Pension Privatization: Evolution of a Paradigm

From 1981 to 2004, a paradigm shift occurred in pension systems worldwide as more than 30 countries fully or partially replaced their state‐administered pay‐as‐you‐go pension systems with ones based on individual, private savings accounts. Yet in 2005, pension privatization abruptly stopped. After the 2008 crisis, several countries that had privatized their pension systems scaled back or even canceled individual accounts. Is the new pension paradigm dead? And if so, why? This article shows that fiscal and ideational factors caused a temporary halt to pension privatization worldwide and induced transnational pension policy networks to find new ways to respond to perceived failures. Adjustments to the new pension paradigm such as emphasizing minimum pensions and recommending that governments “nudge” rather than mandate pension savings will enable pension privatization to continue in years ahead, albeit in a revised form.     

Retirement income security in the United Kingdom.

This article examines the U.K. retirement income security system from the American perspective. It addresses issues that most concern U.S. analysts: how the United Kingdom has kept its future public pension costs at a manageable level, the extent to which privatization of public pensions has contributed to low pension costs, the popular appeal of individual pension accounts, and the impact of privatization on retirement income. These issues are best understood in the context of the U.K. pension program's particular institutional structure and policies, two of which--"contracting out" of public pensions, and strong reliance on means-tested benefits--have been largely rejected in the evolution of U.S. policy to date. Particular use is made of recently available data on coverage rates for public and private pension programs over the total working population and administrative records on inactive personal pension accounts.     

Pension Reform and the Fiscal Policy Stance

The increased budget deficit caused by the privatization of a public pension plan does not imply a relaxation of the stance of fiscal policy. The reform's impact on the fiscal stance and national saving depends primarily on its effect on the sum of explicit and implicit public debt and on the postreform payroll tax and private system contribution rates. Its impact also depends on the difference between the rate of interest on implicit and that on explicit public debt, among other influences. Pension privatization, if not offset by fiscal consolidation, can loosen the fiscal stance in some circumstances.     

Employee buy-outs and privatization: Issues and implications for LDCs and post-communist countries of UK experience

Privatization has become an international phenomenon. Most attention has been devoted to privatization by stock market flotation or by sales to third parties. Management and employee buy-outs present a third main possibility for transferring assets from the public to the private sector. This paper discusses the scope for privatization buy-outs in LDCs and ‘post-communist’ economies in the light of conceptual issues and UK experience. The positive aspects of privatization by management and employee buy-outs concern: ownership incentives; the introduction of control mechanisms by institutional investors and various types of financing instruments; indigenous ownership, decentralized privatization; greater incentives in firms where specific skills are involved; the ability to improve trading relationships between a privatized supplier (the buy-out) and its former parent, which remains in the public sector where the supplier is heavily dependent on its former parent; and the general contribution of buy-outs to a redrawing of a state firm's spread of activities to create a more viable entity. The potential problems with buy-outs concern such issues as: absence of entrepreneurial skills; the scope of their applicability; the potentially restrictive effects of debt and debt-like finance; the need to deal with investment requirements of firms; the lack of personal wealth; the use of inside information by managers to purchase a firm at a price which is to the detriment of the public interest; and the possibility of social and political problems if individuals are perceived to enhance their personal wealth significantly as an accident of where they work. There are means by which many of these potential problems can be dealt with and the paper addresses these.     

Social Security privatization in Latin America

The new, partially privatized social security system adopted by Chile in 1981 has attracted attention in many parts of the world. Since then, a number of Latin American countries have implemented the Chilean model, with some variations: either with a single- or multi-tier system, or with a period of transition to take care of those in the labor force at the time of the change. The single-tier version consists of a privatized program with individual accounts in pension fund management companies. Multi-tier systems have a privatized component and retain some form of public program. This article describes each of the new programs in Latin America, their background, and similarities and differences among them. Much more information is available for Chile than for the other countries (in part because Chile has the oldest system), enough to be able to evaluate what, in most cases, is the most accurate information. That is often not the case for the other countries, especially when dealing with subjects such as transition costs and net rates of return (rates of return minus administrative fees). No country has copied the Chilean system exactly. Bolivia, El Salvador, and Mexico have closed their public systems and set up mandatory individual accounts. Argentina has a mixed public/private system with three tiers. In Colombia and Peru, workers have a choice between the public and private programs. Uruguay created a two-tier mixed system. Costa Rica has a voluntary program for individual accounts as a supplement to the pay-as-you-go program and has just passed a law setting up mandatory accounts containing employer contributions for severance pay. All of the countries continue to face unresolved issues, including: High rates of noncompliance--the percentage of enrollees who do not actively and regularly contribute to their accounts--which could lead to low benefits and greater costs to the governments that offer a guaranteed minimum benefit; Proportionately lower benefits for women and lower earners than for men and higher earners; A minimum required rate of return among the pension fund management companies (in most of these countries) that has resulted in similarity among the companies and the consequent lack of meaningful choice; and High administrative fees in most of these countries, which reduce the individual's effective rate of return. To what extent these issues can be mitigated or resolved in the future is not yet clear. In general, a definitive assessment of the Chilean model and its Latin American variations will not be possible until a cohort of retirees has spent most of its career under the new system.     

Waste in the Sewer: The Collapse of Accountability and Transparency in Public Finance in Jefferson County,Alabama

Following failed auctions for sewer debt in April 2008, major bond rating companies downgraded Jefferson County, Alabama’s bond rating to D (default) triggering massive mandatory payments by the county to its creditors. At the time of writing, the county teeters on the brink of actual default and bankruptcy, unable to pay service on its $3.3 billion sewer debt portfolio. If the county defaults, it will be the largest municipal bankruptcy in United States history, eclipsing Orange County, California’s 1994 default. The intriguingly complex tale of the Jefferson County debt crisis is recounted here by identifying and examining failures of transparency and accountability by local bureaucratic and political actors, private financial institutions, as well as the larger regulatory framework governing public finance. Enhanced regulation of local government and the financial sector plus greater local government capacity to close accountability gaps and thus prevent future crises of similar scale in this or other jurisdictions are recommended.     

Politics,Fiscal Necessity,or Both? Factors Driving the Enactment of Defined Contribution Accounts for Public Employees

Recent conflicts over public sector defined benefit pension funding have inspired polarized debates about the need for reform, including the utility of replacing pensions with defined contribution accounts, which are popular throughout the private sector. Between 1996 and 2011, 15 American states enacted legislation to implement either mandatory or optional defined contribution accounts for certain public employees. What drove this process? This article investigates the role of political, budgetary, and contagion influences on the diffusion of defined contribution accounts for general state employees. Empirical results suggest that enactments were influenced by Republican legislative, but not executive, partisanship. Gains in state indebtedness also increased the likelihood of enactment independent of political and other factors. There is no evidence of policy learning based on neighboring state activity and no influence from two measures of organized labor power. Both quantitative and qualitative robustness checks largely reinforce these findings.     

The relationships between public and private pension schemes: an introductory overview

Only recently have social insurance and private pensions, collectively, come to be thought of in terms of a total social security benefit package. The economic problems brought on by the 1974 oil crisis initially triggered consideration of a common, integrated role for the two systems. The second oil crisis reinforced the relative expansion in private pension programs, as a supplement to social security. Before these events, private and public pension programs interacted in only a limited number of ways, confined to relatively few countries. These interactions were largely confined to collective bargaining, whereby private pensions were gradually extended to nearly all employees in France and Sweden; mandating, or legally requiring private supplementation of social security, debated in several countries in the early 1970's, but postponed by the 1974 oil crisis; and contracting out, or covering a part of the social security benefit under a private plan, as in the United Kingdom. Overall, the tradition of private pensions was not very strong or broadbased. The current debate centers on which public/private pension mix is desirable from the point of view of an old-age income-maintenance program. A new element is the rising support for a "third pillar"--individual tax-encouraged savings--not only as a supplement, but as an alternative to social insurance.     

Lessons from the malfunctioning of the Eurozone's financial system

The persisting Eurozone's crisis is a combination of a sovereign debt crisis and a banking crisis that have been triggered by the Global Financial Crisis. The sovereign debt crisis is the consequence of a policy laxity for applying the principles and fiscal rules of the monetary union, which led to macroeconomic imbalances and enforced the mispricing of risks by the markets that in turn contributed to escalate the banking crisis. To address the consequences of the Eurozone's crisis, the European Union has implemented a new crisis management framework, which, however, is not immune to trials. The present paper follows a tripartite structure and begins by examining the causes of the Eurozone's crisis and draws its lessons. Second, it examines the reforms of the new crisis management framework and highlights their key challenges. Third, in light of these lessons and challenges, a return to three ‘fundamentals’ is advocated and the case of enhancing the position of the European Union within the area of international financial regulation is built to highlight how this is an optimal policy area for addressing the endemic weaknesses of the Eurozone and how this can contribute to securing a sustainable growth. Copyright © 2014 John Wiley & Sons, Ltd.     

Social security reform in Central and Eastern Europe: variations on a Latin American theme

After Chile reformed its social security system in 1981, several other Latin American countries and certain Central and Eastern European (CEE) countries implemented the Chilean model, with some variations: either a single- or multitier system, or with a period of transition to take care of those in the labor force at the time of the change. The single-tier version consists of individual accounts in pension fund management companies. Multi-tier systems retain some form of public program and add mandatory individual accounts. Most of the CEE countries did not want to incur the high transition costs associated with the Chilean model. The switch to a market economy had already strained their economies. Also, the countries' desire to adopt the European Union's Euro as their currency--a move that required a specific debt ceiling--limited the amount of additional debt they could incur. This article describes the CEE reforms and makes some comparisons with the Latin American experience. Most of the CEE countries have chosen a mixed system and have restructured the pay-as-you-go (PAYGO) tier, while the Latin American countries have both single- and multi-tier systems. Some CEE countries have set up notional defined contribution (NDC) schemes for the PAYGO tier in which each insured person has a hypothetical account made up of all contributions during his or her working life. Survivors and disability programs in CEE have remained in the public tier, but in most of the Latin American programs the insured must purchase a separate insurance policy. Issues common to both regions include: Administrative costs are high and competition is keen, which has led to consolidation and mergers among the companies and a large market share controlled by a few companies. Benefits are proportionately lower for women than for men. A large, informal sector is not covered by social security. This sector is apparently much larger in Latin America than in the CEE countries. Issues that are unique to some of the CEE countries include: Individual accounts in Hungary and Poland have proved more attractive than originally anticipated. As a result, contributions to the public PAYGO system in Hungary and Poland fell short of expectations. In several countries, laws setting up the programs were enacted without all the details of providing benefits. For example, in some countries laws must now be drawn up for establishment of annuities because they do not yet exist. Setting up a coherent pension policy has been difficult in some countries because of frequent and significant changes in government. This situation has affected the progress of reform in various stages of development. In general, a definitive assessment of individual accounts in these countries will not be possible until a cohort of retirees has spent most of its career under the new system.     

Does Fiscal Stress Induce Privatization? Correlates of Private and Intermunicipal Contracting, 1992–2002

Using Census of Governments data, preferences for private and intermunicipal contracting by U.S. counties during the 1992–2002 period are modeled as a function of established economic and political factors. After distinguishing between private and intermunicipal contracting, there is no evidence that fiscal stress induces privatization. High debt levels are associated with fewer publicly delivered services, but counties with high debt are as likely to partner with neighboring municipalities as they are with private firms. Political factors are weak predictors of either form of contracting. The strongest and most reliable predictor of both private and intermunicipal contracting is the creation of new public services. These findings imply the strategic use of contracting for trial, temporary, or contingent services.     

Local Government Restructuring: Privatization and Its Alternatives

Local government restructuring should no longer be viewed as a simple dichotomy between private and public provision. A 1997 survey of chief elected township and county officials in New York shows that local governments use both private and public sector mechanisms to structure the market, create competition, and attain economies of scale. In addition to privatization and inter‐municipal cooperation, two alternative forms of service delivery not previously researched—reverse privatization and governmental entrepreneurship—are analyzed here. Logistic regression on the 201 responding governments differentiates the decision to restructure from the level and complexity of restructuring. Results confirm that local governments are guided primarily by pragmatic concerns with information, monitoring, and service quality. Political factors are not significant in the restructuring process and unionization is only significant in cases of simple restructuring (privatization or cooperation used alone). Fiscal stress is not a primary motivator, but debt limits are associated with more complex forms of restructuring. Restructuring service delivery requires capacity to take risks and is more common among experienced local officials in larger, higher‐income communities. Restructuring should be viewed as a complex, pragmatic process where governments combine public and private provision with an active role as service provider and market player. © 2001 by the Association for Public Policy Analysis and Management.     

New capitalist processes,interdependence and the Asia–US private equity relationship

Abstract

Private equity has had a short but eventful history in East Asia, characterized first by US firm dominance and then by a nationalistic backlash. This article charts these earlier patterns, but argues that significant developments have taken place since the early 2000s, which have strengthened the position of private equity capital in the Asian political economy. As private equity deal-making has returned to Asia, new linkages have been formed between US private equity funds and local private equity players. Of particular importance have been US–Asian joint ventures, Asian nationals returning to domestic firms from US private equity houses and supportive local elites in the banking and pension fund sectors. The significance is two-fold. First, the spread of private equity has been founded on interdependent relationships between US actors and local actors, which have more successfully grounded the private equity industry in national political economies than its origins in the Asian crisis period. Second, despite the relative localization of Asian private equity, industry practices are still largely shaped by the US model of private equity and the merger and acquisition activity that it entails, rather than a distinct Asian private equity model. The findings of the article contribute to calls that have been made for research on the changing global economy that comprehensively integrates domestic and international levels of analysis.     

Social Security Privatization and Market Risk

Under Social Security privatization, workers would be allowed to divert some of the money that currently goes to Social Security into private accounts. This would expose them to market risk, that is, the risk of a substantial drop in equity prices or of a prolonged bear market. This could result in generations of workers with less money than they thought they would have for retirement. Depending on a worker's birth date, if the privatization approach proposed by President Bush's Commission to Strengthen Social Security had been enacted at the start of the Social Security program, the retirement benefits generated from putting 10% of earnings in a private account for 35 years would have ranged from 100% to less than 20% relative to pre‐retirement earnings. The extraordinarily high retirement income generated from the booming 1990s stock market was the equivalent of winning the generational lottery—unlikely to be repeated regularly. Even under these beneficial circumstances, a privatized system could have cost the government more than $1 trillion in today's dollars over the past 3 decades if the government decided to help out those who accumulated too little for retirement. The primary alternative to a government bailout of the Social Security system, older workers working longer, would likely not generate the desired results. Workers wanting to work longer would create labor market pressures typically at times when unemployment is already high.     

Shifting Boundaries between the Public and Private Sectors: Implications from the Economic Crisis

What are the differences between the public and private sectors as well as their interrelationships in light of the recent financial crisis? Has the global economic crisis fundamentally shifted the boundaries between the two sectors? This essay examines the nature and extent of the shift. The authors present an analysis of the Troubled Asset Relief Program (TARP) to highlight the massive transformations that are taking place and to introduce lessons for future policy initiatives. Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy—26 percent—than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government. If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank. —Edmund Andrews and David Sanger, New York Times, 2009     

Debt in just societies: A general framework for regulating credit

Debt presents a dilemma to societies: successful societies benefit from a substantial infrastructure of consumer, commercial, corporate, and sovereign debt but debt can cause substantial private and social harm. Pre‐crisis and post‐crisis solutions have seesawed between subsidizing and restricting debt, between leveraging and deleveraging. A consensus exists among governments and international financial institutions that financial stability is the fundamental normative principle underlying financial regulation. Financial stability, however, is insensitive to equality concerns and can produce morally impermissible aggregations in which the least advantaged in a society are made worse off. Solutions based only on financial stability can restrict debt without accounting for the risk of harm to persons least able to bear the risk, worsen preexisting inequalities, destroy or impair the net worth of households, and impose unfavorable distributive consequences. This article offers a new approach to assist policymakers in developing and evaluating regulation to take criteria in addition to financial stability into account, but which do not undermine the aim of financial stability. It calls for a luck egalitarian approach, offering policymakers options to take the debtor's choices into account while still accounting for cognitive mistakes people often make in debt decisionmaking. It offers a general framework for the underlying principles for the regulation of debt: its focus is not on any particular forms of debt or its regulation but in structuring debt regulation more generally. It offers a set of recommendations on how regulators can take concerns about luck and equality into account in regulatory design.     

Appropriating Nature in Crisis-ridden Greece: Deepening Neoliberal Capitalism,Part 2

This is the second paper in a two-paper series in which we present how the ongoing crisis in Greece has been used to accelerate the neoliberal restructuring of Greece with serious implications for the appropriation of nature. In this paper we focus specifically on particular aspects of the austerity programs that relate to natural resources and natural conditions. We examine changes to the business environment and ongoing privatization schemes to show how the Greek austerity programs benefited private capital with significant concessions of natural resources. By discussing relevant specific cases, we concretely show how austerity programs have had far-reaching adverse consequences for the living conditions of working people and their access to natural resources.     

The impact of surplus sharing on the portfolio mix of public sector defined benefit pension plans: a public choice approach

The riskiness of state employee pension plan portfolios varies across states. We investigate whether this variation is related to how public employees and taxpayers share actuarial surpluses of pension accounts. We focus on two determinants of a plan’s asset mix: the relative influence of public employees to taxpayers; and whether a surplus-sharing contract is specified. Our theoretical model demonstrates that the effect of public employee influence on the asset mix is ambiguous. Our empirical results corroborate this complex theoretical result. In our theoretical and empirical analyses, if a surplus sharing rule is specified, plans adopt a more aggressive investment allocation.     

Does retirement education teach people to save pension distributions?

As defined contribution pension plans have become increasingly common over the past two decades, so have lump sum distributions from those plans. Employees who elect such a distribution take the balance of their pension account with them when they leave a job. They can then choose to maintain the funds in accounts designated for retirement, invest them in other saving vehicles, or spend them. If spent pension distributions are not replaced by other savings, however, the future elderly are unlikely to be able to maintain a desirable standard of living. With employee-funded pensions expected to play an increasingly important role in financing Americans' retirement, saving these funds in essential. This article is the first to examine the relationship between retirement education--specifically, meetings sponsored by employers or by public and private institutions--and the saving of lump sum distributions. Two definitions of saving are used: one that includes reinvestment only in tax-deferred saving vehicles, and a broader one that includes tax-deferred vehicles, general saving vehicles (stocks, bonds, savings accounts, and so on), and paying off debt. The analysis also evaluates the effects of retirement education on specific groups identified in previous research as being less likely to keep their pension distributions in tax-deferred accounts: namely, women, younger persons, and persons with less than a college education. The same groups tend to be less financially secure in retirement, making the effects of retirement education on them particularly relevant. With an econometric model using ordinary least squares and data from the 1992 Health and Retirement Study, the analysis finds that retirement education does not affect the overall likelihood that employees will save their distributions, whether in tax-deferred or non-tax-deferred vehicles. The picture is more complicated for subgroups of employees. Attending a retirement meeting is associated with an increased likelihood of saving among persons age 40 and under but a decreased probability of saving among college graduates and women. No effect was found for men, individuals over age 40, or persons who did not graduate from college. The finding that retirement education increases the likelihood of younger persons' saving a distribution is reassuring, for these workers are America's future retirees. However, the finding that attending a meeting does not increase saving among some of the most financially vulnerable groups is a matter of concern to policymakers. Further study of the long-term effects of spending pension distributions is needed.     

‘Going beyond the Troika’: Power and discourse in Portuguese austerity politics

This article analyses the margin of manoeuvre of Portuguese executives after the onset of the sovereign debt crisis in 2010–2015. To obtain a full understanding of what happened behind the closed doors of international meetings, different types of data are triangulated: face‐to‐face interviews; investigations by journalists; and International Monetary Fund and European Union official documents. The findings are compared to the public discourse of Prime Ministers José Sócrates and Pedro Passos‐Coelho. It is shown that while the sovereign debt crisis and the bail‐out limited the executive's autonomy, they also made them stronger in relation to other domestic actors. The perceived need for ‘credibility’ in order to avoid a ‘negative’ reaction from the markets – later associated with the conditions of the bail‐out – concurrently gave the executives a legitimate justification to concentrate power in their hands and a strong argument to counter the opponents of their proposed reforms. Consequently, when Portuguese ministers favoured policies that were in congruence with those supported by international actors, they were able to use the crisis to advance their own agenda. Disagreement with Troika representatives implied the start of a negotiation process between the ministers and international lenders, the final outcome of which depended on the actors’ bargaining powers. These strategies, it is argued, constitute a tactic of depoliticisation in which both the material constraints and the discourse used to frame them are employed to construct imperatives around a narrow selection of policy alternatives.