follows, we refer to the concepts of reform reversal (when policymakers totally or partially reverse previous reforms), and reform stability (when reforms prove to be more stable and start a process of institutionalisation) to qualify different reform trends (Datz and Decsi 2013). In the case of Denmark, before the crisis, the Welfare Agreement of 2006 largely reformed the pension system with the aim of increasing labour market participation. The reform consisted of voluntary early retirement, the increase of the general retirement age (from 65 to 67 years between 2024 and 2027), and the introduction of the demographic adjustment of the retirement age to life expectancy (de la Porte and Natali 2014). The reform was intended to address the rising costs of pension schemes while also maintaining living standards during old-age. In 2011 the Danish government passed a reform package that confirmed the priorities of the previous reforms. The Reformpakken 2020 aimed increased the retirement age from 65 to 67 (through a faster process than planned in the 2006 reform). The other measures concerned the VER (voluntary early retirement) scheme: the further increase of the legal age to accede the voluntary early exit (from 62 to 64) and a reduction of the benefit period for early exit benefits (from 5 to 3 years). To facilitate the dismantlement of the scheme, persons having paid contributions to the scheme would be able to receive the benefits paid out tax free if they left the scheme. To replace it, a new ‘senior disability pension’ was passed in January 2013 for people with health problems (Table 1). Reformpakken 2020 (2011) Increased legal pensionable age from 65 t 67 Revision of the Voluntary Early Retirement (VER) Scheme A new ‘Senior disability pension’ set up in 2013 2007 Reform Increased legal pensionable age (from 65 to 67) Schutzklausel (2009) Guarantee of pension benefits adequacy (even in case of declining wages) Rente mit 63 (2014) full pension at 65 Flexirentengesetz (2016) De facto early retirement option Since 2017 Mandatory contribution for pensioners up to the legal pensionable age Berlusconi Reforms (2009-10) Increased legal pensionable age for women Monti Reform (2011) Increased legal pensionable age Equalization of men and women pensionable age Introduction of the automatic adjustment of the pensionable age and life expectancy Stop to seniority schemes Renzi Reform (2016) Advance Pension (APE and Social APE), de facto early retirement schemes Arduous and hazardous jobs (more categories allowed for early retirement) Germany also experienced a mix of reform measures. The reforms of the ‘red-green’ coalition (1998-2005) – with cutbacks of first pillar benefits and incentives for the spread of supplementary pensions - were followed, in 2007, by the increase of the legal pensionable age from 65 to 67. But, in the wake of the crisis, some partial policy reversal occurred. In 2009, the Grand Coalition (between Christian democrats and Social democrats) suspended the automatic adjustment of pension benefits below the average wage increase, while introducing the Schutzklausel that is the guarantee of pension benefits in case of declining wages. In 2013/14, further reforms revised some key measures introduced in the 1990s. In particular, the government decided for an early retirement option for people with long working lives (“Rente mit 63” which, in the future, will provide a full pension at the age of 65 rather than 67) (Blum and Kuhlmann 2016). Italy is a typical example of those countries - most hit by the crisis and with more explicit budgetary strains - that experienced intense cutbacks with an evident effect on pension rights (Table 1). After the Berlusconi reforms of 2009-10 that increased the legal pensionable age for women, in 2011 the Monti technocratic government (supported by a grand coalition of right-of-centre and left-of-centre parties) passed major changes: a move towards a single reference pensionable age for men and women (66 years and 7 months by 2018), for employees in both the public and private sectors, and the self-employed; a flexible pensionable age between 63 and 70; the periodic adjustment of the pensionable age and contributions in line with increases in average life expectancy since 2013; the full enforcement of a defined contribution pension scheme introduced in earlier reforms to replace the earnings-related defined benefit scheme; the elimination of seniority pension – allowing workers with at least 35 years of pension contributions to retire early. In 2012, the contribution period for early retirement at age 62 was raised from 35 to 42 years (Jessoula and Raitano 2017). In the more recent period, between 2015 and 2017, the pace of reforms in Europe has slowed while measures to address problems of adequacy have become more evident (OECD 2017). In the last two years, some countries confirmed the priorities (especially about extending working life) set in earlier stages of the reform process. Denmark has planned to further increase the legal pensionable age up to 68 years in 2030. While the 2011 reform is going to be implemented and no major contestation has emerged about it, there has been a huge debate about new measures. In particular, political and social actors have started to debate about the need to improve the coverage of supplementary pension funds and the proposed introduction of mandatory pension funds has been at core of the debate (Kvist 2016). Denmark is thus a case of reform stability. Yet, other countries have followed a more mixed and incoherent strategy. In Germany, the Flexible Pension Act (Flexirentengesetz), of December 2016, broadened the range of retirement options before and after the normal retirement age. This legislation may enable older workers to remain employed longer, but OECD (2017) suggests it may represent the equivalent of early retirement programmes with the consequent reduction of labour supply. Since January 2017, full pensioners continue to be subject to contributions to the statutory pension scheme until they reach the statutory retirement age. As a result, they will generally increase their pension entitlement. In Italy, an early retirement option was set up in 2017 as a consequence of the mounting contestation over the 2011 reform by trade unions and some political parties on both the right and the left-end of the spectrum. First, a financial advance pension (APE) allows individuals to take out a loan from a financial institution backed by future pensions provided they have reached age 63 with 20 years of contribution. This mechanism acts as an early-retirement scheme. The Renzi Reform (supported by the left-of-centre government headed by Matteo Renzi) also includes the “social advance pension” (social APE), a separate early-retirement scheme for some vulnerable groups. For the latter, the pensionable age is fixed at 63 years with between 30 and 36 years of contributions. The government wrote down a new list of arduous and hazardous jobs allowed to retire in line with more favorable conditions. For these categories, the automatic link between life expectancy and the pensionable age is not applied (Jessoula 2016). In the meanwhile, some far right-wing, left-wing and populist movements voiced their aim of dismantling the 2011 pension reform to lower the legal pensionable age. Both Germany and Italy represent a case of partial reform reversal at least on the priority about extending working life. A vast literature has demonstrated the centrality of negotiated bargains, or trade-offs, in successful European pensions reform and claim that these bargains are underpinned by a complex process of ‘political exchange’ that diminishes or neutralises opposition (Häusermann 2010). Scholars have shown that the outcomes of such trade-offs are far from a uni-dimensional retrenchment, and often respond effectively to the claims of different actors for an improvement in the distributive qualities of the pension systems, its coverage, and protection against old age risks (Bonoli and Natali 2012). Yet the new waves of reform in Europe put some issues at the forefront of the scientific debate. The brief summary of the reforms proposed in Section one shows the support for reforms can be ambiguous and contingent. Different actors agree on a reform package for different reasons and through different interpretations of the same measures. The deal is often based on a limited shared understanding of problems and solutions and depends on contingent factors (e.g. the economic crisis, the contingent political equilibrium between different political forces). When these conditions change, the political support may weaken and thus lead to the (partial or total) reversal of the reform measures. Four factors can contribute to the weakening of the pro-reform consensus. The first is related to what we could call the austerity backlash that has spread across Europe over the last years. Political leaders and the public opinion have shown a reform fatigue: they have increasingly shared the perception of having accomplished much of the reform programme. The huge impact of cost-containment on social rights and the dramatic experience of fast retrenchment have further contributed to the growing opposition against fiscal austerity with the increased demand for a ‘post austerity’ programme. On top of that, many countries have seen the improvement of their prospect for economic growth, while fiscal constraints have weakened. In Italy, for instance, the last few years have seen the progressive weakening of the austerity programme. Policymakers put more emphasis on some growth in social spending to address major problems, like the increased poverty rates (Dunlop and Radaelli 2016). Secondly, party politics may also change. The cases of Germany and Italy prove the emergence of populist parties may alter the political equilibrium and destabilise the compromise that supported pension reforms in earlier stages. In both countries, populists demand for an increase of pension benefits and see in the elderly a crucial electoral constituency. In parallel, more traditional left-wing and right-wing parties tend to use pensions as part of a distributive policy strategy: they increase pension spending to gain votes and stop the electoral progress of new parties (like Alternative fur Deutschland, Wagstyl 2016). Thirdly, policy priorities are neither stable nor set in stone. They are always reframed by political and social actors. For instance, equality (in the distribution of reform costs) is increasingly crucial. While in the past, many have looked at three main dimensions of the debate (e.g. financial sustainability, social adequacy and the broader modernization of pensions), now equality is of increased importance. When citizens are convinced that retrenchment is unevenly distributed across the population, they do not support new measures. What is more, old concepts, like actuarial fairness, were used in the past to justify reforms, but are increasingly questioned (Jessoula 2016). Such an ongoing ‘reframing’ exercise concerns policy measures as well. Increasing legal pensionable age is a contested issue. While experts and policymakers refer to it as an alternative to retrenchment, many stakeholders (e.g. trade unions) and large part of the public opinion see it as a form of cost-containment and thus oppose it. Even when this measure is introduced, then many countries have seen attempts to reverse it. Germany and Italy show that many political forces attempt to reverse the automatic increase of the legal pensionable age. Last but not least, reform packages are fragile from a policy perspective too. Trade-offs and exchanges between different policy dimensions and measures are difficult to arrange and implement. Unintended consequences of some of these measures may lead to inconsistencies in the reform package that put the balance between the same policy dimensions at risk. As shown in the literature, the increase of the legal retirement age may lead to an increase of benefits and then to a disincentive to save in supplementary pension funds (Jessoula and Raitano 2017). As a consequence, two main priorities of the reform package, increasing employment rates among older workers and setting a multi-pillar system, risk becoming contradictory. The four challenges mentioned above seem particularly effective in weakening the pro-reform support when the reform process has been only partially inclusive. The Danish case proves that a pension reform based on a widespread consensus on key priorities may be stable (irrespective of the economic and political conditions) and reduce the attempt of new political forces to challenge it. In the words of Jacobs (2011), inclusive reform processes allows for stable and long-lasting reforms. By contrast, a narrower pro-reform consensus may be sufficient to pass new measures (see Italy under technocratic governments and to some extent Germany with the red-green coalition of the 1990s) but then may suffer from changing economic and political conditions. The paper has shown recasting pensions is a risky political process. Even in those countries that succeed in passing reforms, their implementation and stabilization are not evident. In the last few years, the reform trend has slowed down and the debate over the measures to pass has become more contrasted. Some countries, e.g. Germany and Italy, show that when the pro-reform coalition includes some political forces but not others, the reform deal becomes fragile and risks of policy reversal – at least of some measures - are high. Yet, Denmark, where the last ten years of reform have been marked by an overall consensus (including populist parties) on the key priorities to pursue, proves that larger coalitions are able to stabilize reforms. In line with the German and Italian cases, there are four major factors that put pro-reform coalitions at risk: the changing economic conditions, the emergence of new political forces, the reframing of the reform priorities, and the difficult implementation of the reform packages. David Natali is Professor of comparative and EU politics at the Sant'Anna School of Advanced Studies in Pisa. His research is mainly centred on a comparative analysis of social policy reforms, EU integration, industrial relations and the politics of welfare. Email: [email protected]