Academic journal article The Poznan University of Economics Review

Sovereign Debt Crises and Pension Reforms in Selected European Countries

Academic journal article The Poznan University of Economics Review

Sovereign Debt Crises and Pension Reforms in Selected European Countries

Article excerpt

Abstract:

The "Great Recession" and sovereign debt crises in several EU countries in the wake of the 2008 financial market crisis have triggered drastic reforms in old-age security systems. Almost exclusively, the reforms meant retrenchments with often severe and immediate consequences for the living conditions of present and future pensioners. This paper deals with the contents and circumstances facilitating or enforcing the reforms in nine EU countries: Greece, Hungary, Ireland, Italy, Latvia, Portugal, Romania, Spain, and the UK. Cross-national comparison reveals similarities and differences and also sheds light on the social consequences that are already visible today.

Keywords: financial market crisis, pension reforms, Europe.

JEL codes: E32, J26, N34.

Introduction

The 1990s and early 2000s have shown that in democratic polities reforms of pension systems - parametric (path-dependent) as well as systemic (path-departing) changes - were not impracticable as was suggested by research on the "new politics of the welfare state" [Pierson 1994,2001]. Reforms came about when incumbent governments were able to shift or share the blame for enacted retrenchments, to hide the true impact of changes, or could even reap credit for reforms that put pension systems on a more sustainable footing in view of advancing population aging [Hinrichs 2011]. After 2008, however, in the wake of the "Great Recession" in a number of European countries plagued with high budget deficits and mounting sovereign debt, pension reforms came to the fore that were different in two respects. First, their magnitude was large, particularly when changes are taken together, and they (will) cause a substantial and immediate negative impact on the living condi - tions of present and future retirees. In a situation where austerity is no longer simply "permanent" but rather "pervasive", it is hardly surprising that pensions became a prime target for saving on expenditure because, almost everywhere, they are by far the largest item of welfare state spending which itself amounts to around half of total public outlays [Obinger 2012].

Second, the political process that brought about these changes deviated from previous attempts to retrench, re-finance or recalibrate old-age security systems. The post-2008 reforms in crisis-shaken EU countries were indeed large and sometimes also changed the hitherto pursued policy direction, swiftly passed the legislative process and were (or: will be) implemented with a short time lag. Hence, they can be considered as "rapid policy changes" [Rüb 2012]. Mainly, this reform pattern sprang from the pressure exerted by financial markets and supranational actors (IMF, European Commission) which urged governments to neglect voteseeking objectives within the well-known credit claiming/blame avoidance framework for the sake of attaining rapid savings on public expenditure [Bonoli 2012]. Consequently, in a number of countries reforming politicians were punished and lost power during subsequent elections because voters rarely appreciated retrenchments designated to overcome a "major crisis situation".

In this contribution eight countries will be analyzed - four Southern European countries (Greece, Italy, Portugal, and Spain), three CEE states (Hungary, Latvia, and Romania) and Ireland. All of them have conducted pension reforms after 2008 in order to ensure their schemes' financial viability in the short and long term or to realize notions of intergenerational equity. Most urgent, however, was regaining room for fiscal maneuver and obtaining financial aid from supranational organizations (IMF, EU). Seven of the eight countries had to seek such aid in the wake of the financial market crisis (2007/08) triggering an economic slump and, as one immediate outcome thereof, a sovereign debt crisis. The causal relevance of these events on the reform process can be read off from concrete recommendations issued by the European Commission or detailed reform demands attached to bailout agreements ("memoranda of understanding"), whereas the intensified reform effort of deeply indebted Italy was driven by the rising spread over German government bonds. …

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