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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

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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

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LATIN AMERICA Chile (1980) Uruguay Bolivia Peru Colombia El Salvador Costa Rica Dominican Republic Mexico Argentina EUROPE Switzerland Denmark Netherlands Sweden UK Latvia Lithuania Estonia Poland Hungary Romania Slovakia Russia Czech Republic Bulgaria Croatia Macedonia Kazakhstan Australia

Transforming Social Security Around the World

UK Argentina

Reversals indicated by bolded, italicized country names. Pension Privatization indicated by red dots.

Latvia Lithuania Hungary Romania Estonia Slovakia Russia Czech Republic Poland

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Pension Privatization

…a “revolution in the postwar social contract.” - Orenstein 2008

When and why is pension privatization reversed?

December 2016 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications 3

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  • Theory of Reversal
  • Global Trends
  • Russian Case
  • Variation in Reversals
  • Implications

December 2016 4

Privatized pensions—what should be done with it? 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.

When & Why Market-Oriented Reforms are Abandoned

Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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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)

December 2016 5 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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Year Reform Partisanship in year of reform Year(s) of Reversal Partisanship in year of reversal Argentina 1994 Right Justicialist Party 2008 Left Civic Coalition Estonia 2002 Right Estonian Reform Party 2009, 2010 Right Estonian Reform Party Hungary 1997 Left Socialist MSzP 2010 Right Fidesz Latvia 2001 Right Latvian Way 2009, 2010 Right New Era Party Lithuania 2002 Left Social Dem. Party 2009, 2010 Right Homeland Chris. Dem. Union Poland 1999 Left Solidarity Elec. Action 2011, 2014 Right Civic Platform Romania 2004 Left Social Democratic Party 2009 Right Liberal Democratic Party Russia 2001 Right United Russia 2012, 2013 Right United Russia Slovakia 2005 Left Movement Dem. Slovakia 2006, 2007 Left Smer-SMD UK 1988 Right Conservative Party 2013 Right Conservative Party

December 2016 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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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

December 2016 7 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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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.

December 2016 8 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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December 2016 9

Financial Crisis Politicians look for revenue & reconsider the cost of continuing to switch from a PAYG to a privatized pension system Large fiscal incentive for politicians to reverse Public & private sector interests are weakly entrenched and not politically influential Moderate Degree of Pension Privatization Reversal

Reversals Most Likely when Financial Crisis Hits Countries with Moderate Pension Privatization

Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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December 2016 10

Global Trends in the Degree of Pension Privatization & Reversals

Data Source: Brooks 2009

20 40 60 80 100 *Russia Sweden Costa Rica Croatia Bulgaria *Romania *Slovakia Uruguay *Hungary Macedonia *Estonia *Lithuania *Latvia *Poland Netherlands Switzerland *UK *Argentina Denmark Australia Mexico Bolivia Chile Colombia Dominican El Salvador Kazakhstan Peru

Red reference line reflects mean degree of privatization and 1 standard deviation above and below Lighter bars indicate reversing countries Degree of Pension Privatization

Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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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

December 2016 11 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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Curvilinear Effect of Degree of Privatization

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10 20 30 40 50 60

Mean to 1 SD below mean Mean to 1 SD above mean Mean to Max

Size of Decrease in Risk of Reversal Mean compared to lower & higher Values

Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

Risk of Reversal Degree of Pension Privatization

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Russian Pension Politics: Least Likely Case of Reversal

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  • Pension privatization adopted (in 2001)

(Dmitriev et al. 2002, Maleva and Sinyavskaya 2005, Orlov-Karba 2005)

  • Reversed (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

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Russian Politicians’ Fiscal Incentives

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2 4 6 8 10 12 2009 2010 2011 2012 2013 2014 2015 2016

Source: Russian Ministry of Finance

Actual Deficit Projected Deficit

Russian State Pension Fund Deficit

  • Low to moderate degree of pension privatization

(17%) determines revenue to be gained by reversing

  • $50 billion from reversing (Gurvich 2011, Guriev

2012)

  • Total outstanding state pension fund debt is

about $50 billion

Live quickly. Die young. Pension Fund of the Russian Federation Russian parody of state pension fund ad

Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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Public Support for Pension Reform

  • Varying levels of awareness –interview with

pension fund rep, Sept. 2007 & interview with bureaucratic assistant, June 2013

  • Almost no public backlash to adoption or

reversals

  • Russian Public Opinion Fund survey, summer

2012 (n = 3000)

  • 88% knew about pension privatization
  • 25% thought they were better off with

pension privatization

  • 37% of those in the privatized system

viewed reversal proposal favorably

December 2016 15

A B C D

  • NEW

PENSION FORMULA Simpler than You Think

Informational material from the Russian state pension fund

Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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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

December 2016 16 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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Knowledge about Pension Privatization

December 2016 17 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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Preferences about Pension Privatization

December 2016 18 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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Variation in Reversals

Degree & nature of reversal Reducing or eliminating contributions to the second, privatized tier Permanent/temporary & different degrees of reversal Domestic political & fiscal conditions determined the type and degree of reversal while still demonstrating why moderate reformers backtrack.

December 2016 19 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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December 2016 20

Year Reform Partisanship in year of reform Year(s) of Reversal Partisanship in year of reversal Multi- step or

  • ne time

Degree of Reversal Temporary or Permanent Argentina 1994 Right Justicialist Party 2008 Left Civic Coalition One time Complete Permanent Estonia 2002 Right Estonian Reform Party 2009, 2010 Right Estonian Reform Party Multi-step Partial Temporary & Permanent Hungary 1997 Left Socialist MSzP 2010 Right Fidesz One time Complete Permanent Latvia 2001 Right Latvian Way 2009, 2010 Right New Era Party Multi-step Partial Temporary & Permanent Lithuania 2002 Left Social Dem. Party 2009, 2010 Right Homeland Chris. Dem. Union Multi-step Partial Temporary & Permanent Poland 1999 Left Solidarity Elec. Action 2011, 2014 Right Civic Platform One time Partial Temporary & Permanent Romania 2004 Left Social Democratic Party 2009 Right Liberal Democratic Party One time Partial Temporary Russia 2001 Right United Russia 2012, 2013 Right United Russia Multi-step Complete Temporary & Permanent Slovakia 2005 Left Mvment Dem. Slovakia 2006, 2007 Left Smer-SMD Multi-step Partial Permanent UK 1988 Right Conservative Party 2013 Right Conservative Party One time Complete Permanent

Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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2008 financial crisis, EU deficit guidelines, more fiscal strain than Poland, Fidesz super majority Hungary’s Moderate Pension Privatization (37%) Complete & Permanent Reversal in 2010 Short timeframe for

  • bjections, limited

push back from private sector Limited Public Concern about Reversal Fiscal & Partisan Incentive to Reverse 2008 financial crisis, EU deficit guidelines, less fiscal strain than Hungary, no legislative super majority Fiscal & Partisan Incentive to Reverse Poland’s Moderate Pension Privatization (49%) Government restricted ability of private pension funds to lobby Hungarian Reversal Polish Reversal Limited Public Concern about Reversal Partial & Temporary Reversal in 2011

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The Political Economy of Pension Policy Reversal

New policies do not always create new politics. Path departing changes may only be temporary deviations. Economic reforms implemented without an understanding of their political consequences, rather than promoting economic efficiency, can significantly reduce it.

  • Daron Acemoglu & James Robinson, 2013

December 2016 22 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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December 2016 Wilson Sokhey 23

Supplementary Slides

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2014 Russian Survey Questions

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2014 Russian Survey Questions

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2015 Russian Survey Questions

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2015 Russian Survey Questions

December 2016 Wilson Sokhey 27

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Backtracking on Market-Oriented Reform: The Political Economy of Pension Policy Reversal

Part I: Introduction & Theory Chapter 1: Introduction Chapter 2: Backtracking on Pension Privatization Chapter 3: A Theory of Reversal Part II: Global Trends in Pension Privatization Reversal Chapter 4: Evidence from around the World Part III: Pension Privatization under Moderate Reform Overview of Case Studies Chapter 5: Russia’s Staggered Reversal Chapter 6: Russia’s Domestic Stakeholders & Reversal Chapter 7: Variation in Reversals: Hungary & Poland Summary of Case Studies Part IV: Conclusion Chapter 8: Conclusion

December 2016 Wilson Sokhey 28

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Political Role of Russian Private Pension Funds

December 2016 29

25 50 75 100 125 150 175 200 225 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Billions of Rubles (constant 2000) Total Funds Operating Funds Reserves

Russian Private Pension Funds, 1999-2009

  • Previously involved in policy discussions (interview

with National Association of Private Pension Funds rep, June 2008)

  • Not heavily invested in privatized system

“We just want to look like we offer the full range of financial services.” - interview with private pension fund rep, September 2007

  • Private funds much less involved after the adoption,

bureaucratic shift in responsibilities (interview Fall 2007 & June 2013, Ministry Economic Development & Trade)

Overview * Puzzle * Theory * Global Trends * Variation in Reversals * Implications

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8

Government Deficit Fidesz Years in Power MSzP Years in Power Reversal in 2010 Adoption in 1998 Financial Crisis in 2008

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8

Government Deficit Civic Platform Solidarity Reversal in 2011 Adoption in 1999 Financial Crisis in 2008 Law & Justice Democratic Left Alliance-Labor Union

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Surveys

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Surveys

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Surveys

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Surveys

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Surveys

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Predicting Reversal

  • Cox Proportional Hazards Model
  • No assumption about baseline hazard (Box-Steffensmeier and Jones 2004)
  • Spatial lag captures possible diffusion (Beck et al. 2006; Drukker et al. 2012;

Haining 2003; Crabtree, Darmofal, and Kern 2015)

  • Frailty term
  • Caveats
  • Missing data
  • Not a definitive causal test, shows consistent results based on existing global

trends

December 2016 37 Introduction * Theory * Global Trends * Russian Case * Variation in Reversals * Implications

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December 2016 38

  • Coeff. (std. error)

p-value Degree Pension Privatization .43 (.27) .10 Degree Pension Privatization squared

  • .006 (.003)

.10 Implicit Pension Debt

  • .003 (.007)

.70 Opposition fractionalization

  • 4.29 (2.16)

.05 Left-wing majority

  • 1.00 (1.72)

.56 Deficit

  • .07 (.14)

.51 EU membership

  • .50 (1.23)

.68 Democracy

  • .18 (.37)

.63 GDP growth

  • .1 (.06)

.13 Spatial Lag

  • .13 (.13)

.26 Frailty term .32 .71 Number of reversals 13 Observations 442 Likelihood ratio 24.93 .005

Cox Proportional Hazards Model

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Other findings

  • GDP growth correlated with lower risk of reversal. Going from 3.47%

to 5.42% GDP growth (mean to ½ std. dev. above mean) decreases the risk of reversal by 36% percent.

  • Implicit pension debt not significant
  • Spatial lag capturing diffusion not significant
  • Frailty term not significant

December 2016 39 Overview * Puzzle * Theory * Global Trends * Variation in Reversals * Implications

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December 2016 Wilson Sokhey 40

Baseline Survival

.9994 .9996 .9998 1 1980 1985 1990 1995 2000 2005 2010 analysis time

Cox proportional hazards regression

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December 2016 Wilson Sokhey 41

.0001 2007 2008 2009 2010 2011 analysis time

Cox proportional hazards regression

Baseline Hazard Model

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Thinking about selection

  • Once pension privatization is adopted, the question is about variation

amongst the privatizing countries NOT privatizing vs. non-privatizing countries.

  • Implicit pension debt predicts the degree of pension privatization BUT
  • nce pension privatization is adopted:
  • Implicit pension debt should have a positive and linear effect on reversal risk
  • Degree pension privatization should have a curvilinear risk
  • Must be included as separate IVs in the model for correct specification
  • Selection models are very sensitive to specification & there are a limited

number of observations and degrees of freedom

December 2016 Wilson Sokhey 42

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December 2016 43 Research Agenda * Puzzle * Theory * Russian Case * Global Evidence * Implications * On-going Research

100 200 300 Average IPD (% GDP) Bolivia Colombia Peru Mexico Dominican Costa Rica El Salvador Kazakhstan Chile *Argentina Macedonia *Slovakia Australia *Poland *Russia Uruguay Netherlands *Romania *Lithuania Switzerland Denmark *Hungary *UK *Estonia Croatia *Latvia Sweden Bulgaria

Red reference line reflects mean IPD and 1 standard deviation above and below

Average Implicit Pension Debt

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December 2016 44

Bolivia Peru Colombia Mexico Dom.Rep. Costa Rica ElSalv.Kazakhstan Chile *ARGENTINA* Macedonia *SLVKIA* Australia *POLAND* *RUSSIA* Uruguay Nthrlnds *ROMANIA* *LITHUANIA* Switzerland Denmark *HUNGARY* *UK* *ESTONIA* Croatia *LATVIA* Sweden Bulgaria

20 40 60 80 100 100 200 300 Average Implicit Pension Debt

Top left countries (100% priv.): Chile, Colombia, Dom. Rep., El Salvador, Peru, Kazakhstan

Average IPD & Degree of Pension Privatization

Expense of PAYG & Degree of Reform

  • Countries with MORE expensive

PAYG systems adopted LESS extensive pension privatization, and vice versa.

  • Bivariate regression: IPD explains

62% variation in degree of pension privatization

Research Agenda * Puzzle * Theory * Russian Case * Global Evidence * Implications * On-going Research

Correlation with Reversal (sig.) Degree Pension Privatization

  • .13 (.007)

Implicit Pension Debt .13 (.007)

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Missing Data

  • Degree Pension Privatization (400/442)
  • 5 of 28 countries missing cross-sectional indicator
  • Match countries with most similar reform partners based on qualitative descriptions
  • Implicit Pension Debt (15/442)
  • Univariate regression with age over 65 predicting IPD, predicts 53% variation in IPD (n=77)
  • Follows James & Brooks (2001) and Brooks (2009) method
  • Sources for IPD: Holzmann et al. 2004, Palacios et al 2000, Kane and Palacios 1996, Van de

Hoord and Herd 1993

  • Deficit (306/442)
  • Multiple imputation using Amelia in R (generates 5 imputed datasets)
  • Partisanship (399/442)
  • Follow DPI coding rules to classify left & right-wing parties that were omitted, often because of

ambiguous party names

December 2016 Wilson Sokhey 45

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Missing Data on Percent Private

December 2016 Wilson Sokhey 46

Country with Missing Data on Percent Private Country with Similar Pension Reform Percent Private in Brooks 2009 (for country with similar pension reform) Lithuania Estonia 42% Macedonia Hungary & Estonia 39% & 42% Romania Bulgaria 37% Russia Sweden 17% Slovakia Bulgaria 37%

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Spatial lag capturing diffusion

  • Spatial weights matrix (Beck et al. 2006, Cao 2010, Drukker et al. 2012,

Franzese and Hays 2007, Haining 2003, Linos 2013)

  • Inverse distance spatial weighting matrix: most appropriate because allows for all
  • bservations to influence each other within the parameters of the specified

spatial weights matrix

  • Neighbors defined by transitional costs & EU membership

December 2016 Wilson Sokhey 47

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December 2016 Wilson Sokhey 48

Effect of a covariate on increasing or decreasing the hazard rate is: % ∆ h (t) = [e^β(xi = X1) - e^β(xi = X2) / e^β(xi = X2)]*100 where β = coefficient, xi = covariate, and X1 and X2 = different values of the covariate See: Box-Steffensmeier and Jones (2004, p.60).

Interpreting Effect of a Covariate on changes in the Hazard Ratio

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Russia’s Fiscal Situation

December 2016 Wilson Sokhey 49

  • 5

5 10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Russia: 2001-2011

Deficit

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Russian Case: Gradual & Nearly Complete Reversal

  • 2012 reversal
  • Option to choose 2% or 6% allocated to the privatized component
  • Suspended contributions to the second tier
  • Required the re-registration of private pension funds
  • 2013 reversal
  • Renewed suspension of contributions to private pension funds through the mandatory

system

  • Extended the deadline to choose to keep contributions in the second tier (until the end
  • f 2015); choice between 0% or 6%
  • Continued re-registration of private pension funds
  • New entrants (new workers) will not have the option of contributing to an individual

account

December 2016 Wilson Sokhey 50

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Hungarian Case: Permanent, one-time, complete reversal

  • Permanent & nearly complete reversal of pension privatization in 2010
  • Unlikely case of reversal, often characterized as a leader in market-
  • riented reforms in the region
  • Left-wing adoption, right wing reversal
  • Large deficits + right-wing government that wanted to avoid raising taxes

(or cutting other expenditures)

  • Interests in the private and public sphere were weakly entrenched and

not politically influential

December 2016 Wilson Sokhey 51

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Polish Case: Gradual, Temporary & Permanent Reversal

  • Pension privatization in 1999 under left-wing government
  • Reversal in 2011, 2014 under right-wing government
  • Pension privatization more entrenched than in Russia or Hungary; public

supported the introduction of pension privatization

  • Private pension funds largely excluded from lobbying or appealing to the

public

  • More gradual, though extensive, reversal
  • Left-wing party privatized pensions, right-wing party reversed pensions

December 2016 Wilson Sokhey 52