The Political Economy of Pension Policy Reversal Forthcoming at Cambridge University Press 2017 Sarah Wilson Sokhey Assistant Professor University of Colorado, Boulder December 12, 2016 1
Transforming Social Security Around the World Pension Privatization indicated by red dots. Reversals indicated by bolded, italicized country names. EUROPE Switzerland Denmark Netherlands Sweden UK UK Latvia Latvia Lithuania Lithuania Estonia Estonia Poland Poland Hungary Hungary Romania LATIN AMERICA Romania Slovakia Chile (1980) Slovakia Russia Uruguay Russia Czech Republic Bolivia Peru Czech Republic Colombia Bulgaria El Salvador Croatia Costa Rica Australia Macedonia Dominican Republic Kazakhstan Mexico Argentina Argentina
Pension Privatization …a “revolution in the postwar social contract.” - Orenstein 2008 When and why is pension privatization reversed? Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 3
When & Why Market-Oriented Reforms are Abandoned • Theory of Reversal • Global Trends • Russian Case • Variation in Reversals Privatized pensions — what should be done with it? • Implications Official publication of the Russian state Pension Fund, February 28, 2012 Moderate reformers — not the least or most extensive reformers — were the most likely to reverse. Politicians’ hands can be tied to costly but necessary reforms by domestic stakeholders in the public and private sphere. Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 4
Surprising Reversals of Pension Privatization “New policies create a new politics.” – E. E. Schattschneider, 1935 • Path dependency (Ebbinghaus 2005, Hacker and Pierson 2014, Pierson 1994, Rose 1990) • Difficult & costly to reverse (Brooks 2007) • Changes the social contract (Kerner forthcoming, Nadler 2000) • Interest groups: private pension funds & bureaucracies (Arce 2005, Madrid 2003, Müller 2001, Sokhey 2010) • World Bank opposes reversals (Rutkovsky 2012) • Alternative policy options (Kritzer et al. 2011, Kritzer 2008) Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 5
Year Partisanship in Year(s) of Partisanship in Reform year of reform Reversal year of reversal Argentina 1994 Right 2008 Left Justicialist Party Civic Coalition Estonia 2002 Right 2009, 2010 Right Estonian Reform Party Estonian Reform Party Hungary 1997 Left 2010 Right Socialist MSzP Fidesz Latvia 2001 Right 2009, 2010 Right Latvian Way New Era Party Lithuania 2002 Left 2009, 2010 Right Social Dem. Party Homeland Chris. Dem. Union Poland 1999 Left 2011, 2014 Right Solidarity Elec. Action Civic Platform Romania 2004 Left 2009 Right Social Democratic Party Liberal Democratic Party Russia 2001 Right 2012, 2013 Right United Russia United Russia Slovakia 2005 Left 2006, 2007 Left Movement Dem. Slovakia Smer-SMD UK 1988 Right 2013 Right Conservative Party Conservative Party Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 6
Why Do Countries Reverse? • Financial Crisis in 2008 • Governments needed money (Drahokoupil and Domonkos 2012; Price & Rudolph 2013; Simonovits 2011; Velculescu 2011 ) • Recurring cost of implementing pension privatization • Financing gap (Bielecki 2011, Casey 2012, Egert 2012, Guardiancich 2013) • Constitutes several percentage points of GDP per year, lasts for decades • Size of gap depends on degree of pension privatization • Competing pressures: more extensive pension privatization meant implementation was more costly AND domestic groups might be more invested in the policy Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 7
Unstuck in the middle: moderate reformers are most likely to reverse • Limited Pension Privatization: It’s not worth reversing . • Moderate Pension Privatization: Politicians get significant short-term revenue with limited political backlash. • Extensive Pension Privatization: Politicians might want the short-term revenue, but domestic groups block reversal. Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 8
Reversals Most Likely when Financial Crisis Hits Countries with Moderate Pension Privatization Politicians look for revenue & reconsider the cost of Financial Crisis continuing to switch from a PAYG to a privatized pension system Moderate Degree of Pension Privatization Large fiscal incentive for politicians to reverse Public & private sector interests are weakly entrenched and not politically influential Reversal Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 9
Global Trends in the Degree of Pension Privatization & Reversals 100 Degree of Pension Privatization 80 60 40 20 0 *Romania *Argentina Dominican Kazakhstan Sweden Costa Rica *Slovakia *Estonia *Lithuania *Latvia El Salvador *Russia Bulgaria Uruguay Macedonia *Poland Switzerland Australia Mexico Colombia Croatia Bolivia Chile Netherlands Denmark Peru *UK *Hungary Data Source: Red reference line reflects mean degree of privatization and 1 standard deviation above and below Brooks 2009 Lighter bars indicate reversing countries Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 10
Did the degree pension privatization influence reversals? • 28 countries over time, 10 countries reverse: 442 country-year observations • 1980-2012 • Dependent variable = reversal • Binary (0 = no reversal, 1 = reversal in a given country-year) • Independent variables • Degree Pension Privatization & squared term • Implicit pension debt (of PAYG) • Spatial lag captures diffusion effects • Deficit • GDP growth • Democracy • EU membership • Opposition fragmentation • Left Majority Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 11
Curvilinear Effect of Degree of Privatization Size of Decrease in Risk of Reversal Mean compared to lower & higher Values 60 50 40 Risk of Reversal 30 20 10 0 Mean to Degree of Pension Privatization Mean to Mean to 1 SD above mean Max 1 SD below mean Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 12
Russian Pension Politics: Least Likely Case of Reversal • Pension privatization adopted (in 2001) (Dmitriev et al. 2002, Maleva and Sinyavskaya 2005, Orlov-Karba 2005) • R eversed (in 2012 & 2013) under Putin’s leadership • 48 interviews (2006-2013) before, during, and after reversals: Reps of key ministries, political parties, policy experts, and private pension funds Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 13
Russian Politicians’ Fiscal Incentives • Low to moderate degree of pension privatization Russian State Pension Fund Deficit (17%) determines revenue to be gained by reversing 12 • $50 billion from reversing (Gurvich 2011, Guriev 10 2012) 8 • Total outstanding state pension fund debt is 6 about $50 billion 4 Russian parody of state pension fund ad 2 0 Live quickly. 2009 2010 2011 2012 2013 2014 2015 2016 Die young. Actual Deficit Projected Deficit Source: Russian Ministry of Finance Pension Fund of the Russian Federation Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 14
Public Support for Pension Reform • Varying levels of awareness – interview with pension fund rep, Sept. 2007 & interview with A B C D bureaucratic assistant, June 2013 ---------------- NEW • Almost no public backlash to adoption or PENSION reversals FORMULA Simpler than You Think • Russian Public Opinion Fund survey, summer 2012 (n = 3000) • 88% knew about pension privatization • 25% thought they were better off with Informational material from pension privatization the Russian state pension fund • 37% of those in the privatized system viewed reversal proposal favorably Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 15
Original Russian survey questions, Fall 2014 & 2015 • Nationally representative surveys(n = 1600) by Levada organization • Many not aware of the details of reform • Standard socioeconomic factors (income, education, white collar job) somewhat improve knowledge • Higher SES predicts giving a preference for pension privatization, but does not predict well which preference Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 16
Knowledge about Pension Privatization Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 17
Preferences about Pension Privatization Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications December 2016 18
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