World Bank Policy Research Working Paper How Politics and Institutions Affect Pension Reform in Three Postcommunist Countries Mitchell A. Orenstein Assistant Professor of Political Science Maxwell School of Citizenship and Public Affairs Syracuse University 100 Eggers Hall, Syracuse, NY 13244-1090; [email protected] The findings, interpretations, conclusions, and all errors in this paper are those of the author and should not be attributed to the World Bank. 2 ABSTRACT Orenstein examines the political and institutional processes that produced fundamental pension reform in three postcommunist countries: Hungary, Kazakhstan, and Poland. He tests various hypotheses about the relationship between deliberative process and outcomes through detailed case studies of pension reform. The outcomes of reform were similar: each country implemented a mandatory funded pension system as part of reform, but the extent and configuration of changes differed greatly. Countries with more "veto actors" -- social and institutional actors with an effective veto over reform -- engaged in less radical reform, as theory predicted. Poland and Hungary generated less radical change than Kazakhstan, partly because they have more representative political systems, to which more associations, interest groups, and "proposal actors" have access. Proposal actors shape the reform agenda and influence the positions of key veto actors. Pension reform takes longer in countries with more veto and proposal actors, such as Poland and Hungary. Legacies of policy, the development of civil society, and international organizations also profoundly affect the shape and progress of reform. Orenstein sees pension reform as happening in three phases: commitment-building, coalition- building, and implementation. He presents hypotheses about tradeoffs among inclusiveness (of process), radicalism (of reform), and participation in, and compliance with, the new system. One hypothesis: Including more, and more various, veto and proposal actors early in the deliberative process increases buy-in and compliance when reform is implemented, but at the expense of faster and greater change. Early challenges in implementation in all three countries, but especially in Kazakhstan, suggest the importance of improving buy-in through inclusive deliberative processes, where possible. 3 ABSTRACT......................................................................................................................................................................................3 1 INTRODUCTION..................................................................................................................................................................6 2 THE POLICY PROCESS FOR SOCIAL SECTOR REFORMS ...................................................................................9 2.1 POLICY LEGACIES .......................................................................................................................................................... 9 2.2 POLITICAL INSTITUTIONS AND POLICY ACTORS.............................................................................................. 12 2.3 INTERNATIONAL ORGANIZATIONS AND IDEAS................................................................................................ 13 3 STAGES AND TRADEOFFS IN THE POLICY PROCESS ........................................................................................14 3.1 TRADEOFFS ACROSS DELIBERATIVE FORA......................................................................................................... 15 3.2 TRADEOFFS ACROSS POLICY STAGES................................................................................................................... 16 3.3 TIMELINE OF PENSION REFORM IN THREE COUNTRIES.................................................................................. 17 3.3.1 Commitment-building ........................................................................................................................................17 3.3.2 Coalition-Building.............................................................................................................................................19 3.3.3 Implementation....................................................................................................................................................19 4 IMPACTS OF DELIBERATION ......................................................................................................................................20 5 PROCESS AND OUTCOMES IN KAZAKHSTAN, HUNGARY, AND POLAND ..................................................21 5.1 KAZAKHSTAN .............................................................................................................................................................. 22 5.1.1 Policy Legacies ...................................................................................................................................................23 5.1.2 Commitment-building ........................................................................................................................................23 5.1.3 Coalition-building .............................................................................................................................................24 5.1.4 Implementation....................................................................................................................................................29 5.1.5 Conclusions.........................................................................................................................................................31 5.2 HUNGARY...................................................................................................................................................................... 31 5.2.1 Policy Legacies ...................................................................................................................................................31 5.2.2 Commitment-Building........................................................................................................................................32 5.2.3 Coalition-Building.............................................................................................................................................38 5.2.4 Implementation....................................................................................................................................................43 5.2.5 Conclusions.........................................................................................................................................................44 5.3 POLAND.......................................................................................................................................................................... 45 5.3.1 Policy Legacies ...................................................................................................................................................45 5.3.2 Commitment-Building........................................................................................................................................46 5.3.3 Coalition-Building: Phase One .......................................................................................................................48 5.3.4 Coalition-Building: Phase Two.......................................................................................................................52 5.3.5 Implementation....................................................................................................................................................56 5.3.6 Conclusions.........................................................................................................................................................57 6 ACTORS AND THE POLITICAL-INSTITUTIONAL CONTEXT.............................................................................59 6.1 INSTITUTIONAL VETO AND PROPOSAL ACTORS............................................................................................... 60 6.2 PARTISAN VETO AND PROPOSAL ACTORS.......................................................................................................... 61 6.3 INTEREST GROUPS....................................................................................................................................................... 61 6.3.1 Trade Unions.......................................................................................................................................................62 6.3.2 Pensioners' Associations...................................................................................................................................66 6.3.3 State Pension Administrations.........................................................................................................................67 6.3.4 Private Pension Funds.......................................................................................................................................67 7 CONCLUSIONS AND POLICY RECOMMENDATIONS ..........................................................................................68 7.1 REFORM OUTCOMES.................................................................................................................................................. 68 7.2 POLICY LEGACIES 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