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Reforming Pensions in Europe: Economic Fundamentals and Political Factors

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  • Ondrej Schneider

Abstract

This paper analyzes pension reforms in Europe and their determinants. As pension reforms are intrinsically difficult to define and pinpoint, we introduce an alternative measure of pension reforms by comparing long-term forecasts of pension expenditures for seventeen European countries. The larger the decrease in expected spending on public pensions in 2050 between two base years, the more successful a pension reform the country achieved (after controlling for other factors, such as demography). Our analysis shows that the reform effort varies widely across countries and over time. Indeed, only three countries in the EU managed to reduce their expected spending on pensions in both reference periods.In the second part of the paper, we analyze factors that may facilitate or hamper pension reform – quality of fiscal institutions, public debt, trade unions’ influence, and also demographic factors. Only the measure of trade union power proves to be significant in explaining pension reforms. Other factors, such as quality of fiscal institutions, size of the existing funded pillar, public debt or recent demographic developments, do not seem to play a significant role. However, specific pension system factors – most significantly the lagged change in pension expenditures – are significant and suggest that European governments do reform their pension systems when faced with the threat of escalating pension expenditures.In conclusion, we propose a hypothesis of “bounded” economic rationale of European governments, as they seem to react to expectations of an increase in pension spending, but they seem to be content with the current spending levels. The appendix gives detailed information on pension reforms in the ten Central and Eastern European countries that became EU members in 2004 and 2007 (EU-10).

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2572.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2572

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Keywords: pension system; European Union; pension reform; fiscal institutions;

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References

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  1. Disney, Richard & Whitehouse, Edward, 1999. "Pension plans and retirement incentives," MPRA Paper 14755, University Library of Munich, Germany.
  2. Vincenzo Galasso & Paola Profeta, 2004. "Lessons for an Aging Society: The Political Sustainability of Social Security Systems," Working Papers, Center for Retirement Research at Boston College wp2004-7, Center for Retirement Research.
  3. Philip R. Gerson & G. A. Mackenzie & Peter S. Heller & Alfredo Cuevas, 2001. "Pension Reform and the Fiscal Policy Stance," IMF Working Papers 01/214, International Monetary Fund.
  4. Ondřej Schneider & Petr Hedbávný & Jan Zápal, 2007. "A Fiscal Rule that Has Teeth: A Suggestion for a “Fiscal Sustainability Council” Underpinned by the Financial Markets," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 1(1), pages 32-53, March.
  5. Robert Jahoda & Jiøí Špalek, 2009. "Pension Reform through Voluntary Opt-Out: The Czech Case," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 309-333, Oktober.
  6. Mukesh Chawla & Gordon Betcherman & Arup Banerji, 2007. "From Red to Gray : The "Third Transition" of Aging Populations in Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 6741, October.
  7. Martin Feldstein & Horst Siebert, 2002. "Social Security Pension Reform in Europe," NBER Books, National Bureau of Economic Research, Inc, number feld02-2, June.
  8. Drazen, Allan & Grilli, Vittorio, 1993. "The Benefit of Crises for Economic Reforms," American Economic Review, American Economic Association, vol. 83(3), pages 598-607, June.
  9. Libor Dušek & Juraj Kopecsni, 2008. "Policy Risk in Action: Pension Reforms and Social Security Wealth in Hungary, Czech Republic, and Slovakia," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(07-08), pages 329-357, Oktober.
  10. Schuknecht, Ludger, 2004. "EU fiscal rules: issues and lessons from political economy," Working Paper Series 0421, European Central Bank.
  11. Robert Holzmann, 1997. "Pension Reform, Financial Market Development, and Economic Growth: Preliminary Evidence from Chile," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 149-178, June.
  12. Thai-Thanh Dang & Pablo Antolín & Howard Oxley, 2001. "Fiscal Implications of Ageing: Projections of Age-Related Spending," OECD Economics Department Working Papers 305, OECD Publishing.
  13. Deborah Roseveare & Willi Leibfritz & Douglas Fore & Eckhard Wurzel, 1996. "Ageing Populations, Pension Systems and Government Budgets: Simulations for 20 OECD Countries," OECD Economics Department Working Papers 168, OECD Publishing.
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Cited by:
  1. Aaron George Grech, 2010. "Assessing the sustainability of pension reforms in Europe," CASE Papers case140, Centre for Analysis of Social Exclusion, LSE.
  2. Grech, Aaron George, 2013. "How best to measure pension adequacy," MPRA Paper 46126, University Library of Munich, Germany.
  3. Aaron George Grech, 2012. "Evaluating the possible impact of pension reforms on future living standards in Europe," CASE Papers /161, Centre for Analysis of Social Exclusion, LSE.
  4. Heinemann, Friedrich & Hennighausen, Tanja & Moessinger, Marc-Daniel, 2011. "Intrinsic work motivation and pension reform acceptance," ZEW Discussion Papers 11-045, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Robert Jahoda & Jiøí Špalek, 2009. "Pension Reform through Voluntary Opt-Out: The Czech Case," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 309-333, Oktober.
  6. repec:cep:sticas:case161 is not listed on IDEAS
  7. Grech, Aaron George, 2013. "Pension reform sustainability in the EU: a pension wealth-based framework," MPRA Paper 48800, University Library of Munich, Germany.
  8. Jana Tepperová & Stanislav Klazar, 2012. "The Impact of Social Systems and their Coordination on Economic Migration," Politická ekonomie, University of Economics, Prague, vol. 2012(4), pages 505-522.

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