THE POLITICAL ECONOMY OF PENSION SYSTEM REFORM IN THE EU AND GENDER EQUALITY
UNIVERSITY OF ATHENS
SCHOOL OF LAW, ECONOMICS, AND POLITICAL SCIENCES
DEPARTMENT OF POLITICAL SCIENCE AND PUBLIC ADMINISTRATION
Master’s Program: “European and International Studies”
COURSE: EUROPEAN ECONOMY
PROFESSORS: L. Tsoukalis, N. Koutsiaras
First Semester Assignment
THE POLITICAL ECONOMY
OF PENSION SYSTEM REFORM IN THE EUROPEAN UNION
and
GENDER EQUALITY
Anna Karamanou
December 2004
THE POLITICAL ECONOMY OF REFORM
OF THE PENSION SYSTEM REFORM IN THE EU
and GENDER EQUALITY
Anna Karamanou
INTRODUCTION
The reform of the pension system is one of the issues on the political agenda of the European Union, as well as of all countries with organized social protection systems, since the 1980s. Numerous studies and political-economic analyses argue that the welfare state is threatened by the globalization of the economy and the demands of the elderly, which make it impossible to finance future generations. The arguments in favor of reform mainly concern the increased life expectancy of both men and women, declining birth rates, economic competitiveness, and economic trends that lead to an increase in obligations, which cannot be met by the existing generous pension systems.
The reduction in the level of benefits, the controlled increase in contributions and retirement age, the strengthening of the principles of reciprocity and capitalization, and primarily the expansion of private insurance, summarize the philosophy of the proposed measures for the “parametric” changes and “structural” reforms of pension systems (M. Karamesini, 2001, The Gender Dimension in Pension System Reform).
On their part, workers and pensioners view the reform efforts with distrust, as nearly all of them are associated with spending cuts and reduced benefits. “Instead of weakening the welfare state and reducing pensions, the dialogue on competitiveness should focus on stimulating imagination, education, and increasing spending on research and development, for good universities and innovations,” emphasizes John Monks, General Secretary of the ETUC, in an interview (EuroActiv magazine, March 2004). There is also strong skepticism about the rhetoric of crisis, expressed by scholars such as Francis G. Castles in his excellent book The Future of the Welfare State – Crisis Myths and Crisis Realities, 2004.
The question thus arises whether fiscal and demographic developments truly lead to disaster, or whether through alarmist rhetoric (a race to the bottom), the demands of market mechanisms for higher profits are being met by compressing labor and social security costs. The brief analysis that follows will attempt to shed light on the issue by presenting data primarily concerning: the state of pension systems in the EU, the identification of problems (demographic, unemployment, unequal treatment of women, etc.), and what reforms are ultimately prioritized, based on the principle of gender equality.
PENSION SYSTEMS IN THE EU – HISTORICAL OVERVIEW
The main pension systems in Europe were developed in the 19th century. The German model, or Bismarckian model, was based on redistribution and was an essential complement to the employment relationship. The guiding principle of the German model is the responsibility of the individuals involved (employees and employers) for their own insurance protection, a responsibility that translates into autonomy and self-financing of the insurance institutions, while pensions are subject to the fundamental principle of correspondence or reciprocity between contributions and benefits. Bismarck-type systems were not the result of collective bargaining within the market, but rather state intervention, which forced employers to participate in the insurance protection of workers.
In contrast to the German model, the British insurance model, or Beveridge model, which is also applied in the Scandinavian countries, stipulates that social security for citizens is the responsibility of the state and is financed exclusively by the government. Gradually, the distinction between social insurance systems has been mitigated as a result of the convergence that occurred (Irō Nikolakopoulou-Stefanou, 1992, Convergence of Social Security Systems, 1992, p. 14, 19).
The creation of the welfare state was driven by European humanistic ideals and was strengthened both by Keynesian views and by the ideas of social justice advocated by the Fabian Society socialists and social democrats. Later, it was argued that the welfare state is founded on the social rights of citizens, while according to the more recent functional perspective, it is based on the interdependence and solidarity between generations (ibid.).
Pensions in Europe are part of social protection. Since the 1980s, the European Commission, under the leadership of Jacques Delors, undertook a series of initiatives, including the Social Charter, to ensure that the Internal Market would not lead to social dumping. The Social Charter of Fundamental Social Rights of Workers (1989) states that “every individual who has reached retirement age but has not established a right to a pension or does not have other financial means should have the right to sufficient resources and access to medical and social assistance, according to their specific needs.” The same spirit is reflected in the Council Recommendation on common criteria related to resources and social benefits, with the primary goal of preventing the social exclusion of retirees (COM (91)161, 13/5/1991).
EVALUATION OF PENSION SYSTEMS
Currently, poverty among the elderly is not a widespread phenomenon in the EU. In the Union’s countries, social spending accounts for about 27% of GDP, compared to 15% in the US, which reflects the greater development of the welfare state in Europe, while the burdens on labor costs reach 46% in Europe, compared to 27% in the US (I. Koukiadis, 2000, The Social Europe, p.25). Of course, these comparisons fuel the rhetoric about the urgency of reform, always accompanied by good intentions, such as more efficient functioning of the system, rationalization, and the prevention of its collapse.
In December 2002, the European Commission released the first comprehensive analysis of the pension systems of the EU member states, evaluating the adequacy of national systems and their ability to address the challenge of an aging population. This was preceded by the Commission’s proposal in 2000 for a “Social Policy Agenda,” while the Stockholm European Council (March 2001) paved the way for the “open method of coordination” on pensions, with a view to developing a strategy – based on the employment strategy model. This process began at the Laeken European Council in December 2001 and includes eleven objectives, which can be grouped under the following three headings:
- Safeguarding the ability of pension systems to fulfill their social objectives.
- Maintaining the economic sustainability of pension systems.
- Ability to respond to changing social needs.
The Economic Policy Committee and the Social Protection Committee, based on the national reports, drafted a report which became the draft of the joint report of the Commission and the Council (ECOFIN 51, SOC 72, 3.3.2003). The issue of pensions was one of the priorities of the Greek Presidency during the first half of 2003.
The joint report states that all member states assure that they provide a minimum income for the elderly and that in many countries the risk of poverty is lower for the elderly than for the young. The report finds that the maturation of pension systems and the greater participation of women in professional life have contributed to the increase in the average level of pensions, while further improvements are expected in the future.
According to the evaluation, member states have pension systems with strong elements of redistribution and solidarity, mainly in the form of minimum pension guarantees or benefits during periods without pensionable income (unemployment, parental leave, etc.).
THE SUSTAINABILITY OF PENSION SYSTEMS
Despite the positive assessment of the current state of pension systems in the EU, the joint Report of the Commission and the Council (2003) raises concerns about the long-term sustainability of these systems. The report argues that, based on projections, public spending on pensions may increase by three to five percentage points of GDP in most EU member states between 2000 and 2050.
All member states consider that increasing employment, particularly the employment of women, is a key variable in the long-term strategy for sustainable pensions. The projections of public spending show that if the Lisbon goals were achieved and beyond 2010, the increase in public pension spending would be reduced by one-third as a percentage of GDP. This means that merely increasing employment is not enough to ensure the sustainability of pension systems. Economic growth, adequate productivity, as well as full employment with quality jobs in a healthy and secure working environment, is the best solution to ensure the financial sustainability of pension systems, emphasizes the European Parliament (Resolution A5-0259/24.9.2003).
As is well known, most Europeans retire early. It is estimated that if the actual retirement age were increased by just one year, without extending pension rights, the expected increase in pension spending would be reduced by 0.6-1% of GDP by 2050. This means that a one-year increase in the actual retirement age would absorb approximately 20% of the expected average increase in pension spending by 2050. For this reason, all EU member countries are in the process of reforming early retirement systems as well as employment policies. However, the pace of reforms is very slow for achieving the goal of increasing the actual retirement age by five years by 2010 (Joint EU and Council Report-2003).
Reforms should be integrated into the framework of coordinated efforts by member states to achieve the goals of the Lisbon Strategy, including structural and fiscal reforms and more productive public investments. Particularly important is the improvement of incentives for older workers to remain in the labor market, due to the increase in life expectancy, as well as the integration of more women. According to the Report, the adequacy of pension systems also depends on adapting to more flexible employment and career patterns, as well as the changing roles of genders in society.
THE DEMOGRAPHIC PROBLEM
“There is nothing more annoying than constantly hearing about the ‘burden’ that the aging population places on society. The increase in life expectancy and better health are very good news, not a burden for society. Older people are valuable to businesses, the economy, and society,” said Mr. Berglind Asgeirsdottir, Deputy Secretary-General of the OECD, in his speech at the Lisbon Council meeting (Brussels, 28.9.2004).
The enlargement of Europe to 25 countries increased its population from 380 million to 455 million – well above the U.S., which has 295 million. However, it is estimated that by 2050, the Americans will have closed the gap, reaching 420 million, while Europeans will reach 430 million. Europe is aging much faster than the New World. Aging will affect the economy due to the decrease in the labor force. In Italy, for example, the workforce will shrink by 20% between 2005 and 2035, and by an additional 15% by 2050. If there are no significant changes in employment rates and productivity, the reduction in the labor force will severely impact economic growth (Economist, October 2–8, 2004, Old Europe, p. 27).
In Europe, the fertility rate has been below the replacement rate threshold (2.1) since 1970 in Western Europe and since 1980 in Eastern Europe, with little hope for recovery. On the other hand, life expectancy is expected to increase over the next 50 years by 4.2 years for women and 5 years for men. As a result of this trend, for the Europe of 15, the forecast is that the elderly population will increase from 27.7% (2000) to 53.4% of the population by 2050, based on optimistic projections for the fertility rate (increasing to 1.8 in most countries) and pessimistic projections for life expectancy (increasing less than in the past), according to Robert Holzmann of the World Bank (Paper prepared for the Swedish Social Security Fund-World Bank Conference, Stockholm 29-30/9/2003).
Mr. Holzmann argues that the average expenditure is expected to increase from 10.4% of GDP in 2000 to 13.6% around 2040, with a projected decline from 5.5% to 4.4% for the UK, but a doubling for Spain, which will reach 24.8% from the current level of 12.6%. This means an average increase in expenditure of 30% and a demographic increase of 70%. The experts at the World Bank argue that even without demographic and fiscal reasons, there would still be a significant need for pension system reforms in order to align with socio-economic changes, the most important of which are: a) the increase in female participation in the labor force, b) changes in family structures and the rise in divorces, and c) the expansion of informal forms of employment (Holzman, 2003).
Certainly, “some solution” to the demographic issue could also come from the mass attraction of young immigrants, as well as the strengthening of measures supporting childcare and the reconciliation of professional and private life for individuals.
THE POLITICAL AND ECONOMIC DIMENSION OF REFORM
As understood, many measures and policies that are desirable for economic reasons are not implemented for political reasons. This discrepancy between economics and politics has led economists and political scientists to think about the political economy of reforms. Significant work has already been done on the political economy of macroeconomic reform and trade policy, but less progress has been made in the case of pension system reform. A World Bank study addresses three key questions: How do political and economic forces affect the likelihood of structural pension reform, how do these factors influence the nature of the reform, and…
how countries that undertook reforms overcame the resistance of powerful interest groups. (Estelle James and Sarah Brooks, 2001, World Bank – The Political Economy of Structural Pension Reform).
It is clear that the World Bank has engaged in a campaign to convince people of the necessity of pension system reform and, in particular, to persuade workers and retirees that the changes are beneficial, as the old system is not sustainable. In Chile, Minister of Labor Dr. Jose Pinera personally tried every day, through television and radio, to convince workers of the need for change. The same happened in Hungary and Poland, where governments launched large informational campaigns, primarily targeting the young and the elderly.
The example of Chile is cited as the most successful by supporters of reform. It began in 1980 and replaced the old system with private savings (Pension Savings Account). More than 95% of workers contributed to national savings, increasing it by 27% of GDP, and achieved annual economic growth rates of 6.5%. (Constantin T. Gurdiev, economist, Director of the Open Republic Institute, 2004, Ireland).
Along with the World Bank, the CATO Institute, through its president Edward H. Crane, argues that reform cannot be delayed because, in the U.S., within the next 15 years, the system will face deficits. It is worth noting that during the last presidential election, “the society of ownership,” that is, one that would give citizens greater control over issues like health, retirement, and housing, meaning a social security system based on private accounts, was a central theme of President Bush’s campaign.
Reforms, of course, always have winners and losers. The big losers are the institutions of social and economic security (as in Chile), while the big winner is the private sector. An earlier study by the World Bank highlights the problems that arise from the new systems, among the losers of which are primarily women and low-wage earners. (Patricio Arrau /Klaus Schmidt-Hebbel, 1995, Pension Systems and Reforms).
The International Labour Office, through Mr. Roger Beattie at the World Conference on Development (Copenhagen, 1995), arguing against the Chilean model, states that it is based on the flawed assumption that what is good for one individual applies to a large number of individuals. Of course, it is not a problem if someone stops working and lives off the goods and services they can access with the savings they previously accumulated. But think about what would happen if everyone did the same!.. There would be neither goods nor services, and the savings would be worth nothing.
It is a fact that regardless of the method of financing pensions, the current consumption of retirees depends on the current productivity of workers. That is why demographic trends affect not only the old systems (PAYG) but equally the new ones like Chile’s and any others. What makes the Chilean model uneconomical is that all risks, including those related to demographics, fall on the shoulders of the workers. (Roger Beattie)
In this system, future retirees have little or no knowledge of what income replacement they will enjoy in the future. Some at the International Labour Office estimate that the pension will be 44% of the final salary, assuming that contributions are paid continuously from the age of 20 until the age of 65, but a supporter of the system argues that the replacement will be between 112% and 234%! In any case, the fact remains that the Chilean system does not meet the minimum standards set by the International Labour Office for secure pensions.
REFORM AND GENDER EQUALITY
The Social Security System in Greece and Europe was structured and still operates, to some extent, based on the model of the “male breadwinner,” who works and is protected by the system in order to fulfill his responsibilities as the head of the family. The woman is indirectly protected by her husband’s insurance, always within the framework of marriage. The system operates on the logic of the dividing line between the public and private spheres. (F. Sianos, member of the Executive Committee of ETUC, March 2002, Athens, Publication of the European Socialist Party, “Social Security and Gender Equality”).
The direct connection between insurance rights and employment, along with the traditional family model, combined with gender stereotypes—man = income provider, woman = caregiver in the family—are the main causes of discrimination embedded in the social security system. Direct gender-based discrimination is found in regulations that provide more favorable pension conditions for women compared to men: lower retirement age limits and fewer years of insurance required to qualify for a pension. These regulations may benefit women who meet the relevant conditions, but when viewed from the perspective of all women and the broader public interest, they raise serious concerns. The different treatment undermines the position of women in the labor market and has a negative impact on the economy of the social security system. (A. Petroglou, Lawyer, December 2001, Athens, European Socialist Party Seminar).
Arguments in favor of early retirement for women due to motherhood are essentially undermining the real interests of women, as very few women have dependent children who require care after the age of 55. The issue of “motherhood and dependent children” should be a separate chapter in social policy and should not be intertwined with pension rights.
It has been found that the implementation of “protective legislation” in Greece in the recent past (over the last 15 years, indirect and dependent insurance, etc.) is largely responsible for the downgraded position of women in the labor market, their absence from positions of responsibility, increased unemployment, low wages, meager pensions, the unequal and unfair distribution of family responsibilities, the devaluation of women, and the perpetuation of outdated notions of the “weaker sex.” Social security should strengthen, not weaken, women’s employment and competitiveness, provide incentives to stay in the labor market, not incentives to withdraw. (A. Karamanou, 3/12/2001, ESC Seminar).
Social infrastructure and measures to support the care of children and the elderly, the safeguarding of labor and pension rights during parental leave periods, the fair distribution of all responsibilities and benefits of public and private life between the sexes, the connection of social policy with economic policy and employment policy, as well as the individualization of insurance and tax rights, should be an essential part of the reform of the social security system. (ibid)
At the same seminar, Professor of Political Economy, Mr. Th. Sakellaropoulos, emphasized that “the struggle of women for economic equality, independence, and security, along with the changes happening in the structure of the family, such as divorces, single-parent families, etc., have made the demand for the individualization of social rights a driving force for change and modernization of the social security system. A reform that does not take the gender dimension into account will not deserve its name, as it will perpetuate economic and social inequalities to the detriment of women.”
WHAT REFORM? IN GREECE AND THE EU
In Greece, at the initiative of the GSEE, a “National Conference” on social security was held in September 2001, which essentially resulted in a “non-reform,” or rather marginal changes to the existing system. The dialogue mainly focused on age limits, which are low for many categories of workers, as is the case in other EU countries, where there were also reactions, particularly in Italy and France. However, in Greece, major changes to the age limits were implemented with the Sioufas reform in 1992, which set the retirement age for those insured from January 1, 1993, at 65.
The new social security law 3029/2002 mainly concerns the better organization of the system through the merger of various funds by December 31, 2007, as well as the unification of supplementary insurance, meaning the merging of all funds into one. The most important aspect is that it provides for the financing of IKA with 1% of GDP. The budget submitted by the government for 2005 already includes a relevant provision.
However, other more appropriate solutions are also being considered, such as a three-tier system, friendly to both sexes, as proposed in the study by Matsaggani-Petroglou, on behalf of the Center for Research on Gender Equality (KETHI-2001):
1st Level: The citizen’s pension, which will be entirely funded by the state budget and will be granted to every citizen—man or woman—upon reaching the retirement age, without any income or contribution requirements. This pension will ensure that every elderly person has an income to protect them from poverty.
2nd Level: The proportional pension, which will be provided by the existing public distribution pension system, will be financed exclusively by the contributions of workers and employers and will be calculated based on the principle of reciprocity.
To achieve a balance of rights between men and women, it is proposed within this system to recognize an additional two years of insurance for each child. This system has been successfully implemented in Sweden and Italy since the mid-1990s.
2nd Level:The supplementary pension, which is proposed to be optional and have a capitalization character.
The implementation of this three-tier system is the most effective and rational response to perhaps the most critical side effect of the system for the majority of women: the failure to establish pension entitlement due to an insufficient number of insurance stamps.
Under the proposed system, a woman who has never had a paid job (e.g., a mother of two children) and therefore has never made social security contributions would be entitled to: the full amount of the Citizen’s Pension and the portion of the proportional pension corresponding to four notional years of insurance (two for each child). The total amount of the pension would certainly increase if the woman has a number of insurance stamps and/or the supplementary savings pension. (Petroglou, 2002)
The implementation of such a three-tier system seems to better respond to the new needs of life in the 21st century. The new life paths are characterized by uncertainty and by alternating periods of employment, training, retraining, and caregiving for others. The Citizen’s Pension provides the necessary security, while the contributory-distributive and especially the supplementary pension allow the insured person to use them whenever they wish. In this way, the pension system enables the insured to make a personal choice regarding the time and manner in which they will allocate periods of employment, training, and caregiving throughout their life, with coverage for periods of non-employment through social security benefits. (Z. Asimakopoulou, A. Lymperaki, A. Petroglou, International Conference “Women and the Welfare State”, May 2001, Komotini).
Indeed, the proposed three-pillar system, based on the ongoing dialogue in the EU, is the most beneficial for both men and women because it: enhances pension rights, encourages employment and personal autonomy, is flexible, promotes the entry and retention of women in the labor market, ensures social solidarity and solidarity between generations, is compatible with new family structures and private life obligations, as well as with the new technological and production model.
It is evident that the adoption of a comprehensive pension system, such as the three-tier system, should be accompanied by the necessary guarantees regarding administration, the way funds from insured individuals are invested, etc. Additionally, there is a need to modernize the parental leave system, improve childcare and elderly care infrastructure, and establish a comprehensive protection system for large families and children with disabilities. In other words, all the elements that ensure gender equality in social security and in life.
BIBLIOGRAPHY
1. Karamesini, Maria, 2001, “The Gender Dimension in Pension System Reform,” European Socialist Party Seminar, Athens, 3.12.2001.
2. Monks, John, 2004, General Secretary of ETUC, EuroActiv magazine.
3. Castels, M., 2004, the Future of the WELFARE STATE Crisis Myths and Crisis Realities, OXFORD University Press
4. Nikolaakopoulou-Stefano, Iro, 1992, Convergence of Social Security Systems, Sideris Publications.
5. European Commission, 1989, *Social Charter of Fundamental Workers’ Rights*.
6. Council, Recommendation, COM(91)161, 13.5.1991, On the Prevention of Social Exclusion.
7. Koukiadis, Ioannis, 2000, Social Europe, Paratiritis Publications.
8. European Council of Laeken, December 2001, Conclusions
9. Economic Policy Committee and Social Protection Committee, Joint Report, ECOFIN 51, SOC72-3.3.2003.
10. European Council of Stockholm, March 2001, Conclusions
11. European Parliament, Resolution, A5-0259/24.9.2003, Adequate and Sustainable Pensions
12. Asgeirsdottir, Beglid, 2004, OECD.
13. ECONOMIST, 2-8 October 2004, Old Europe, p. 27.
14.Holzman, Robert, 2003, World Bank
15. James, Estelle and Sarah Brooks, 2001, World Bank, the Political Economy of Structural Pension Reform
16. Gourdiev, Constantin T., 2004, speech, Director Open Republic Institute, Ireland
17. Crane, Edward H, 2004, speech, CATO Institute, Washington, USA
18. Arrau, Patricio and Klaus Schmidt-Hebbel, 1995, Pension Systems and Reforms
19. Beattie, Roger, 1995, I.L.O, Geneva
20. Sianou, Fotini, 2002, Member of the Executive Committee of ETUC, Social Protection and Women’s Rights, Publication of the European Socialist Party, Social Security and Gender Equality.
21. Petroglou, Athena, 2001, To Systema Koinonikis Prostasias kai oi Gynaikes, Imerida E.S.K.
22. Karamanou, Anna, 2001, Metarrythmisi kai Isotita ton Fylon, Imerida E.S.K.
23. Sakellaropoulos, Theodoros, 2001, Anisotites Fylon kai Koinoniki Asfaliisi – Orismena Symperasmata, Imerida E.S.K.
24. GSEE, 2001, Ethniki Syndiaskefsi gia to Asfalistiko
25. Matsaganis, Manos and Athena Petrogloy, 2001, To Systima Koinonikis Prostasia kai oi Gynaikes, Meleti, KETHI
26. Asimakopoulou Z., A. Lymperaki, A. Petroglou, 2001, Gynaikes kai Koinoniko Kratos, Synedrio, Komotini, May 2001
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Anna Karamanou
24.12.2004