Public pension arrangements under adaptational pressures

Pension systems in virtually all advanced welfare states are exposed to a number of serious internal as well as external pressures, some of which will reveal their full effect only over the coming decades. Depending on the specific institutional set-up of retirement income policies, their relative impact is likely to differ from one country to another. Broadly speaking, we may distinguish between economic, fiscal, and demographic pressures, all of which challenge the sustainability of national pension arrangements. In the following section, I will briefly portray the variety of strains with which pension policymakers in advanced welfare states have to cope.

Economic and fiscal pressures

The economic slowdown since the mid-1970s and – related to that – sluggish wage growth and shrinking employment has significantly weakened the revenue base of public pension schemes in the eu (European Union). At the same time, public pension systems themselves were increasingly used as an instrument for an early exit from the labour market, especially in the Continental welfare states. In addition, regular jobs drifted increasingly toward the shadow economy in recent years or were crowded out by various forms of “atypical” employment, which were often not subject to social insurance contributions. As a consequence, public pension arrangements were faced with a growing gap between revenues and expenditures.

Initially, most governments closed this gap with an increase in pension contributions rates, which at the time was a politically more feasible strategy than cut-backs of pension entitlements (Palier 2002). However, in the context of growing economic internationalisation this option turned out to be increasingly costly. Within Europe, this development gained further momentum through the Single European Market dismantling the legal obstacles to the free movement of goods, workers, services and capital between EU member states. Most importantly, intensified competition on product markets put a severe constraint on the capacity of domestic producers to shift any increase of labour costs on to domestic consumers. These pressures are reinforced by the fact that the post-socialist countries in central and Eastern Europe are increasingly important players on world markets. With their comparatively low social standards and with wage costs being only a fraction of those in Western Europe, these countries have emerged as serious competitors to the older eu member states.