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Kent Weaver Georgetown University and the Brookings Institution

Paths and Forks or Chutes and Ladders?: Negative Feedbacks and the Dynamics of Pension Regime Change. Kent Weaver Georgetown University and the Brookings Institution. Policy Regimes, defined:. A system of organizing, financing and delivering policy that:

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Kent Weaver Georgetown University and the Brookings Institution

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  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 Examples: • The German pension system • The U.S. health care system • Cheap energy policies • “Socialism market economy” in China

  3. The Questions: • How frequent is a major change in policy regimes? • 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. Old 103

  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 Regime Type at t1 at t2 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 Regime Type at t1 at t2 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 Regime Type at t1 at t2 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 Regime Type at t1 at t2 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 Regime Type at t1 at t2 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 t1: Regime Type Regime Type Regime Type at t1 at t2 at t3 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 t2: Regime Type Regime Type Regime Type at t1 at t2 at t3 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 t1 at t2 at t3 Regime Type 1 Regime Type 2 Regime Type 3 Regime Type 4 Regime Type 5 Regime Type 6 Regime Type 7

  18. 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 policymakers—and 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 theyspend 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, 2001. 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, 2001. 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 reforms―shifts 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-Andersen’s 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. Pension Regime Transitions 1950 1974 1985 1995 2009 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 * Italy * Germany * Austria France U.S. Canada N.Z.* Ireland Denmark Switz. U.K. Neth. Australia

  37. Available regime transition options depend on your starting point…

  38. Residual (Means-Tested) Pension Regime Transitions 1950 1974 1985 1995 2009 NDC Bismarckian Bismarckian Lite Universal Mixed Residual Canada Denmark Australia

  39. Universal Pension Regime Transitions: Early exits and multiple destinations 1950 1974 1985 1995 2009 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 N.Z.* Ireland Denmark Switz. U.K.

  40. Bismarckian Pension Regime Transitions: Very late exits and only 1 destination (plus*) 1950 1974 1985 1995 2009 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 * Italy * Germany * Austria France

  41. “Bismarckian Lite” Pension Regime Transitions: High durability 1950 1974 1985 1995 2009 NDC Bismarckian Bismarckian Lite Universal Mixed Residual U.S. Canada

  42. Mixed Pension Regime Transitions:Multiple Precursors, No Exits, and ** 1950 1974 1985 1995 2009 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 * Italy * Germany * N.Z.* Denmark Switz. U.K. Neth. Australia

  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-1973 • 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 incrementalreforms 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 aging • Need to address problems of low labor market participation in 55-64 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) • Can’t 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

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