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Paths and Forks or Chutes and Ladders?: Negative Feedbacks and the Dynamics of Pension Regime Change Kent Weaver Georgetown University and the Brookings.

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Presentation on theme: "Paths and Forks or Chutes and Ladders?: Negative Feedbacks and the Dynamics of Pension Regime Change Kent Weaver Georgetown University and the Brookings."— Presentation transcript:

1 Paths and Forks or Chutes and Ladders?: Negative Feedbacks and the Dynamics of Pension Regime Change Kent Weaver Georgetown University and the Brookings Institution

2 Policy Regimes, defined: A system of organizing, financing and delivering policy that: –Has a distinctive distribution of costs and benefits –Is relatively stable over time The German pension system The U.S. health care system Cheap energy policies Socialism market economy in China Examples:

3 The Questions: 1.How frequent is a major change in policy regimes? 2.How much do past choices constrain the range of future regime options? Do policymakers have significant discretion in shifting policy regimes? Is the best metaphor for policy regime transitions…

4 Paths and Forks?

5 103 Old

6 Path Choice at Some Times and Not at Others?

7 Cul-de-sac or No Exit?

8 Boomerang or policy reversal?

9 ..or Driving off a Cliff?

10 Cul-de-sac: Regime Type at t 1 at t 2 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

11 Unconstrained choice: Regime Type at t 1 at t 2 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

12 Paths and Forks: Regime Type at t 1 at t 2 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

13 Chutes and Ladders: Regime Type at t 1 at t 2 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

14 Mixed Patterns Across Regimes: Regime Type at t 1 at t 2 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

15 More choice at t 1 : Regime Type Regime Type Regime Type at t 1 at t 2 at t 3 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

16 More choice at t 2 : Regime Type Regime Type Regime Type at t 1 at t 2 at t 3 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

17 Boomerang: Regime Type Regime Type Regime Type at t 1 at t 2 at t 3 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

18 3.What factors determine whether policy regime change occurs? The Conventional (Piersonian) Wisdom: Once policies are in place they are generally reinforced by: –Adaptive expectations and sunk costs (lock-in effects) –Political support coalitions that grow up around the policies –Multiple veto points in political systems So policy regime change mostly results from exogenous shocks

19 A Framework for Explaining Policy Regime Change: Much policy regime change has endogenous roots, and depends on: Balance between positive and negative feedbacks from existing policy Incremental reform options available to policymakersand whether they have been exhausted Regime transition opportunities available to policymakers

20 A Quick Overview of Pension Policy in Wealthy Countries

21 OECD countries vary substantially in what they spend on pensions

22 Pension systems vary substantially across countries in their impact on poverty

23 Most western countries face a severe decline in the ratio of workers to retirees….

24 ….that gets worse the further out projections are made

25 And many countries have experienced falls in labor force participation for older men…. Source: Social Security Administration, An Aging World, The initial year is 1981 for Canada and New Zealand, 1982 for France. The final year is 1996 for France.

26 …while levels for older women are lower and show more uneven trends Source: Social Security Administration, An Aging World, The initial year is 1981 for Canada and New Zealand, 1982 for France. The final year is 1996 for France.

27 A variety of incremental policy responses have been tried to address pension funding issues: Refinancing –Increase payroll tax base and rates –Add dedicated revenue sources or increase general revenue subsidies Retrenchment –Change indexation formulas –Punish early retirement –Increase retirement ages But what about more fundamental reformsshifts in pension regimes?

28 The Questions on Pension Regime Change: How frequent is a major change in pension policy regimes? How much do past choices constrain the range of future pension regime options? Do policymakers have significant discretion in shifting pension policy paths? What are the forces that determine whether pension regime changes occur?

29 The Convention Wisdom on Pension Regime Change

30 Categorizing Pension Regimes: Welfare states can be divided into three categories –Universal/citizenship regimes (Scandinavia) –Social insurance Bismarckian regimes (continental Europe) –Residual regimes (U.K., Canada, United States, Australia) Esping-Andersen, The Three Worlds of Welfare Capitalism

31 The Frequency of Pension Regime Restructuring: Welfare states have survived recent economic and demographic pressures relatively intact Pension reform has been largely incremental rather than fundamental regime change Myles and Pierson, The New Politics of the Welfare State

32 Explaining Patterns of Pension Restructuring: Positive policy feedbacks limit the pension reform options of policymakers: –Constrain choice sets –Create constituencies who resist any change that would make them worse off Age and maturity of pension regime matter (e.g., double payment problem)

33 A Revised Approach

34 Categorizing Pension Regimes: Esping-Andersens tripartite categories are overly broad and misleading, e.g.: –Residual category is overly broad mixture of means-tested Bismarckian Lite mixed regimes with distinctive challenges and regime transition opportunities –New Notional Defined Contribution (NDC) pension has different challenges and transition opportunities from continental/Bismarckian regimes

35 Recategorizing Pension Regimes: –Universal/citizenship regimes (New Zealand) –Social insurance Bismarckian regimes (continental Europe) –Bismarckian Lite regimes (U.S.,Canada) –NDC regimes (Sweden, Italy) –Residual regimes (formerly Australia) –Mixed regimes (U.K., Netherlands, Switzerland, Denmark) –Privatized regimes (none among rich countries)

36 NDC Bismarckian Bismarckian Lite Universal Mixed Residual Asterisk indicates that a country has added a small mandatory or quasi-mandatory defined contribution individual account tier. Italy * Sweden * Germany * Austria France U.S. Canada Denmark Australia Ireland Neth. Switz. N.Z.* U.K. Pension Regime Transitions

37 Available regime transition options depend on your starting point…

38 NDC Bismarckian Bismarckian Lite Universal Mixed Residual Canada Denmark Australia Residual (Means-Tested) Pension Regime Transitions

39 NDC Bismarckian Bismarckian Lite Universal Mixed Residual Asterisk indicates that a country has added a small mandatory or quasi-mandatory defined contribution individual account tier. Sweden * Canada Denmark Ireland Switz. N.Z.* U.K. Universal Pension Regime Transitions: Early exits and multiple destinations

40 NDC Bismarckian Bismarckian Lite Universal Mixed Residual Asterisk indicates that a country has added a small mandatory or quasi-mandatory defined contribution individual account tier. Italy * Sweden * Germany * Austria France Bismarckian Pension Regime Transitions: Very late exits and only 1 destination (plus*)

41 NDC Bismarckian Bismarckian Lite Universal Mixed Residual U.S. Canada Bismarckian Lite Pension Regime Transitions: High durability

42 NDC Bismarckian Bismarckian Lite Universal Mixed Residual Asterisk indicates that a country has added a small mandatory or quasi-mandatory defined contribution individual account tier. Italy * Sweden * Germany * Denmark Australia Neth. Switz. N.Z.* U.K. Mixed Pension Regime Transitions: Multiple Precursors, No Exits, and **

43 The Frequency of Pension Regime Restructuring: Pension regime change is fairly frequent –9 of 14 countries in sample have at least one –Only four (Sweden, Canada, Denmark and New Zealand) have more than one –Regime reversals (Boomerangs) are very rare Bismarckian systems are beginning to thaw with shifts to NDC regimes and addition of small DC tiers The U.S. is an outlier in having virtually no incremental or regime changes since 1983

44 Pension Regimes differ substantially in their durability: Bismarckian Lite and mixed regimes are highly durable (cul-de- sac) in post WW II period Universal and residual regimes virtually disappeared after World War II, with multiple destinations (paths and forks) Bismarckian regimes were very durable until mid-1990s when shift to NDC began (precursor to Chutes and Ladders?)

45 Pension Regime Restructuring Timing: Different types of regime transitions are concentrated in different periods: –Shifts to Bismarckian regimes stop pre –Shifts to mixed regimes concentrated post-1973 –Shifts from Bismarckian to NDC regimes post-1994 (after incremental reform options exhausted) –Individual account account add-ons to dominant DB regimes grow beginning in 1990s

46 Argument: Prospects for pension regime change depend on: The balance of positive and negative feedbacks The availability and efficacy of incremental reforms to address those challenges The availability and political acceptability of regime transition options which vary across specific pension regimes

47 Challenge and Change in Bismarckian Pension Regimes

48 Challenges for Bismarckian social insurance systems are severe: Severe sustainability issues with agingSevere sustainability issues with aging Need to address problems of low labor market participation in age groupNeed to address problems of low labor market participation in age group

49 Incremental reform options for Bismarckian social insurance systems are limited: Payroll taxes perceived to hurt competitiveness Less visible incremental benefit cuts mostly exhausted, leaving only painful options (e.g. retirement age increase)

50 Transition Opportunities for Bismarckian regimes are highly constrained: Shift to mixed regime regimes unlikely due to double payment problem (only small DC add-on possible) Cant shift to universal, residual, or Bismarckian Lite regimes because of adequacy concerns NDC regime is only remaining regime transition option (single chute)– and it is a recent innovation

51 Sweden in the 1990sPolicy Feedbacks in a Bismarckian System Universal pension Earnings-related pension on top Generous income-tested pension removes almost all seniors from poverty

52 Sweden-- Strong Negative Feedback Effects Very serious fiscal challenge in both short run and long run as population ages Very high payroll taxes and overall tax burden spark competition concerns Exhausted Incremental reform options Strong resistance to payroll tax increases Strong union resistance to visible benefit cuts Limited Regime Transition Opportunities: Shift to a Mixed System very difficult given high current commitments and payroll tax Shift to NDC system compatible with existing earnings-related system

53 Sweden TodayAn NDC System with an Individual Account Add-On: NDC tier financed by 16% contribution rate-- risk of poor economic performance and increased longevity shifted from state to workers Individual account tier financed by 2.5% contribution rate

54 Challenge and Change in Bismarckian Lite Pension Regimes

55 Challenges for Bismarckian Lite social insurance systems include: Developing adequate mechanisms to deal with senior povertyDeveloping adequate mechanisms to deal with senior poverty Adapting to changes in supplementary occupational and personal pension sectorsAdapting to changes in supplementary occupational and personal pension sectors Addressing long-term pension funding problems in the absence of an immediate funding crisisAddressing long-term pension funding problems in the absence of an immediate funding crisis

56 Bismarckian Lite pension regimes contain room for refinancing without restructuring

57 Bismarckian Lite pension regimes have multiple transition opportunities: Can shift to Bismarckian regime only before demographic crisis hits Can shift to mixed regime as add- on with higher contributions Can shift to NDC regime But also have less need to shift because of availability of incremental reform options

58 United States: Negative Feedbacks Moderate fiscal challenge in short run and relatively modest in longer run Adequacy: High senior poverty rates especially very old single women Incremental reform options Benefit cuts (e.g., retirement age increases and increased income-testing at upper end) payroll tax increases off the table because of Republican opposition

59 United States: Regime Transition Opportunities Shift to mixed system inhibited by financing constraints unless new revenues added NDC system possible but inhibited by internal cross-subsidies unless new revenues added

60 United States Today Bismarckian Lite Stability : Social Security in the U.S.: Incremental reform in 1977 and 1983 including benefit cuts and increases in standard retirement age Virtually no policy change since then Efforts by Bush II to get opt-out individual account reform on the agenda failed

61 Concluding Thoughts

62 1. How much pension regime change?: How much regime change you see depends on how you categorize regimes Tri-partite conceptualization of pension regimes is inadequate Amount of pension regime change over last fifty years has been substantial in OECD countries

63 2.Amount and direction of pension policy regime change depends in large part on: Balance between positive and negative policy feedbacks –Negative policy feedbacks can be strongly transition-encouraging (e.g., affordability of Bismarckian regimes) Incremental reform options available to policymakersand whether they have been exhausted Regime transition opportunities available to policymakers –Only available after invented (e.g., NDC) –Adoption depends in part on political resources

64 3. Prospects for specific pension regime transitions vary over time (Most common timing of pension regime transitions is shown next time to the corresponding arrow. Pension regimes with a low probability of regime exit in the current late period of public pension development are shown with a shaded background) No public pensions Bismarckian Literegime Universal regime Residual regime Mixed regime Bismarckian regime NDC regime late early middle or late middle or late early middle early middle

65 4.Negative feedback effects are a necessary but not sufficient explanation of pension regime transitions, e.g., why: Some Bismarckian systems (e.g., Sweden, Italy) shift to NDC while others (e.g., France) do not New Zealand and Ireland remain outliers as residual systems Timing differs in regime transitions

66 5.A broader set of explanations of pension policy regime change includes: Political Environments and strategies (e.g.,macro- institutions, coalitions, corporatism Policy feedbacks (e.g., policy regimes, program maturity, micro rules) Economic- demographic variables (e.g., aging, competitiveness, fiscal crisis The Problem stream Policy Implementation Policy survival Agenda-setting The Politics stream Policy Adoption The Policy stream But examining negative feedbacks is a good place to start!

67 6.A framework focused on negative feedbacks and reform options has wide applicability e.g., where Marx and Engels went wrong: Balance of positive and negative feedback effects Anticipated near-universal immiseration did not occur Incremental Reform Options Many incremental patches available (e.g., welfare state programs, better regulation of business cycles) Patches became more politically feasible as voting franchise was expanded Regime Transition Options High costs of transition Major opposition from entrenched interests Socialist and communist alternatives proved to have substantial negative impacts in practice Redistributive welfare state (with great variations) proved easier regime transition option

68 The End– Finally!


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