Notional Defined Contribution Accounts: Neoliberal Ideology and the Political Economy of Pension Reform

By Williamson, John B.; Williams, Matthew | The American Journal of Economics and Sociology, April 2005 | Go to article overview

Notional Defined Contribution Accounts: Neoliberal Ideology and the Political Economy of Pension Reform


Williamson, John B., Williams, Matthew, The American Journal of Economics and Sociology


I

Introduction

AN INCREASING NUMBER OF COUNTRIES ARE FACING CRISES in their pension systems due to both fiscal and demographic crises (or projected crises). Some aspects of these crises are due to the structure of the pension systems themselves, but others are due to that constellation of phenomena variously known as neoliberalism, globalization, or free market reforms. Most countries have responded to such crises either by reforming their existing public pension system, by privatizing it, or by some combination of these strategies. A small number of countries--as of this writing, seven--have adopted a third approach to pension reform, creating notional defined contribution (NDC) accounts. Although an NDC scheme is still a public social insurance system, it nonetheless is consistent with neoliberalism's ethic of individualizing costs and the curtailment of social welfare programs. Many have argued that privatization is the wave of the future. We ask whether NDC systems might eventually displace privatization as a pension reform strategy.

The policy analysis in this article draws on the political-economic perspective. We use the term political economy as it is commonly used in sociology, where the term has a different meaning than the one common in the field of economics. As used by sociologists, "political economy" refers to the examination of the intersection of state, economic, and ideological power, with a focus on class conflict and compromise; here, we consider how this affects pension policy. Gaining a sense of the balance of these forces will allow us not only to evaluate the impact of NDC systems on different segments of the population, but also how likely the model is to spread to other countries. Our political-economic analysis does not focus solely on domestic factors, but takes global forces into account as well.

In particular, we consider the effects of neoliberalism, which we here understand in a dual sense, as both an ideology (a term we use in a neutral, technical sense) and an emerging global economic structure, the two of which are dialectically related. The advocates of neoliberalism as an ideology emphasize economic deregulation, the curtailment of the welfare state, and market solutions to social problems; as a structure, neoliberalism involves the transformation of the global market in a way that increases the power of certain social actors, such as transnational corporations and investors, intergovernmental organizations such as the International Monetary Fund and World Bank, and the leading industrialized nation-states--the United States, Japan, and the countries of Western Europe. We recognize that most of those we refer to as "neoliberals" would most likely not call themselves such and that the term reflects a left-of-center normative orientation. We feel, however, that alternative terms, such as "free market reformer," are also normatively loaded and that the term "neoliberal" best reflects our own orientation. Further, "neoliberal" is a term commonly used by sociologists and, albeit much less frequently, by economists and political scientists.

II

The Structure of NDC and Other Pension Schemes

DURING THE POST-WORLD WAR II ERA the most common old-age security model around the world has been the public, unfunded (or partially funded), pay-as-you-go defined benefit (PAYGO DB) model (Social Security Administration 1999), but privatized, funded defined contribution (FDC) individual account schemes have become increasingly common with the rise of neoliberalism. A PAYGO DB system (such as we have in the United States today) essentially works through paying for the pensions of today's recipients with contributions of today's workers, who will be recipients tomorrow. PAYGO DB schemes are funded through a payroll tax on workers' earnings and on their employers. Workers' future pensions will be calculated based on their contributions during their working life, sometimes the whole span, sometimes their final years or the years when they earned the most. …

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