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T ÁRKI NDC Book Launch, Budapest, September 19 , 20 12

NDC Schemes as a Pathway toward Politically Feasible Pension Reform Andr ás Bodor joint work with Michal Rutkowski. T ÁRKI NDC Book Launch, Budapest, September 19 , 20 12. Motivation.

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T ÁRKI NDC Book Launch, Budapest, September 19 , 20 12

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  1. NDC Schemes as a Pathway towardPolitically Feasible Pension ReformAndrás Bodorjoint work with Michal Rutkowski TÁRKI NDC Book Launch, Budapest, September 19, 2012

  2. Motivation • Traditional median-voter based political economy models of pension reform are of limited use for guiding pension reform professionals for making meaningful (sustainability and adequacy enhancing) reforms to happen • Apply the emerging knowledge at the intersection of psychology and economics in the pension reform context? • Revisit the NDC experience of Poland • Explain the political process through the power of the emergence of collective intelligence

  3. I. Move from the Median-Voter Approach to Utilizing the Psychological Foundations of Poltical Behaviors

  4. Median-voter approach • Selén and Ståhlberg (2007) • Swedish NDC reform was politically feasible because the value of contributions that would be paid under the reform proposal decreased more than the value of benefits for all age cohorts not older than 53 when the age of the median voter was 47 • Median-voter models can explain observed outcomes, but have limited predictability power

  5. Weaknesses of the Agent Rationality Assumption and the Medium-Voter Approach • Focus on explaining the size of the PAYG system as opposed the reform moves towards sustainability (Persson & Tabellini 2002) • Implicit assumption about contribution rate increases disregarding the reality of general revenue funding of pension system balance deficits • Homogeneous political participation assumption across age groups – assumption of similar drive in composite voting behavior by pension policy across generations • No behavioral response / no exist assumption for younger generations

  6. Weaknesses of the Agent Rationality Assumption and the Medium-Voter Approach(cont’d) • No concern for nontransparent DB rules limiting the capability to estimate net personal effects of pension reform options • Full commitment assumption, i.e. governments do not default on pension obligations

  7. Evidence on the flaws of the agent rationality assumption in the pension context • Madrian & Shea – US 401k voluntary pension savings • Default options matter • 2005 Bush proposal on US FDC reform • Political party preference matters more than age group • Boeri et al (2001) France, Germany, Italy, Spain • More restrictive opt out option is more popular

  8. Emerging learning about psychology and political behavior • Thaler and Sunstein (Nudge) & Kahnemann (Thinking Fast and Slow) • Voting behavior is a System 1 activity that may only gradually altered by interaction between System 1 and System 2 through indirect flow of rationality into the decision • System 1 is particularly flawed in mathematical predictions • Akerloff and Schiller (Animal Spirit) • The role of stories: “Real estate prices has always just gone up and they always will”+ framing • Kahnemann (2003) – A psychological perspective on economics • Tversky and Kahneman (1986) “Rational Choice and the Framing of Decisions” • Framing: the brain’s information processing along stories

  9. NDC “stories” that could give rise to meaningful reforms • The flexibility of the retirement age • Is the retirement age an archaic construct? • Emergence of quasi ownership rights over NDC balances • Disney (2004) – the stronger the link between contributions and pension benefits (i.e., the higher the weight of an individual saving component in the contribution rate) and the weaker the role of redistribution within the pension system (i.e., the smaller the weight of a tax component in the contribution rate), the higher the (formal) labor force participation rate will be. • Reporting individual NDC balances make it harder to default on pension promises?

  10. NDC “stories” that could give rise to meaningful reforms (cont’d) • Leveraging the pension wealth for better protection against unemployment risk • The case of Jordan • Linking NDC benefits to social benefits in transparent ways? • Supporting pension rights accumulation during maternal care • Differential rights for armed services professionals • Joint ownership of spousal NDC balances? • Case for FDC to NDC transition in cases of limited access to capital markets • West Bank and Gaza example

  11. I. Policy-Making Process-The Case of the NDC Reform of Poland-The Emergence of Collective Intelligence

  12. The Policymaking Process • Framework of William Isaacs (1999) • Pre-commitment • Commitment building • Initiation • Discovery • Reform group formation • Coalition building • Reality check on the ground • Generative dialogue and the emergence of the concept • Identity commitment

  13. Pre-commitment • Expert consideration beginning 1991 • Funded system proposal • Increase in pension spending • Constitutional Tribunal intervenes in ad hoc changes

  14. Commitment building: Initiation • Four proposals • “Funding hawks” vs. “PAYG hawks” • Shifting fortunes of MOF and MoL

  15. Commitment building: Discovery • January 1996 Conference • First emergence of NDC • NDC as a possible compromise and face saver • Lack of meaningful instinctive opposition to NDC

  16. Table 1: Pension Reform Proposals in Poland, 1995-1996 Source: Orenstein (2008), p. 116.

  17. Commitment building: Reform group formation • February 1996 Cabinet Reshuffle • Establishment of the Office of the Plenipotentiary • Reform group formation • Proposals actors and veto actors

  18. Coalition building: Reality Check on the Ground • Education • Opinion polls and focus groups • Press, MPs, lawyers, academics, government • Staying on the message • Emerging special role of the link between pensions and wages

  19. Coalition building: Emergence of “Security through Diversity” • The NDC decision in the reform team • The “trap of understanding” and a small backlash: pensions system demystified • Collectivist vs. individualistic system • Collective learning through new language and re-labeling • Conceptual twins and business class partition • Peace between “PAYG hawks” and funding hawks • Advantages of novelty • Elegance and transparency • Support of the Social Security Institution

  20. Coalition building: Identity commitment • Government approval of “Security through Diversity” • Support of Tripartite Commission • Why unions supported NDC? • Legislative path: two distinct phases • Political upside-down but the reform is in!

  21. Conclusion • Need for new approaches in the political economy of pension reform to support problem solving pension reform professionals • NDC design could be consistent with ‘stories’ appealing the psychological foundations of political behaviors • Crisis induced reforms are not friendly towards long-term systematic / paradigm changing reforms • An environment allowing the emergence of a reform supporting collective intelligence is critical for successful systematic reform

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