EUROPEAN PAPERS ON THE NEW WELFARE

5. Conclusions: Political Competition, Occupational Fragmentation and Economic Output

The logic of this most different system design was to find common features able to explain the common efforts to phase out early retirement and to consolidate a multi-pillar pension system. I tried to show that this is not simply a history of convergence and that any account exclusively based on the impact of exogenous irresistible forces is inappropriate, given the complexity of the topic. On the contrary, I think that the comparison has revealed three important properties or endogenous mechanisms at work in both cases. What follows is a tentative conceptualization of their functioning logic.

The first mechanism is an interaction between the arguments proposed by Kitschelt and Ross. Starting from the Danish case, the two perspectives combined reveal that both social democrats and market liberals pursuing unlikely policies are less afraid of experiencing electoral costs not only because electors cannot punish them, but also because they trust them. Moreover, given the clear contraposition between liberals and social democrats, a party pursuing policies nearer to the specific issues of the opponent does not provoke a hostile reaction, but rather creates margins of bipartisan consensus. The latter is a key asset in the Danish political system, where minority governments are the rule, rather than the exception. This also has two positive consequences on sequenced welfare reforms. Firstly, it improves the confidence of the rule takers (pensioners, unemployed, investors…) in the effectiveness of the new regulations, potentially creating a self-fulfilling prophecy of success. Secondly, it grants long term consistency to the process of reform, making its various steps less likely to be reversed and more likely to be tested extensively and optimized by trial and error. This kind of consistency is certainly a further enhancement of the overall credibility of policy change.

The same argument can be applied to the Italian case, where Kitschelt expects the reform to stall, as no party can give away its identity of paladin of the welfare state. Essentially, the collapse of the old party system in 1992 has made liberal positions more appealing while creating wider divides among centrist and social-democrats. The strength of the neo-progressive argument embraced by the technocratic and centre-left cabinets and the failure of the more markedly market-liberal attempt of the centre-right in 1994 forcefully supports the interpretation of NiC opportunities empowering the ‘social democrats’. However, as the evolving identity of the Lega Nord grants the centre-right an equal opportunity to justify retrenchment (especially on early retirement) a new kind of stalemate is created, in which neither expansive credit-claiming nor the pursuing of unlikely policies are dominant strategies of party competition. When taking into account the institutional rule imposing majority governments, it becomes evident that only cohesive majorities sensitive to problem pressure will be able to use NiC instead of credit claiming, though this will encourage strong opposition from the parliamentary minority. However, so long as the opportunity structure is symmetrical, an alternation to power is likely to produce nearly the same situation, as long as the robustness of the majority is similar. As a consequence, decision makers are likely to pursue very similar policies while being systematically unable to cooperate. This argument is therefore consistent with the incremental but contentious path of the Italian reforms and with its occasional drift in the direction of old-fashioned expansive credit claiming. Needless to say, the long term efficiency, consistency and credibility of the reforms are hardly improved by this policy making style. As the uncertainty of the rule takers grows rather than being reduced, the resulting self fulfilling prophecy is most likely to generate a lack of confidence rather than trust.

The second general property I see holding in both cases refers to what Nicholas Barr (2002) has called the centrality of output. Since no pension system can literally store production today to give it to pensioners tomorrow, both PAYGO and funded pensions rest on a claim on future production, i.e. on an intergenerational transfer between the employed and the retirees. Funding provides a stronger individual property right on the quantification of that claim in nominal (monetary) terms, but it cannot guarantee any real income or individual welfare in terms of consumption of goods. It could be argued that the Danish pension system is particularly desirable because of its multi-pillar structure and of its strong reliance on funding, even in the first pillar (OECD, 2008). It could equally be claimed that the NDC formula in the Italian contributory regime is desirable as well, for its ability to smooth the costs of transition between PAYGO and funded schemes (Natali, 2008). Finally, it is certainly true that a strong contributory logic (be it actual or figurative) guarantees that the pension promises made by the pension system are more transparent and realistic.

From the individual point of view, however, defined contribution funded schemes are even more demanding. In fact, the real value of future pensions depends on the performance of the economy not only when individuals cash in their pension benefits, but also when they set the value of their claim on future assets by paying out their contributions. The topic of the centrality of output is generally overshadowed by the debate on the ‘optimal’ pension system (Bonoli, 2003; World Bank, 2005) and it is often framed in a short term perspective, to contain immediate pension outlays (SPC, 2008). However, the interdependence between institutions suggests that the centrality of output is even more relevant for the long-term sustainability of the pension system. While the real strength of the Danish pension system comes from the economic potential acquired through the flexicurity paradigm, the main threats to the Italian pension policy still originate from the structural deficiencies of its labour market (Fornero, 2007).

The last point refers to the long term evolutionary dynamics of the two pension systems. Denmark and Italy came to a high degree of occupational fragmentation through very different institutional mechanisms. Italy preserved the original Bismarckian orientation of its pension policy even though challenged by a more universalistic perspective in many phases of its institutional development (Ferrera, 1993). The clientelism of the political system gave rise to an exasperated occupationalism both in the labour market and in pension policy, creating visible and unjustifiable inequalities in terms of coverage and individual welfare. Up to the Seventies, Denmark relied on a very generous universalistic welfare state and seemed able, for at least two decades, to avoid both the revenge of Bismarck and the individualistic drift of multi-pillar systems. Occupational and private savings interested a minority of workers and they were more attached to wage negotiation than to social security. However, as the public pension was no longer able to guarantee status maintenance to the working class elite of white and blue collar workers (especially the metalworkers), occupationalism came back with a vengeance with the sudden expansion of the occupational pillar in 1991. Just as in Italy, the reform process debate was not limited to macroeconomic problems, but directly tackled the issues of inequality in coverage and inequality in treatment. In Italy, the notion of actuarial neutrality, which implies a reproduction of market inequalities in the welfare state, came to be used as an argument in favour of equality, since it contributed to insulating the pension policy from political distortions. In Denmark, the labour market risks connected to discontinuous careers are translated into old age poverty risks by the strong contributory orientation of the new system. At the same time, the consolidation of the occupational pillar is crowding out a major restructuring of the universalistic first pillar, which runs the risk of turning into a residual scheme for workers with low contributory records.

These developments seem to suggest that the steps towards the introduction or consolidation of a multi-pillar pension system in the two countries tended to compensate for the main biases of the pre-existing institutional design. The conflicting relation between the twin objectives of insurance (status maintenance) and redistribution (equality of coverage and treatment) introduced a structural incentive to move towards a more complex institutional setup, where different pillars can pursue different objectives and handle this contradiction with more transparency and efficiency. This argument can be further generalized claiming that occupational fragmentation does not only support social insurance systems with increasing political returns, but also generates inconsistencies (negative feedbacks) that require a more articulated distribution of tasks among different pillars. In any event, no clear prediction can be formulated on the likely effect on the future orientation of the system, be it residual, occupational or universalistic.

While these are only tentative conceptualizations, their further development and testing can enrich the agenda of research on the links between pension and labour market reforms, calling a much needed attention to agency and endogenous dynamics.

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Tags: Active ageing Denmark Italy, early retirement, Political Competition