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Reforming Pensions in Europe: Economic Fundamentals and Political Factors

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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).

Suggested Citation

  • Ondřej Schneider, 2009. "Reforming Pensions in Europe: Economic Fundamentals and Political Factors," Working Papers IES 2009/08, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Feb 2009.
  • Handle: RePEc:fau:wpaper:wp2009_08
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    References listed on IDEAS

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    1. Disney, Richard & Whitehouse, Edward, 1999. "Pension plans and retirement incentives," Social Protection and Labor Policy and Technical Notes 20851, The World Bank.
    2. 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.
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    6. 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.
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    10. 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.
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    Cited by:

    1. 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.
    2. Špačková Zuzana, 2015. "Laboratory Experiments in Teaching Public Economics and Policy," Central European Journal of Public Policy, De Gruyter Open, vol. 9(1), pages 196-206, May.
    3. Grech, Aaron George, 2010. "Assessing the sustainability of pension reforms in Europe," MPRA Paper 27407, University Library of Munich, Germany.
    4. Aaron George Grech, 2013. "How best to measure pension adequacy," CASE Papers case172, Centre for Analysis of Social Exclusion, LSE.
    5. Grech, Aaron George, 2012. "Evaluating the possible impact of pension reforms onfuture living standards in Europe," LSE Research Online Documents on Economics 51296, London School of Economics and Political Science, LSE Library.
    6. Grech, Aaron George, 2014. "Evaluating the possible impact of pension reforms on elderly poverty in Europe," MPRA Paper 57639, University Library of Munich, Germany.
    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. "Vliv sociálních systémů a jejich koordinace na ekonomickou migraci
      [The Impact of Social Systems and their Coordination on Economic Migration]
      ," Politická ekonomie, University of Economics, Prague, vol. 2012(4), pages 505-522.
    9. repec:cep:sticas:/161 is not listed on IDEAS
    10. 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.
    11. repec:cep:sticas:/172 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy

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