Department of Political and Social Sciences Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, Implementation and Sustainability Igor Guardiancich Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Florence, October 2009 EUROPEAN UNIVERSITY INSTITUTE Department of Political and Social Sciences Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, Implementation and Sustainability Igor Guardiancich Thesis submitted for assessment with a view to obtaining the degree of Doctor of Political and Social Sciences of the European University Institute Examining Board: Prof. Martin Rhodes, University of Denver/formerly EUI (Supervisor) Prof. Nicholas Barr, London School of Economics Prof. Martin Kohli, European University Institute Prof. Tine Stanovnik, Univerza v Ljubljani © 2009, Igor Guardiancich No part of this thesis may be copied, reproduced or transmitted without prior permission of the author Guardiancich, Igor (2009), Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, implementation and sustainability European University Institute DOI: 10.2870/1700 Guardiancich, Igor (2009), Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, implementation and sustainability European University Institute DOI: 10.2870/1700 Acknowledgments No PhD dissertation is a truly individual endeavour and this one is no exception to the rule. Rather it is a collective effort that I managed with the help of a number of people, mostly connected with the EUI community, to whom I owe a huge debt of gratitude. In particular, I would like to thank all my interviewees, my supervisors Prof. Martin Rhodes and Prof. Martin Kohli, as well as Prof. Tine Stanovnik for continuing intellectual support and invaluable input to the thesis. Likewise, I am extremely grateful for the logistical help I received from the Polish government through the Paderewski Grant, which allowed me a prolonged stay in Warsaw, and to Carsten Schneider, who helped me to get involved in the Central European University’s environment. A special thanks goes to Šverko, who kindly helped me with my sojourn in Zagreb. Furthermore, I would like to express my gratitude to Bea, Bapor, Magda, Kinga and Zbigniew for their help with translation and interpretation, and to Alex for proofreading the thesis. As for my Florentine life, I have to thank my friends and the Fiasco crowd, who made it more than pleasurable. Finally, I cannot but admire my family that managed to put up with me during these, at times difficult, five years. i Guardiancich, Igor (2009), Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, implementation and sustainability European University Institute DOI: 10.2870/1700 ii Guardiancich, Igor (2009), Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, implementation and sustainability European University Institute DOI: 10.2870/1700 Abstract This dissertation traces and analyses the legislation and implementation of pension reforms in four Central, Eastern and Southeastern European countries: Croatia, Hungary, Poland and Slovenia. By comparing the political economy of their policymaking processes, the thesis seeks to pinpoint regularities between institutional settings, actor constellations, decision-making strategies and reform outcomes. The study allows us to address three research questions: Why was reform possible and how was it carried through? What are its distributive consequences? Does it guarantee long-term political support? The main argument of this research is that viable pension reforms should not be seen simply as an event, but rather as a continuing process that must at all times be fiscally, socially and politically sustainable. In particular, the primary goal of a pension scheme is to reduce poverty, provide adequate retirement income and insure against the risks of old age within given fiscal constraints, and this will happen only if the scheme enjoys continuing political support at all levels. Elaborating on this premise, the research makes four broad claims; two related to the legislative phase and two to the implementation of reforms. First, I argue that the fiscal unsustainability of post-socialist pension systems, as well as their abuse in providing a de facto safety net for redundant workers, quickly exhausted the possibility of enacting simple corrective measures (via refinancing and retrenchment). This forced policymakers to engage in negotiated bargains with the pro-welfare coalition. Complex political exchanges became central to the restructuring of public schemes and a fundamental ingredient of successful reform. Second, I claim that systemic reforms that seek to introduce policy innovations, such as funded elements, into a Pay-As-You-Go system, can be politically superior to more traditional parametric changes. Systemic innovations can be a substantial source of credit and popular support for policymakers. This provides them with greater room for manoeuvre vis-à-vis the pro- welfare coalition, which typically supports the status quo. In particular, the new funded elements are often traded for cuts in public pension schemes. Third, I demonstrate that trade-offs between the fiscal and social dimensions of pension reforms emerge during legislation, and these may jeopardise successful implementation. Excessive emphasis on financial viability and economic competitiveness often conflicts with sound social policy, i.e. producing a pension system that protects the elderly from poverty and provides them with adequate benefits. Conversely, failure to eliminate both extreme imbalances between contributions and benefits, and unjustified special privileges for particular groups, may result in a disproportionate burden for the fiscal budget. iii Guardiancich, Igor (2009), Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, implementation and sustainability European University Institute DOI: 10.2870/1700 Finally, how legislation is conducted is important for a reform’s political acceptability and the achievement of its multiple objectives. Negotiated bargains are qualitatively very different from other modes of policy making. Contrary to a received wisdom in the literature, I argue that consensual, inclusive decision-making, as opposed to unilateralism or limited bargaining, increases both the effectiveness of reforms and their political sustainability over time. The involvement of a greater number of stakeholders allows for smoother implementation: costly deviations from efficient solutions are more easily avoided, and incentives to stick to the reform’s initial design and purpose are put in place. To substantiate these claims, this dissertation analyses reforms in Croatia, Hungary, Poland and Slovenia. Despite similar and parallel reform processes, these countries have quite different institutional settings, policymaking styles and reform outcomes. Whereas Croatia and Hungary are majoritarian regimes in which policymakers failed to include a majority of stakeholders, Poland and Slovenia are consensual democracies where decision-making was concerted. This affected the political sustainability of reforms: the first two countries have witnessed sharp declines in popular support whereas the latter display reasonable a resilience to policy reversal. The distributive outcomes are likewise diverse: Croatia and Poland overemphasised the financial viability of pensions at the expense of the adequacy of future pension benefits; Hungary and Slovenia failed to fiscally stabilise their public retirement schemes. None has so far struck a fair balance between social, fiscal and political objectives, thereby rendering a rethinking of their reform strategies unavoidable. With respect to existing work on Central, Eastern and Southeastern European pensions, this dissertation makes two innovations. First, it is the first to extend its analysis to ten years of implementation, following the reform wave of the late 1990s. Second, it links the legislative and the implementation phases together by employing and adapting the theoretical framework developed by Natali and Rhodes for the analysis of pension reforms in Western Europe. This framework considers policymaking as a negotiated bargain between policymakers and the social partners, consisting of complex exchanges between politics and policy. In particular, the two authors distinguish between political (vote-, office- and policy-seeking) goals and policy objectives (financial viability, economic competitiveness, equity and effectiveness). These can be traded against each other, thus expanding the room for manoeuvre available to decision- makers. The application of this framework to my four cases requires two modifications. First, the dissertation extends the ‘time horizon’ of analysis to encompass both legislation and implementation. The framework is inserted into a political-institutional context, in order to analyse its influence on the reforms’ distributional consequences and political sustainability. iv Guardiancich, Igor (2009), Pension Reforms in Central, Eastern and Southeastern Europe: Legislation, implementation and sustainability European University Institute DOI: 10.2870/1700 Second, the actor constellations and policy objectives are adapted to the post-socialist experience. Elite welfare stakeholders, such as the vast state bureaucracy, are included. And certain policy objectives,