The Politics of Structural Pension Reform in Western Europe:
Does the EU Matter?
Martin Hering
Department of Political Science
McMaster University
Hamilton, ON, Canada
[email protected]
Comments are welcome!
Paper to be presented at
the Fifteenth International Conference of the Council for European Studies,
March 29–April 2, 2006, Chicago, IL
Introduction
In the past 10 or 20 years, many countries enacted reforms of their pension
systems. The reform activity was strong not only in developing and transition countries
(Müller 2003), but also in the advanced industrialized countries of Western Europe
(Schludi 2005). Many analyses of the politics of pension reform take the causes of reform
as given and focus on the explanation of why reforms succeeded or failed. For example,
they examine the effect of voter preferences and trade union resistance on the willingness
and ability of governments to adopt and implement changes such as retirement age
increases, pension benefit cutbacks and contribution increases. The causes of reform are
often not the central focus of analyses of pension politics, because many scholars assume
that these need no further explanation. Since the populations of most industrialized
countries are aging, pension spending will rise significantly and contribution revenue will
decline. Therefore, all governments face the necessity to reform their pension systems.
Even though this argument is convincing, it does not answer the important question why
some governments attempt to reproduce their pension systems, while others seek to
transform them. These widely different reform strategies are not fully explained by
differences in demographic pressures. They require an analysis of other reform causes,
namely the preferences and options of governments.
This paper seeks to contribute to the search for the causes that lead governments
to adopt different reform strategies (Orenstein 2005; Brooks 2005). Why do some
governments seek to make structural changes to their pension systems? I will focus in this
2
paper on one factor that could potentially explain the adoption of structural reforms in
Western Europe: European monetary union. I argue that monetary union restricts the
options of governments to adapt a certain type of pension system that I refer to as
dominant public pillar system. Monetary union exerts its effect on EU member states not
by imposing a different institutional model on countries, but by interfering with the
reproduction of dominant pillar pension systems. Specifically, the EU’s requirement of
fiscal sustainability and its deficit and debt rules largely preclude the strategy of
refinancing generous public pensions in the face of aging populations. The options that
remain for most European governments are the retrenchment and restructuring of
pensions. Governments continue to be able to provide adequate pensions for their
citizens, but they have to rely on a mix of public and private pensions. Thus, European
monetary union leads to gradual transformations of dominant pillar systems and to an
increasing convergence of member states towards the multi-pillar pension model. I
illustrate my argument by examining the case of Germany, which was one of the four EU
member states that in the past 10 years gradually shifted towards the multi-pillar model.
This paper is divided into four parts. In the first part, I examine which EU
member states adopted structural pension reforms in the period from 1995 to 2004 and
show that a gradual convergence of West European pension systems occurred even
though the EU did not have the competence to prescribe a common pension model. In the
second part, I present my argument about the interference from European monetary union
in dominant pillar pension systems. In the third one, I relate my argument to the literature
on the impacts of European integration and argue that institutional interference is a
3
distinctive mechanism of Europeanization. In the fourth one, I analyze the impact of
European monetary union on the politics of pension reform in Germany, and show how
institutional interference restricted the reproduction of the dominant pillar pension
system.
Structural Pension Reform in Western Europe
The definition and and analysis of the dependent variable continues to be a key
challenge in studies of welfare state reform (Green-Pedersen 2004). Which kinds of
changes were made, and how large or small were these? In recent years, governments in
Western Europe have enacted a large variety of pension reforms, which have been
described and categorized, for example, as increases in retirement ages, changes in
contribution rates and changes in the relationship between benefits and contributions
(Myles and Quadagno 1997; Weaver 2003). This section of the paper does not attempt to
give a comprehensive picture of the changes in pension policy in Western Europe, but
seeks to provide a more selective analysis of the occurrence and direction of institutional
change in West European pension systems. Did the changes that were enacted in the past
10 years lead to continuity or discontinuity in the development of old-age security
institutions? Were pension systems reproduced or transformed?
The question whether pension reforms produced structural or only marginal
change is still very much debated in the literature not only because of methodological
4
issues, but also because of conceptual ones. First, many changes in pension policy were
phased in over very long time periods, frequently over several decades. Thus, most
effects of recent pension reforms are not yet visible and are also difficult to estimate.
Second, scholars disagree about the conceptualization of discontinuous change. As
Wolfgang Streeck and Kathleen Thelen have pointed out, many existing studies limit the
definition of major change to the breakdown and abrupt replacement of institutions
(Streeck and Thelen 2005). Since structural change, especially in pension systems, occurs
mostly gradually, they thus underestimate the frequency of structural change.
A solution to the conceptual issues requires definitions of both the types of
pension systems that exist in Western Europe and the types of pension reforms that likely
produce a gradual shift from one type to another one. Following Esping-Andersen’s
argument that the relative importance of the state and the market is a key dimension in
pension provision (Esping-Andersen 1990), I use the broad distinction between dominant
pillar systems, in which public pensions are the dominant or even the only pillar of
income security, and multi-pillar systems, in which adequate retirement incomes depend
on a combination of public pensions with private ones (Bonoli 2003; World Bank 1994).
To classify reforms as marginal or structural, I analyze changes at two different levels.
First, at the level of policy paradigms, I examine whether governments changed their
strategies for achieving income maintenance in retirement from adequate public benefits
to a combination of public and private pensions (in dominant pillar systems), or from a
public-private mix to adequate public pensions (in multi-pillar systems). Second, at the
level of adopted policies, I assess whether changes will increasingly replace public
5
pensions with private ones (in dominant pillar systems) or private pensions with public
ones (in multi-pillar systems). To partly solve the methological issues, my analysis relies
mostly on the so-called National Strategy Reports on Adequate and Sustainable Pensions
that member states submitted in 2002 and 2005 as part of the EU’s new policy learning
process, and on recent work by the EU’s Social Protection Committee, which made longterm projections of pension replacement rates and analyzed the future importance of
privately provided pensions (European Commission and European Council 2003; Social
Protection Committee 2004, 2005).
Table 1.
Structural Pension Reform in Western Europe, 1995-2004
Institutional Development
Reproduction by Adaptation
Gradual Transformation
Dominant Pillar Systems
Multipillar Systems
Luxembourg
Belgium
Finland
Spain
Portugal
France
Greece
Denmark
United Kingdom
Ireland
Netherlands
Sweden
Germany
Italy
Austria
—
In the early 1990s, the large majority of pension systems in Western Europe were
dominant pillar systems. As shown in Table 1, of the 15 EU member states, only 4 had
multi-pillar systems: the Netherlands, Denmark, the United Kingdom and Ireland. A
study by Eurostat from 1993 showed that in most countries, public pension replacement
rates ranged from about 70 to more than 100 percent of wages, which was adequate for
6
income maintenance. By contrast, in the four cases with multi-pillar systems, the
replacement rate ranged from about 40 to 60 percent (Whiteford 1995). Since that level
was not sufficient for maintaining a person’s living standard after retirement,
occupational or personal pensions were an indispensible component of retirement
income. The differences between the two systems were also reflected in the size of assets
of private pension funds, which in the early 1990s was less than 5 percent of GDP in all
EU member states except in the four countries with multi-pillar systems. In the
Netherlands and the United Kingdom, these assets amounted to more than 70 percent of
GDP, and in Ireland and Denmark, whose occupational pension systems were still
maturing, they exceeded 20 percent of GDP (OECD 2003).
An examination of the policy paradigms, policy changes and projected policy
outcomes shows that during the past 10 years, most West European pension systems were
stable but some were changing (see Table 1). Two-thirds of the 15 old EU countries
reproduced their pension systems by enacting numerous marginal adjustment measures,
focusing either on the refinancing or retrenchment of public pensions. But four
countries—Sweden, Italy, Germany and Austria—restructured their pension systems by
cutting public pensions and replacing these increasingly with private ones, and thus
began a gradual shift from the dominant pillar model to the multi-pillar one. By contrast,
none of the countries with multi-pillar systems attempted to increasingly crowd out
private pensions. Overall, the changes in West European pension systems resemble well
the two types of institutional development suggested by Streeck and Thelen (Streeck and
Thelen 2005): reproduction by adaptation and gradual transformation.
7
Table 2. Projected Pension Reform Outcomes in Western Europe, 2004
Public Pension
Total Replacement
Replacement Rate*
Rate*
2002
2050
2002
2050
Change in
Change in
Public Pension
Total
Replacement Replacement
Rate
Rate
2002-50 2002-50
Dominant Pillar Countries
Refinancing
Belgium
Luxembourg
Retrenchment
Greece
France
Portugal
Spain
Finland
Restructuring
Sweden
Italy
Austria
Germany
36.5
89.5
36.6
89.5
40
89.5
48.8
89.5
0.1
0
8.8
0
108
65
72.3
88.6
57.6
94.7
56.8
64.9
83
53.8
108
65
72.3
88.6
57.6
94.7
56.8
64.9
83
53.8
-13.3
-8.2
-7.4
-5.6
-3.8
-13.3
-8.2
-7.4
-5.6
-3.8
57
79.6
74.3
44.6
40.1
64.6
66.9
37.8
70.9
79.6
74.3
50.1
54.4
84.1
66.9
50.5
-16.9
-15
-7.4
-6.8
-16.5
4.5
-7.4
0.4
32.6
31.4
32.6
34
70
66.7
70
66.7
0
2.6
0
0
41.7
16.6
33.6
11.4
45.1
66.6
68.9
61.4
-8.1
-5.2
23.8
-5.2
—
—
—
—
—
—
Multipillar Countries
Refinancing
Netherlands
Ireland
Retrenchment
Denmark
United Kingdom
Restructuring
—
*Gross replacement rate
Source: Social Protection Committee. 2004. Current and Prospective Pension
Replacement Rates: Report on Work in Progress. Brussels: European Commission.
Even though the Swedish, Italian, German and Austrian governments were
equally committed to the gradual transformation of their pension systems (European
Commission and European Council 2003), they adopted structural reforms to different
degrees. First, as recent projections by the Social Protection Committee show (see Table
8
2), Sweden enacted the largest cuts of public pensions, reducing the gross replacement
rate in the long-run from almost 60 percent of wages to about 40 percent. The public
pension cutbacks will likely be even larger than this, because Sweden’s new mandatory
individual account tier was classified by the EU as a public pension. Beyond these
growing personal pensions, the Swedish government did not seek to provide
compensation for the substantial reductions of public pensions, most likely because
occupational pensions were already much more established than in other dominant pillar
countries. Second, Italy also made large cutbacks of benefits, but unlike Sweden, it
expanded occupational pension which is expected to increase total replacement rates in
the long-term. Third, Germany implemented changes similar to Italy’s: substantial
cutbacks of public pensions, and full compensation by a growth of occupational pensions.
The data in Table 2 likely underestimates the reduction of benefits, because it does not
include the effects of Germany’s latest pension reform in 2004 which led to more cuts of
public pensions. Finally, Austria enacted substantial cutbacks of public pensions and
gave employees the option of compensating these by occupational pensions. Unlike the
Italian and German governments, the Austrian one continued to regard private pensions,
at least officially, not as a necessary part of income maintenance, but as a supplement to
adequate public pensions. The projections in Table 2 thus do not reflect the expected
partial replacement of public benefits by private ones (Social Protection Committee
2005).
The EU member states that chose reproduction by adapation are not the focus of
this paper, but a brief overview of the changes in the other dominant pillar countries helps
9
to distinguish those with more robust systems from those with less stable ones. In the
future, the latter will potentially follow Sweden, Italy, Germany and Austria in gradually
transforming their pension systems. A strong degree of institutional reproduction existed
in Luxembourg, Belgium, Finland, Spain and Portugal. Some of these countries enacted
pension cutbacks. But since these cuts were relatively small, they did not undermine the
income maintenance function of public pensions.1 In addition, all five countries either
already had sizable pension reserve funds (Finland, Luxembourg) or were building up
reserves (Belgium, Spain and Portugal). Thus, there was room for further reproduction by
adaptation. By contrast, France and Greece displayed a weak degree of reproduction.
France adopted public pension cuts that lowered substantially both gross and net
replacement rates. Since France’s most recent pension reform in 2003 was not considered
in the projections, the decline in benefit levels will likely be much larger than that
revealed by the data. Even after big cutbacks, in Greece public pensions were projected to
remain, at least theoretically, at an extremely high level. Nonetheless, since there were
wide coverage gaps among Greek employees, public pensions may not ensure adequate
incomes in retirement for some parts of the population (Social Protection Committee
2004). If public pensions became insufficient for income maintenance, governments
would likely put the issue of partly replacing these with private pensions on their agenda.
Further reproduction by adaptation will remain possible in France and Greece, but since
neither country has a significant or steadily growing pension reserve fund, these
1
Belgium had relatively low gross replacement rates, but its net replacement rates were about as
high as those in Finland and Germany. Portugal enacted comparatively large cutbacks of gross
replacement rates, but these did not affect net replacement rates (Social Protection Committee
2004).
10
countries’ adjustment options will be more limited those existing in countries with more
robust systems.
In sum, the analysis showed that in the period from 1995 to 2004 Western
European pension systems began to change. Almost one-third of the EU member states
started a gradual transformation of their dominant pillar pension system into a multi-pillar
one by cutting public pension benefits and expanding occupational pensions. In addition,
France and Greece made major cuts in public benefits, but did not create a significant
private pension pillar. An examination of the National Strategy Reports and the
projections of the Social Protection Committee shows a paradigmatic and policy
convergence towards the multi-pillar model. Under the condition that Sweden, Italy,
Germany and Austria sustain the transformation of their pension systems, the pension
landscape of 2050 will look very different from that of the 1990s. Dominant pillar
pension systems will no longer make up the large majority of pension systems in Western
Europe. Multi-pillar pension systems will become the new norm in ensuring income
maintenance in retirement, and dominant pillar systems will become the exception.
The gradual convergence of West European pension systems is a puzzle because
it occurred not only despite of strong path-dependence in member states’ pension
systems, but also despite of the European Union’s limited powers in the field of social
policy. Unlike in environmental policy and other regulatory policies (Knill and Lehmkuhl
2002), in pension policy the EU does not require from member states the adoption of a
particular institutional model. In addition, in contrast to the World Bank (World Bank
11
1994), which promoted the multi-pillar model in the 1995-2004 period, the EU did not
even develop and propose an institutional model for member states’ pension systems. As
Fritz W. Scharpf has argued, the diversity of welfare states in the EU precluded the
adoption of a common model in welfare provision. Since the values and institutions
differed much, and since the imposition of a single European welfare model would have
implied both normative and structural changes at the national level, there was little scope
for agreement on EU legislation in the field of social policy, including in that of pension
policy (Scharpf 2002).
Member states’ responsibilities in social policy matters and the diversity of their
welfare states also restricted the definition of a common European model. The EU’s new
information exchange and peer-review process in the area of pensions, the so-called Open
Method of Coordination, was based on the agreement among member states that they
would not recommend a particular institutional model. The Social Protection Committee
stated in its first report on pensions: “… no type of pension scheme (pay-as-you-go vs.
funded, private vs. public, defined benefit vs. defined contribution) can be regarded as
superior to another” (Social Protection Committee 2000). Moreover, even though the
Social Protection Committee defined the maintenance of adequate pension as a common
goal, it emphasized that there were multiple institutional means to achieve that goal.
Specifically, it said that “[t]he three pillars of the pension system, operating in
combinations decided by the Member States, should enable people … to maintain the
living standard achieved during their working life” (Social Protection Committee 2000).
To conclude, if European integration had an effect on the restructuring of the Swedish,
12
Italian, German and Austrian, it had only an indirect impact. The prescription of an
institutional model, which is a powerful mechanism of Europeanization (Knill and
Lehmkuhl 2002), was not the means by which the EU mattered in the structural reform of
dominant pillar pension system. In the following section, I will propose a different
mechanism of Europeanization that potentially explains why many West European
countries began to converge towards the multi-pillar model in the period from 1995 to
2004.
Institutional Interference
I argue that an explanation of the partial convergence of pension systems, which
are both path-dependent and very diverse, requires an analysis of indirect mechanisms of
Europeanization that are based not only on the preferences and power of actors, but also
on the goals and capacities of institutions. If the EU’s impact were restricted to the
socialization and empowerment of actors at the national level, a partial convergence of
institutions would unlikely occur, mostly because it would be difficult to sustain. In the
event of a change in government, new actors who do not share common values and goals
could come into office and stop or revert a gradual institutional transformation.
Convergence, I argue, thus depends on institutions, because these are more stable factors
that continue to exert their effect even when non-Europeanized actors gain power at the
domestic level.
13
How could EU institutions have an indirect impact on national-level institutions,
pushing the latter towards convergence? Fritz W. Scharpf has argued that EU institutions
reduced the capacities of member states to pursue Keynesian economic policies (Scharpf
2002). Specifically, European monetary union ruled out two adjustment options on which
member states previously relied in order to stimulate economic growth and create
employment. First, the transfer of the competence for monetary policy-making from the
national level to the European Central Bank prevented countries with low rates of
economic growth from reducing interest rates. Second, the budget deficit and debt rules
set forth in the Maastricht Treaty and the Stability and Growth Pact precluded the
stimulation of growth and employment by increases in public spending. The interaction
of these constraints led to a substantial loss of institutional capacities in member states.
EU institutions effectively ruled out Keynesian macro-economic management which
relies on demand-side policies. Even though the EU did not impose a monetarist model,
which focuses to the supply-side, its institutions for monetary and fiscal policy-making
restricted member states in the use of supply-side options for influencing growth and
employment, such as tax reductions and labor market deregulation. Thus, even though
EU institutions had only an indirect effect, they produced increasing convergence among
member states with regards to management of their economies.
I argue that an institutional mechanism similar to that proposed by Scharpf
explains the reduction of EU member states’ capacity to pursue certain pension policies.
European monetary union closed not only the main adjustment options of Keynesian
welfare states, which are interest rate cuts and public spending increases, it also
14
constrained the use of the two key instruments of adaptation available in Bismarckian
pension systems: contribution rate increases and general tax increases. In order to
maintain generous public pension benefits, governments in countries with dominant pillar
systems depend on refinancing measures. Even though retrenchment is an option for
dealing with the pressures from population aging, its magnitude is limited by the
boundaries between dominant pillar and multipillar systems. Large benefit cutbacks are
rarely a feasible adjustment strategy for countries with dominant public pension systems,
because they would undermine, at least in the long-term, the adequacy of public pensions
for income maintenance. For example, French governments cut pension benefits
repeatedly during the past 10 years, and thus successfully adapted their dominant pillar
system. But if they relied on the retrenchment option for another 10 or 20 years, they
would cause a shift towards a multi-pillar system. In addition, even countries that keep a
significant reserve fund for their dominant pillar pension systems will likely need to rely
on increases of contribution rates or general revenues in the next two or three decades.
For example, despite of the reserves of Finland’s public pension system, which are by far
the largest in Western Europe, the Finnish government expects that a contribution rate
increase will be necessary to finance adequate public pensions in the long-term. Thus,
refinancing is an indispensible option for the reproduction of Bismarckian pension
systems, and retrenchment is compatible with adequate public pensions only to a limited
extent.
European monetary union severely constrains member states in pursuing the
refinancing strategy. The Maastricht Treaty defines the sustainability of member states’
15
public finances as a requirement for a successful monetary union, and operationalizes that
requirement by a budget deficit ceiling of 3 percent of GDP and a public debt ceiling of
60 percent of GDP. Since these values apply to all governmental expenditure, including
those of social insurance systems, they also apply to public pension systems. Public
pension expenditure is relevant for the sustainability of public finances because in most
EU member states it is projected to increase between 3 percent and 6 percent of GDP by
2050 (Economic Policy Committee 2001), which could potentially lead to increasing debt
levels.
Table 3. Sustainability of Public Finances in Western Europe, 2001
Public Finances
Sustainable
Unsustainable
Dominant Pillar Systems
Multipillar Systems
Belgium
Finland
Luxembourg
Sweden
Denmark
Ireland
Netherlands
United Kingdom
Austria
France
Germany
Greece
Italy
Portugal
Spain
—
Source: European Commission. 2005. Public Finances in EMU. Brussels: European
Commission.
The risk of unsustainable debt levels differs across types of pension systems.
Current pension expenditure on average is about twice as high in dominant pillar systems
as in multipillar ones, and future spending growth is projected to be higher in the former
than in the latter. The requirement of fiscal sustainability thus mostly affects dominant
16
pillar pension systems. As shown in Table 3, the European Commission’s first
assessment of fiscal sustainability in member states classified only countries with
dominant pillar pension systems as fiscally unsustainable.
The Maastricht Treaty does not specify the instruments by which member states
should reduce and maintain their public debt below the ceiling of 60 percent. In addition,
the Treaty is silent about member states’ options in adjusting their pension systems to
demographic pressures. In theory, member states could thus either increase revenues or
reduce expenditures, as long as they meet the deficit and debt criteria. But as Andrew
Martin has pointed out, in practice, European monetary union sets much more stringent
limits than the wording of the Treaty provisions suggests (Martin 2004). The application
of the requirement of fiscal sustainability by the European Central Bank (ECB), the
Council of Economics and Finance Ministers (ECOFIN) and the European Commission
is restrictive. Not only higher debt levels are defined as unsustainable, higher tax burdens
are also interpreted as a threat to sustainable public finances. For example, the ECB
regards the refinancing of pensions as a detriment to compliance with the EU’s fiscal
rules, because “… a further increase in social security contributions would be harmful to
economic growth”, and because lower growth rates would “… erode the basis for sound
public finances” (European Central Bank 2003). The ECB explicitly recommends an
overall limit on social contributions. The ECOFIN Council and the European
Commission’s interpretation of the Treaty provisions is similar to the ECB’s. In a report
to the European Council from 2001, these actors even incorporated the additional
requirement of stable or lower taxes and social contributions in a new definition of fiscal
17
sustainability. Specifically, the Council and the Commission stated that “… sustainable
public finances not only require avoiding structural deficits and raising debt: they also
imply keeping the tax burden (especially on labor) at levels such that employment and
growth are not hindered …” (Council of the European Union 2001). In addition, the
Commission’s annual assessments of the sustainability of member states’ public finances
are based on the assumption of a constant ratio of taxes to GDP (European Commission
2002).
To conclude, EU does not impose the multi-pillar pension model on member
states, but since the mid-1990s its institutions for fiscal policy-making have restricted
member states’ use of the refinancing option, which made reproduction by adaptation
increasingly difficult for many countries with dominant pillar pension system. EU
institutions did not prevent member states from pursuing the goal of adequate incomes in
retirement. However, they limited their option to the expansion of private pension
provision. This mechanism, which I refer to as institutional interference, is a potential
explanation for the partial convergence of West European countries towards the multipillar model.
If the recently adopted reform of the Stability and Growth Pact (SGP) is an
indication of future developments, the interference from EU institutions in dominant
pillar pension systems will likely increase. The new Council Regulation will likely
strengthen the EU’s constraints on dominant pillar pension systems and, for the first time,
loosen these constraints for countries that gradually shift towards a multi-pillar system. In
18
the reformed SGP, implicit liabilities such as those of pay-as-you-go pension systems
will be taken into account in the definition of medium-term budgetary targets for
individual member states. That rule will likely punish dominant pillar pension systems,
especially those that have no reserve fund or only a small one. In addition, the
assessments of the Commission and the ECOFIN Council will be more lenient if member
states enact structural reforms that lead to fiscal sustainability in the long-term, but
generate transition costs in the medium-term. A shift to a multi-pillar pension system will
be given special consideration (European Central Bank 2005).
Four Mechanisms of Europeanization
Institutional changes at the national level may result from a number of different
mechanisms of Europeanization. Most of the existing literature has focused on either the
direct mechanism of prescription by EU legislation (Knill and Lehmkuhl 2002), or the
indirect mechanisms of empowerment or socialization (Risse, Cowles, and Caporaso
2000; Featherstone 2004). I argue that institutional interference is different from the
mechanisms of Europeanization that have been suggested so far. It is an alternative to
Europeanization by prescription, and complements changes in the distribution of power
and in actors’ beliefs and preferences. In order to identify better the distinctive
characteristics of institutional interference, I propose a two-dimensional classification of
Europeanization mechanisms.
19
My classification builds on distinctions that are frequently made in analyses of the
impact of Europe (Cowles, Caporaso, and Risse 2000; Featherstone 2003; Martin and
Ross 2004; Dyson 2002). Based on an examination of different regulatory policies,
Christoph Knill and Dirk Lehmkuhl have distinguished three kinds of Europeanization
mechanisms: changes in European legislation, changes in domestic opportunity structures
and changes in European and domestic beliefs (Knill and Lehmkuhl 2002). The first is a
direct and coercive mechanism which involves the definition of a particular institutional
model at the EU level. Pressures for implementation arise from the supremacy of
European law. This mechanism is found mostly in policy areas in which national
competencies have been transferred to a large extent to the EU level, such as
environmental policy or occupational health and safety policy. The second mechanism is
an indirect one, because the EU only empowers some actors at the national level, but
does not require institutional changes. Finally, the third mechanism is an indirect and soft
one, because it involves changes only in actors’ beliefs, preferences and strategies, but
not in their relative power. Other scholars make distinctions similar to those suggested by
Knill and Lehmkuhl. For example, Kenneth Dyson distinguishes changes in the strategic
capacities of domestic actors from changes in the latters’ ideas and interests (Dyson
2002). Thomas Risse, Maria Green Cowles and James Caporaso distinguish changes in
EU legislation from changes in European and domestic norms (Risse, Cowles, and
Caporaso 2000). Finally, Kevin Featherstone distinguishes the empowerment of actors
who support EU policies from the transfer of European norms and values to domestic
actors (Featherstone 2004).
20
Table 4. Mechanisms of Europeanization
Institution-Based
Actor-Based
Positive
Prescription
Socialization
Negative
Interference
Empowerment
I suggest to classify the mechanisms of Europeanization by two dimensions (see
Table 4). The first dimension separates institution-based mechanisms from actor-based
ones. The prescription of institutional models by EU legislation and the interference in
domestic institutions by EU institutions are mechanisms that operate independently of the
actor constellations at the national level. In policy areas in which the EU defines an
institutional model and has the competence to legislate institutional changes, even
member state governments that are strong or do not share European preferences and
beliefs likely are unable to reproduce a type of institutions that conflicts with the EU’s
model. Like prescription, interference also has an impact on domestic institutions even in
cases in which member state governments are resistant to changing their institutional
model. If EU institutions define and enforce constraints on domestic institutions that
prevent the reproduction of a model, governments that prefer to adapt it to changing
circumstances likely are restricted in pursuing that strategy. Even though actor-based
mechanisms of Europeanization frequently interact with institutional ones, their effect is
partly independent of the institutional arrangements at the EU level. For example, the
adoption of EU norms and beliefs by domestic governments does not depend on the
legislation of a European institutional model or the enforcement of institutional
constraints. The second dimension distinguishes between positive and negative
21
Europeanization mechanisms. Drawing on Scharpf’s distinction between positive and
negative integration (Scharpf 1999), I use positive Europeanization to refer to the transfer
of a European institutional model to the domestic level, and to negative Europeanization
as the restriction of national institutional models by European constraints. The
prescription of an institutional model and the socialization of domestic actors are positive
Europeanization mechanisms because they either directly or indirectly lead actors to
adopt a European model. By contrast, institutional interference and the empowerment of
domestic actors are negative mechanisms because they restrict the actors who seek to
reproduce certain national institutional models.
The conceptualization of institutional interference as a fourth type of
Europeanization mechanism is useful for two reasons. First, interference is an alternative
means of producing institutional change in member states. In order to achieve
convergence, EU-level actors thus do not depend on the definition and enforcement of a
European model. Constraining the options for adapating a different type of institutions
can lead to convergence. Second, interference reinforces the empowerment of
Europeanized domestic actors. Since it constrains the options of domestic actors who
prefer to defend a distinctive national model, Europeanized actors likely face less
resistance in changing domestic institutions.
22
European Influences on Structural Pension Reform in Germany
As the projections by the EU’s Social Protection Committee showed, Germany is
one of the countries in which a gradual transformation from a dominant pillar to a multipillar pension system has begun. Until 2050, the level of public pension benefits is
projected to decline from about 45 percent to 38 percent of gross wages, and the level of
private pension benefits is expected to rise from about 6 percent to 13 percent. Thus, even
though the combination of public and private benefits will likely remain adequate for
income maintenance in retirement, public pensions by themselves will only be able to
prevent poverty. In the National Strategy Report on Adequate and Sustainable Pensions,
the German government emphasized that the latest pension reform of 2004, whose effects
were not taken into account in the Social Protection Committee’s projection, reinforced
the replacement of public pensions with private ones that was started by the pension
reform of 2001 (European Commission 2005). These developments, which are similar to
those in Italy, Austria and Sweden, raise two questions. First, when did Germany end
reproduction by adaptation, and thus begin the gradual transformation of its pension
system? And second, did European integration restrict the refinancing option, and thus
have an impact on the shift in German pension politics from reproduction to
transformation?
The change from reproduction to transformation in Germany was gradual. In the
period from 1995 to 2004, German governments increasingly changed their pension
reform strategies from refinancing, which was complemented by limited retrenchment, to
a combination of retrenchment and restructuring. Twice, in 1998 and 2002, they made a
23
brief switch back to refinancing, but this did not stop the movement towards
restructuring.
Table 5. Types of Reforms in German Pension Policy, 1995-2004
1996
1997
1998
1999
2001 I
2001 II
2002
2003
2004 I
2004 II
Reform Law
Growth & Empl. Promotion Act
Pension Reform Act
Social Insurance Correction Act
Budget Consolidation Act
Old-Age Provision Act
Reserve Fund Act
Contribution Stabilization Act
Social Insurance Reform Act
Sustainability Act
Retirement Income Act
Refinancing
X
X
X
X
X
X
X
Retrenchment
X
X
Restructuring
X
X
X
X
X
X
X
As Table 5 shows, German governments were very active, legislating 10 pension
reforms within a 10-year period (see Appendix A for details). The Growth and
Employment Promotion Act of 1996, which was enacted by Chancellor Helmut Kohl’s
center-right government, was biased towards refinancing. It led to a large increase of the
contribution rate, but produced only small expenditure reductions. Most importantly, it
did not reduce the benefit level. By contrast, the Pension Reform Act of 1997 led to
major retrenchment, reducing the benefit level in the long-term from 70 percent to 64
percent of wages. But it included an equally significant increase in pension revenues
because it raised general taxes. The Social Insurance Correction Act of 1998, which was
the first pension reform of Chancellor Gerhard Schröder’s newly elected center-left
government, reversed the retrenchment strategy briefly. It suspended the Kohl
government’s benefit cutbacks and focused exclusively on refinancing measures.
24
Specifically, it led to another major increase in revenue both from general taxes and from
social contributions. One year later, the Budget Consolidation Act of 1999 reversed the
strategy reversal of the center-left government. Based purely on retrenchment, it cut
pension benefits in the short-term from 70 percent to 67 percent. The Old-Age Provision
Act of 2001 not only reinforced the retrenchment strategy by reducing the benefit level to
64 percent, it also included restructuring measures. This was the first time in German
pension politics that private pensions were used as a replacement for declining public
pensions. The Reserve Fund Act of 2001 and the Contribution Stabilization Act of 2002,
which the center-left government enacted a year before and shortly after the 2002 federal
election, led to a temporary postponement of the retrenchment and restructuring strategy.
They increased revenues from contribution rates and used a large portion of the pension
systems’ small reserves. Like the Budget Consolidation Act, the Social Insurance Reform
Act of 2003 led to pure retrenchment, significantly cutting the level of pension benefits in
the short-term. Finally, the Sustainability Act and the Retirement Income Act, which
were legislated in 2004, strengthened the retrenchment and restructuring measures that
the Schröder government had enacted three years earlier. They included yet another large
cutback of the level of pension benefits and increased in parallel the opportunities and
incentives for private pension savings. Most importantly, they defined a ceiling for
pension contribution rates, which was a clear reflection of the German government’s
commitment to rule out the refinancing option.
The short review of the reforms in Germany between 1995 and 2004 shows that
the beginning of the gradual transformation of the dominant pillar pension system is not
25
as easy to identify as it may seem at first. The Schröder government’s Old-Age Provision
Act of 2001 was certainly a landmark legislation because it formally replaced public
pensions in part with private ones. But it was the Sustainability Act of 2004 that
explicitly put a stop to the refinancing of pensions. In addition, the Kohl government’s
Pension Reform Act of 1997 clearly deviated from reproduction by adaptation, because
the size of the pension cutbacks that it produced contradicted the goal of income
maintenance in retirement. Finally, the Budget Consolidation Act enacted by the
Schröder government was announced as the first part of a series of retrenchment and
restructuring measures. An answer to the question whether the EU had an impact on
structural pension reform in Germany thus requires an analysis of the series of pension
reforms in the period from 1995 to 2004. A focus on the enactment of only one reform
law, such as the Old-Age Provision Act, would be insufficient.
In order to assess whether or not the EU restricted the refinancing of Germany’s
pension system, I use the Pension Reform Act of 1989, which was the last major reform
before the Maastricht Treaty took effect, as a benchmark. The Pension Reform Act,
enacted by a grand reform coalition of the Christian Democrats and the Social
Democrats, showed which changes were required for continued reproduction by
adaptation. To keep the level of benefits at 70 percent of net wages, which was regarded
as the minimum for income maintenance, large increases in revenue were necessary in
the long-term. The key question was whether to increase social contributions or transfers
from general taxes. German policy-makers opted for a mixed approach to refinancing.
First, they indexed the contribution rate to pension expenditure growth, thus allowing it
26
to increase until 2030 from about 19 percent to 27 percent. Second, they also indexed the
transfers from general taxes to expenditures, which meant that about 20 percent of the
growth in pension spending would be financed by tax increases. Without these revenue
increases a large reduction of the benefit level would have been necessary, and these
would have undermined Germany’s dominant pillar pension system.
To study the impact of European monetary union on German pension politics, it is
useful to distinguish three different phases of pension reform: the qualification phase
(1995-1997), the consolidation phase (1998-2001), and the excessive deficit phase (20022004). From 1995 to 1997, Germany mostly focused on reducing its budget deficit to
below 3 percent of GDP in order to qualify for membership in European monetary union.
Even though the European Central Bank expressed strong concerns about Germany’s
growth of pension spending already before the start of monetary union, the ECOFIN
Council did not focus on the requirement of fiscal sustainability and the debt limit of 60
percent of GDP during the qualification period. From 1998 to 2001, Germany did not
face short-term pressures from the ECOFIN Council because relatively strong economic
growth led to a declining budget deficit, which stayed below 3 percent of GDP in this
period, and to a gradual decrease of the public debt. However, after the start of monetary
union the ECOFIN Council and the European Commission increasingly focused on the
goal of fiscal sustainability and made the assessment of the budgetary impact of pension
expenditure growth a key part of the Stability and Growth Pact’s surveillance procedure.
Finally, from 2002 to 2004, Germany’s budget deficit exceeded 3 percent of GDP, and its
debt remained above the limit of 60 percent of GDP. The short-term pressure from the
27
ECOFIN Council to reduce the budget deficit thus reinforced the growing long-term
pressure to achieve sustainable public finances.
In the qualification phase from 1995 to 1997, most member states were not
restricted in using the refinancing option in order to cover funding shortfalls in their
pension systems. Many countries raised significantly their pension contribution rates or
increased transfers from general taxes. Germany, which was governed by a center-right
government in the qualification phase, was no exception. The Growth and Employment
Promotion Act of 1996 raised the contribution rate by more than 1 percentage point, and
the Pension Reform Act of 1997 increased the VAT by 1 percentage point. Nonetheless,
the fiscal constraints resulting from the Maastricht Treaty’s deficit limit also led to large
benefit cutbacks because revenue increases were insufficient for reducing Germany’s
budget deficit to below 3 percent of GDP by 1997 and reaching the fiscal position of
“close to balance or in surplus” that the Stability and Growth Pact required. The German
finance minister, Theo Waigel, therefore attempted to make major cutbacks of pension
benefits. This attempt failed the first time, because the labor minister, who defended the
dominant pillar system, resisted the pressures from the finance minister. The Growth and
Employment Promotion Act of 1996 thus did not lead to cuts of the benefit level. But the
second time, the finance minister was able to strike a bargain with the labor minister,
mostly because the center-right coalition parties had also put pressure on the latter. The
labor minister agreed to reduce pension benefits from 70 percent to 64 percent of wages
under the condition that the finance minister increased the VAT. The Pension Reform Act
28
of 1997 thus contained an odd combination of refinancing and retrenchment measures:
even though it increased revenue, it broke with reproduction by adaptation.
In the consolidation phase from 1998 to 2001, Germany was under less pressure
than in the previous phase to enact cuts of pension benefits in the short-term, but was
more restricted in using the refinancing option. Since the budget deficit did not approach
or exceed 3 percent of GDP and the debt level continued to fall, the center-left
government, which had come to power in 1998, was able to delay the retrenchment of
public pensions. But since fiscal sustainability was increasingly a concern of the ECOFIN
Council, it had to address the issue of how to finance public pensions in the long-term.
The absence of short-term pressures allowed Oskar Lafontaine, who served briefly as the
finance minister of the center-left government, to gradually raise taxes on energy in order
to transfer more tax revenue to the pension system. A combination of revenue increases
with benefit cutbacks, which the previous government had enacted, was not necessary for
the further consolidation of public finances. Even though the ECOFIN Council criticized
that Germany’s progress towards a balanced budget was too slow, it did not recommend
pension spending cutbacks.
Hans Eichel, who succeeded Lafontaine as finance minister in 1999, was
determined to cut pension expenditure even without pressures from the ECOFIN Council.
In contrast to his predecessor, he fully shared the norms and beliefs that were dominant at
the EU-level. Eichel was as committed to the goal of fiscal sustainability as the ECOFIN
Council, the ECB and the European Commission, and like them, believed that dominant
29
pillar pension systems were the main obstacle to achieving that goal. The German finance
minister developed for the first time a long-term plan for the reduction of the public debt,
and proposed a budget that reduced the transfers of general tax revenue to the pension
system. In addition, Eichel attempted to prevent any further increases of pension
contributions and supported the idea of defining a ceiling for the contribution rate. Unlike
the finance minister of the center-right government, Eichel faced little resistance from the
labor minister. His attempts to cut pension benefits were very successful: the Budget
Consolidation Act of 1999 and the Old-Age Provision Act of 2001 cut pension benefits
and at the same time reduced both the contribution rate and the transfers from general
taxes. In addition, a new contribution rate ceiling restricted further refinancing. The
ECOFIN Council encouraged Germany to enact more reforms like these. It stated that
“… the recently implemented reform of the pension system is a step in the right
direction” (Council of the European Union 2002).
In the excessive deficit phase from 2002 to 2004, the German government was
under a high degree of pressure to cut pension spending not only because the ECOFIN
Council required a reduction of the excessive deficit, but also because the goal of
sustainable public finances became a key consideration in the ECOFIN Council’s
assessments of the public finances in member states. Due to the Council’s decision in
January 2003 to start the Excessive Deficit Procedure against Germany, finance minister
Hans Eichel sought to cut pension spending. The Council had explicitly required
expenditure cutbacks from Germany and had specifically referred to cuts in pension and
health care spending. It had emphasized that there was “… the need for urgent reforms …
30
in social security and benefit systems …” (Council of the European Union 2002). Since
the transfer to the pension system accounted for about one-third of the federal
government’s budget, Eichel pressured Ulla Schmidt, the labor minister, to cut pension
benefits in order to reduce the transfer from general taxes. When the labor minister tried
to resist that demand, Eichel effectively forced her to make cutbacks by including a
provision in the Budget Act of 2003 that reduced the federal government’s obligations by
2 billion Euros per year. With the Social Insurance Reform Act of 2003, the labor
minister achieved the now necessary cuts of pension benefits. However, since these
measures were insufficient for reducing Germany’s budget deficit to below the
Maastricht limit and since the short-term funding problems of the pension system
increased due to weak economic growth, the centre-left government planned to make
further cutbacks in the following year. The finance minister was concerned that pension
contribution increases would become necessary, which would have automatically led to
higher transfers from general revenue. In order to ensure that the contribution rate ceiling
of 20 percent would be enforced successfully, in 2004 the centre-left government
introduced a so-called “sustainability factor” in the pension indexation formula, which
reduces the level of pension benefits automatically if revenues from contributions
decrease. The Sustainability Act of 2004 thus completed the transition from reproduction
by adapation to gradual transformation. Refinancing pensions was no longer an option.
The ECOFIN Council praised Germany for cutting pension benefits and limiting
contribution rates. It stated that “[t]he already legislated structural reforms … and in
particular the pension reform is likely to reduce the budgetary impact of aging …”
(Council of the European Union 2005). In addition, because of the Schröder
31
government’s pension reforms which culminated in the Sustainability Act of 2004, the
Council and the Commission no longer assessed Germany’s public finances as
unsustainable. The Commission noted that “… the challenge and recommendations on
long-term sustainability appear to be largely addressed …” and referred specifically to
the introduction of the sustainability factor in the benefit adjustment formula (European
Commission 2005).
To conclude, the long series of pension reforms in the period from 1995 to 2004
ended reproduction by adaptation. The Pension Reform of 1992 provides a benchmark
for the refinancing requirements of Germany’s dominant pillar pension system: the
maintenance of adequate public pensions would have required not only a contribution
rate of 27 percent in 2030, but also steadily rising transfers from general revenue. By
contrast, the reforms enacted in the past 10 years, especially the Old-Age Provision Act
of 2001 and the Sustainability Act of 2004, restricted the first refinancing option. The
contribution rate ceiling was set at 22 percent in 2030, which was clearly not enough for
guaranteeing a level of benefits of 70 percent of wages. In addition, the European
requirement of fiscal sustainability restricted the second refinancing option. Very high
additional transfers from general revenue, which German governments were able to enact
before the start of European monetary union, would conflict with the ECOFIN Council’s
interpretation of fiscal sustainability, and thus lead to further pressures for expenditure
restraint.
32
Conclusion
In this paper, I showed that there was a partial convergence of West European
pension systems in the period from 1995 to 2004. Four EU member states—Sweden,
Italy, Germany and Austria—enacted structural pension reforms that caused a gradual
transformation of their dominant pillar pension systems. If they complete this
transformation, which will likely take 50 or more years, the multi-pillar systems will
become the most common model of retirement provision in Western Europe.
I argued that these transformations were potentially caused by European monetary
union even though the formal authority for pension legislation still rests with the EU
member states. The fiscal requirements in monetary union, especially the sustainability of
public finances, restricted the option of refinancing dominant pillar systems by increasing
revenues from social contributions or general taxes. European monetary union thus
interfered with reproduction by adaptation and left several member state governments
only the alternative of gradual transformation. I illustrated my argument with a case study
of pension reforms in Germany between 1995 and 2004. This analysis showed that EU
constraints played an important role in the domestic politics of pension reform. Most of
the 10 reforms that German governments adopted in that period were initiated by finance
ministers who needed to cut pensions in order to reduce Germany’s budget deficit in the
short-term, and also to prevent an increase of its public debt in the long-term.
33
Since this paper focused on the causal mechanisms by which European monetary
union affects pension systems, it by no means provided a complete explanation of
structural pension reform in Western Europe. As Andrew Martin and George Ross have
pointed out, “[i]t would be a mistake to conclude that all the social model change
occurring concurrently with monetary integration was caused by it” (Martin and Ross
2004). Other factors, especially the perceptions and preferences of governments, were
almost certainly important. For example, in Sweden and Austria structural pension
reforms were driven in part by the ideologies of government parties. In addition, this
paper considered only to some extent the conditions that facilitate or hinder the
interference from EU institutions. For example, as the different approaches of German
finance ministers Oskar Lafontaine and Hans Eichel showed, the values and beliefs of
domestic actors clearly mattered. These factors would need to be taken into account in
order to assess not only the causal mechanisms of Europeanization, but also the relative
contribution of European monetary union to structural pension reforms in Western
Europe.
34
Appendix A. Pension Refinancing, Retrenchment and Restructuring in Germany, 1994-2005
Reform Act
Status Quo:
Pension Reform Act 1992 (1989)/
Pension System Transfer Act (1991)
Growth and Employment Promotion
Act (1996)
Type of Reform and Type of Measures
Refinancing
Contribution rate increases
Increases of general government revenue
Reform Measures
Immediate increase of general government revenue
Retrenchment
Retirement age increases
Benefit cutbacks
Reduction of wage indexation in pension benefits
Increase of the retirement age from 60/63 years to 65 years (for the
unemployed and for women)
Reduction of education credits from 13 to 7 years
Restructuring
—
Refinancing
Immediate increase of the contribution rate from 19.2 to 20.3 percent
(1997)
Contribution rate increases
Use of reserves
Retrenchment
Retirement age increases
Immediate and fast phasing-in of retirement age increases
Reduction of education credits (from 7 to 3 years)
Service cutbacks
Pension Reform Act 1999 (1997)
Restructuring
—
Refinancing
Immediate increase of the VAT (1998), for the specific purpose of
funding pensions
Increases of general government revenues
Retrenchment
Across-the-board cutback of the benefit level from 70 to 64 percent
Benefit cutbacks
Retirement age increases
Restructuring
—
Appendix A. (continued)
Reform Act
Type of Reform and Type of Measures
Reform Measures
Social Insurance Correction Act
(1998)
Refinancing
Inclusion of previously exempted groups
Immediate introduction of an “eco tax” (1999), for the specific purpose
of funding pensions
Immediate introduction of employer contributions for part-time
employees
Retrenchment
—
Restructuring
—
Refinancing
—
Retrenchment
Immediate across-the-board reduction of the benefit level from 70 to
67 percent
Budget Consolidation Act (1999)
Increases of general government revenues
Benefit cutbacks
Old-Age Provision Act (2001)
Restructuring
—
Refinancing
Reduction of the reserve fund
Use of reserves
Retrenchment
Across-the-board cutback of the benefit level from 70 to 64 percent
Benefit cutbacks
Restructuring
Addition of a voluntary individual account tier
Addition of tiers
Reserve Fund Act (2001)
Refinancing
Reduction of the reserve fund
Use of reserves
Retrenchment
—
Restructuring
—
36
Appendix A. (continued)
Reform Act
Contribution
(2002)
Stabilization
Act
Type of Reform and Type of Measures
Reform Measures
Refinancing
Retrenchment
Immediate increase of the contribution rate from 19.1 to 19.5 percent
(2003)
Increase of the income level up to which contributions are payable
Reduction of the reserve fund
—
Restructuring
—
Refinancing
Reduction of the reserve fund
Contribution rate increases
Use of reserves
Social Insurance Reform Act (2003)
Use of reserves
Retrenchment
Immediate across-the-board reduction of the benefit level (2004)
Benefit cutbacks
Sustainability Act (2004)
Restructuring
—
Refinancing
—
Retrenchment
Restructuring
Across-the-board reduction of the benefit level from 67 percent to 59
percent
Immediate and fast phasing-in of retirement age increases
Abolition of education credits
—
Refinancing
—
Retrenchment
Across-the-board reduction of the benefit level from 67 percent to 52
percent
Benefit cutbacks
Retirement age increase
Retirement Income Act (2004)
Benefit cutbacks
Restructuring
Addition of a second, voluntary individual account tier
Addition of new tier
37
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