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Katharina Katharina MüllerMüller

Ten Years After: Pension Reforms

in Central and Eastern Europe &

The Former Soviet Union

No. 02/00

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© by the author© by the author

2 F.I.T. Discussion Paper 02/00

Katharina MÜLLER

Ten Years After:

Pension Reforms in Central and Eastern Europe

& the Former Soviet Union

Dr. Katharina Müller is an economist at the Frankfurt Institute for TransformationStudies (FIT). The FIT is supported by the Deutsche Forschungsgemeinschaft(DFG) as innovation college. Dr. Müller works on the research project The Politi-cal Economy of Pension Reform: Eastern Europe and Latin America in Compari-son funded by the Volkswagen Foundation.

Ten Years After:Pension reforms in Central and Eastern Europe & the Former Soviet Union 1

1 Introduction

Since the late eighties, the countries of Central and Eastern Europe (CEE)2 and theFormer Soviet Union (FSU)3 have witnessed far-reaching changes in their economiesand societies. Compared with this, the area of social security has long remained ex-empt from structural change. In the early years of transition it was assumed that mac-roeconomic and political reforms were most pressing, leaving the existing set ofsocial security institutions mainly untouched. When welfare and distribution issuesstarted to attract greater attention after a wave of election victories of post-communist forces in many transition countries, it turned out that the scope and type ofreforms needed in the field of social policy were highly disputed.

This has been especially true in the area of old-age security. Pension reform seemedinevitable in CEE and the FSU, as the process of economic transformation was put-ting great strain on the existing retirement systems. However, there was considerabledisagreement with regard to the paradigm to be followed in old-age security. In manytransition countries, local discussions reflected the international controversy be-tween the “new pension orthodoxy”4 and its opponents, triggered by forecasts ofpopulation ageing and a wave of pension privatisations in Latin America. This de-bate focused on the question whether it is sufficient to adapt the existing public pay-as-you-go (PAYG) systems, or whether private, individually fully funded (IFF) pen-sion schemes, such as the one in Chile5, are a more appropriate solution to short- andlong-run problems facing old-age security.

Interestingly, the paradigm choices to be observed in CEE and the FSU reflect con-siderable diversity, comprising innovative solutions beyond the “classical” textbookdichotomy. Most notably, the introduction of notional defined contribution (NDC)plans was pioneered in the Baltics and has been replicated elsewhere. Those transi-

1 This paper has been written in the context of the ongoing research project The Political Economy

of Pension Reform: Eastern Europe and Latin America in Comparison. Funding by the Volks-wagen Foundation is gratefully acknowledged. Franziska Kuhlmann, András Simonovits and Hans-Jürgen Wagener provided me with helpful comments.

2 Albania, Bosnia & Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia,Poland, Romania, the Slovak Republic, Slovenia, and Yugoslavia.

3 Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, the Kyrgyz Republic, Latvia, Lithua-nia, Moldova, the Russian Federation, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.

4 The “new pension orthodoxy” (Lo Vuolo, 1996) surged in the 1990s and advocates pension pri-vatisation all over the world. Its main transmission mechanism in developing and transition coun-tries has been World Bank advice (cf., e.g., World Bank, 1994). See Müller (1999) for more de-tails.

5 In 1981, under the Pinochet dictatorship, Chile was the first country in the world to switch from apublic PAYG system to a multipillar scheme mainly based on private, FF pension funds.


tion countries that have implemented partial or full pension privatisation clearlyfollowed the much-advertised Latin American role models. Another group of CEEand FSU countries has decided to reform their existing public PAYG scheme fromwithin, without resorting to systemic change. This paper analyses the divergent pen-sion reform paths ten years after the start of economic and political transformation inCEE and FSU.6

This paper comes in four parts. First, the pre-1989 legacy in old-age security is re-viewed, comprising both the socialist retirement schemes and the earlier social secu-rity traditions. The next section outlines the impact of economic transformation on theexisting retirement schemes, as well as describing parametric reforms implementedin post-communist countries. Then, the systemic reforms implemented in CEE and theFSU – i.e. the introduction of NDC plans and the full or partial privatisation of old-age security – are discussed. The following section identifies some relevant politicalactors in the post-communist pension reform arena. The article ends with some con-cluding remarks.

2 The legacy

In a number of South-Eastern and Central European countries, mandatory public pen-sion insurance preceded the socialist era, sometimes dating back to the turn of thecentury. Modelled on the German and Austrian examples, these Bismarckian-typepension schemes consisted of separate schemes for blue- and white-collar workers,financed by employers’ and employees’ contributions. Other typical features of theinterwar pension schemes included their incomplete coverage, notably of the rurallabour force, and the existence of privileged groups with non-contributory schemes.It is interesting to note that these schemes were originally fully funded but lost theirreserves during World War II, resulting in a post-war shift to PAYG financing.

During the decades of socialist rule, old-age security in CEE countries and the So-viet Union followed similar lines, yet without rendering local pension schemesidentical.7 The central policy measure was the setting up of a unified pension schemethat was integrated into the state budget, thereby cross-subsidising other expenditureitems. Employees’ contributions were largely abolished, rendering employers’ con-tributions the only source of financing. In most countries, the administration of theold-age scheme was taken over by trades unions in the 1950s. A major achievementof the post-war years was the gradual expansion of coverage, becoming universal bythe 1960s or 1970s. As a rule, the legal pension age was decreased to 60 for men 6 Two caveats are necessary here: due to the scarcity of general information and data on pension

reform in CEE and FSU countries, it is impossible to cover all 27 transition countries in detail.Moreover, the momentum to be observed in this policy area may inevitably render part of myanalysis incomplete and/or outdated while this paper is still in print.

7 The following simplification ignores local differences.

K. Müller: Ten Years After: Pension Reforms in CEE and FSU 3

and 55 for women; while the effective retirement age was several years lower.Overall, the existing contribution-benefit link was weak: pensions tended to dependon years of service rather than on the level of contributions. Consequently, and in acontext of high labour participation rates, there was little benefit differentiation. Yet,pension privileges – a lower retirement age and higher pensions – granted for occu-pations of strategic importance marked an important departure from universalism.

The insufficient adjustment of current pensions to price or wage dynamics impliedthat newly granted pensions were considerably higher than average retirement bene-fits, giving rise to problems of inter-cohort fairness and of benefit adequacy. In Po-land, this problem came to be known as “stary portfel emerytalny” (old pensionportfolio) – the longer a pension was drawn, the lower its purchasing power (see¯ukowski, 1997: 138). Hence, many pensioners continued their gainful employmentto top up their low old-age benefits. The creation of this de facto extra labour supplywas functional in the context of the socialist economies, where labour hoarding byenterprises resulted in an excess demand for labour on a macro-level (see Götting,1998).

3 Old-age security in transformation

Economic transformation affected the existing PAYG systems in CEE and the FSU inseveral ways. At the onset of market-oriented reforms, price liberalisation and thecurtailment of subsidies on basic goods and services required a shift from indirect todirect transfers, resulting in rising expenditures for old-age security. At a later stage,the restructuring of the state-owned enterprises had an effect on both the revenue andthe expenditure side of public pension schemes. The privatisation, downsizing andclosing-down of enterprises was accompanied by a mounting number of disabilitypensions and by early retirement policies. This policy, designed to disguise the em-ployment effects of structural adjustment, implied that the retirement system was usedas a substitute for welfare and unemployment benefits.

By leading to an increased number of pensioners and a falling number of contributorsto the public pension schemes, this policy resulted in a significant destabilisation ofpublic pension finances.8 As the below table shows, the system dependency ratiosdeteriorated dramatically: in all CEE and FSU countries but Armenia, Belarus andMacedonia, there were less than two contributors per pensioner. The trend was par-ticularly alarming in Albania, Bulgaria and Hungary (95.3, 81.0 and 78.1, respec-tively). The declining revenue base and the erosion of social security are furtherillustrated by a dramatic drop in coverage ratios – notably in Albania, where cover-age plunged to 32 per cent, but also in Kazakhstan, Azerbaijan and Romania, whereit reached 51, 52 and 55 per cent, respectively. 8 Cichon (1999: 91) aptly denominates this effect as the “artificial ageing of a pension scheme”.


Table 1: Pension Indicators for Eastern Europe and the Former Soviet Union, mid-1990s

System

Dependency1

Coverage

Ratio2

Pension

Spending3

Replacement

Rate4

Population

20-59 / 60+5

Albania 95,3 32,0 5,1 n.a. 5,4

Armenia 38,0 66,6 3,1 24,0 4,6

Azerbaijan 66,0 52,0 2,5 29,0 5,4

Belarus 47,0 97,0 7,7 40,9 3,0

Bulgaria 81,0 64,0 7,3 38,3 2,6

Croatia 61,7 66,0 11,6 62,2 2,5

Czech Republic 53,0 85,0 9,0 48,6 3,2

Estonia 60,0 76,0 7,0 38,8 3,0

Georgia 66,0 77,0 1,7 36,0 3,2

Hungary 78,1 77,0 9,7 57,9 2,8

Kazakhstan 66,0 51,0 5,0 34,0 5,3

Kyrgyz Republic 67,1 n.a. 6,4 48,5 5,3

Latvia 65,9 60,5 10,2 62,8 2,9

Lithuania 69,2 n.a. 6,2 30,7 3,1

Macedonia 50,0 49,0 11,1 53,0 4,4

Moldova n.a. n.a. 7,5 48,1 3,9

Poland 53,7 68,0 14,4 55,4 3,4

Romania 58,3 55,0 5,1 43,1 3,1

Russian Federation n.a. 71,7 5,7 28,4 3,3

Slovak Republic 57,0 73,0 9,1 42,5 3,6

Slovenia 58,9 86,0 13,6 68,7 3,2

Tajikistan n.a. n.a. 3,0 30,5 6,4

Turkmenistan n.a. n.a. 2,3 53,3 7,1

Ukraine 78,0 69,8 8,6 32,0 2,9

Uzbekistan n.a. n.a. 5,3 40,9 6,71 Pensioners / Contributors (in per cent)2 Contributors as percentage of labour force3 Public pension spending as percentage of GDP4 Average pension / average wage (in per cent)5 20-59 years old / 60+ years old

Sources: Castello Branco, 1998; IMF, 1999; Medaiskis, 1998; World Bank, 1999.

No data were available for Yugoslavia and Bosnia & Herzegovina.

Whereas public pension spending was on the rise in the region, only Poland and Slo-venia surpassed the West European average, with pension expenditures amounting to


14.4 and 13.6 per cent of GDP.9 With expenditure levels between 1.7 and 3.1 percent of GDP, pension spending was lowest in the Central Asian and Caucasian Re-publics of Georgia, Turkmenistan, Azerbaijan, Tajikistan and Armenia, partly due toextremely meagre replacement rates (see table above). To some extent, these differ-ences in pension spending are accounted for by the heterogeneous demographicbackground in the region. While in Central Asia, the Caucasus and Albania only 6.3to 9.8 per cent of the population are over 60 years old, the other transition countriesdisplay similar old-age dependency ratios as the European Union (see table above).It is expected that in the future, population ageing will affect the region to a lesserextent than Western, Northern or even Southern Europe (see Prinz, 1997). Life ex-pectancy trends have slowed down in CEE and the FSU since the onset of transfor-mation – primarily due to high male mortality – and are even outstripped by the fore-casts for Latin America and the Caribbean (see Augusztinovics, 1999; World Bank,1999).

In the course of the 1990s, it became clear that the old-age security systems inheritedfrom the socialist past were in dire need of reform, to secure their financialsustainability, to meet the demographic challenges ahead and to adapt some of theprevious design features to the new economic order. A first change in the public-private mix was brought about by introducing supplementary private IFF schemes inAlbania, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Moldova,Poland, Russia, and Slovakia. This move was intended to strengthen the idea of self-provision for old age. Furthermore, the newly introduced pension funds were ex-pected to provide long-term investment capital, thereby contributing to the develop-ment of the local capital markets. Yet, in most countries, the amount of voluntaryfunds collected fell short of expectations (see, e.g., Jelínek and Schneider, 1999).

As far as parametric changes to the existing retirement schemes are concerned, itwas relatively undisputed among social security experts in CEE and the FSU thatessential pension reform measures included the separation of pension schemes fromother social insurance plans and from the state budget (except for non-contributorybenefits), the introduction of an employees’ contribution, the raising of the retirementage, the abolition of branch privileges, the restriction of early retirement, and thetightening of eligibility to invalidity pensions. Moreover, there is a clear tendencyfor linking benefits closer to lifetime earnings to improve contribution incentives.Yet it should be noted that in a PAYG scheme, a greater differentiation of benefitlevels requires extra financial means to improve the financial position of middle andhigh lifetime earners, if minimum benefits are already very low and cannot be de-creased. Therefore, some countries in the region could not provide earnings related

9 In 1993, the EU-12 average of expenditures for old-age and survivors’ pensions amounted to

11.9 per cent of GDP (see Döring, 1998: 36).


pensions, spending scarce resources on benefits providing minimal consumption(Palacios, Rutkowski and Yu, 1999).

The introduction of automatic indexation rules amounts to another necessary, butpotentially costly post-communist pension reform measure. For fiscal reasons, it wasa common practice to adjust retirement benefits only partially or in an ad hoc fashionto price and/or wage increases. In a context of high inflation, this resulted not only ininsufficient retirement incomes, but also in a serious distortion of relative benefitlevels.

By and large, these parametric reforms have been implemented in most CEE andFSU countries by now (for more details see Schwarz and Demirguc-Kunt, 1999).Yet, some of the retrenchment measures – notably the increase in pension age and theabolition of branch privileges – met with considerable political resistance. In politi-cal economy terms, the main drawback of these reforms is their large blame-generating potential, making them politically sensitive: they easily allow the identifi-cation of individual losses, and are perceived as a mere cutback of acquired entitle-ments, without anything in exchange (Holzmann, 1994). Fierce resistance to paramet-ric reforms, that were sometimes even blocked by constitutional courts (e.g. in theKyrgyz Republic and Poland), induced policymakers to compromise on the speedand/or scope of the required reform steps. In a bumber of countries reform has notbeen far-reaching enough, implying that retirees continue to suffer from the transfor-mation-induced crises of existing retirement schemes. Notably in some FSU coun-tries, old-age benefits have fallen below subsistence level. In Georgia, Kazakhstan,the Kyrgyz Republic, Moldova, Russia, Tajikistan, Ukraine and Uzbekistan, pensionsare often paid several months late. In Moldova, retirement pensions have even beenhanded out in apples or onions after in-kind contribution payment had been accepted(Castel and Fox, 1999).

Various transition countries have engaged in radical pension reforms that extend farbeyond a bold adaptation of the technical parameters of PAYG schemes. By intro-ducing NDC plans and/or privatising old-age security, they created important prece-dents in the region. The next section discusses the systemic reforms recently enactedin CEE and the FSU.

4 Systemic pension reforms

4.1 Notional defined contribution schemes


In the provision of old-age security, there is a traditional distinction between definedbenefit and defined contribution plans.10 Notional defined contribution (NDC) plansamount to an interim solution. All contribution payments are recorded in notionalindividualised accounts, yet capital accumulation is only virtual in these schemes.Individual benefit levels depend mainly on past contributions and their notional rateof return. The latter is a discretionary factor, boiling down to an indexation of thevirtual pension capital to the growth in GDP, average wages or prices. Moreover,future benefit amounts are linked to the development of mortality and the chosen re-tirement age. Years spent in higher eductaion, military service and raising childrencan be credited to individual accounts, provided the government assumes contribu-tion payment for these periods (see Holzmann, 1997a, 1997b; James, 1998; Rutkow-ski, 1998).

NDC plans, that introduce a quasi-actuarial pension formula to the public tier, havebeen developed by Swedish experts, but were pioneered by Latvia in 1996 (see Ci-chon, 1999).11 The Latvian pension formula can be simplified as P = C / E, with P =annual pension, C = total amount of indexed pension contributions accumulated bythe insured, and E = remaining life-expectancy at the time of retirement.12 In the caseof delayed retirement, P increases due to both a higher C and a lower E. The insuredreceive annual statements that include information about paid contributions; soonthey will also be informed on the pension they would receive if retiring at age 60, 65or 70. Recently, the Kyrgyz Republic (1997), Estonia (1999), Moldova (1999) andPoland (1999) have introduced similar NDC plans.13

The introduction of a NDC plan amounts to a fundamental change of the rules withinthe public tier, tying benefits closely to contributions and automatically adjusting thebenefit level to a shortening of the period of contributions and/or an extension of theyears in retirement. The NDC approach has even been interpreted as a “close ana-logue” to the Chilean-style paradigm shift, as it appropriates the vocabulary andmimics the logic of IFF schemes, eventually facilitating a smooth integration with atruly defined-contribution second tier (Holzmann, 1997a: 6). It has been claimed thatthe main attraction of NDC plans is political. Tying benefits closely to contributionsand reducing (incrementing) them actuarially for early (late) retirement is also pos-

10 Under the former, pensions are based on a prescribed formula (e.g. based on the number of

years in service, the final salary), providing a guarantee of replacement ratios. In contrast, definedcontribution plans pay out pensions according to the size of accumulated pension contributionsplus the investment returns yielded by them over the decades, ensuring actuarial fairness.

11 According to Disney (1999a), the Swedish reformers have also been inspired by the Germansystem of pension points. Yet, the latter entails no automatic adjustment of benefits to life-expectancy trends and is less transparent than the NDC system.

12 See Vanovska and Velde (1997), Bite (1998), Fox and Palmer (1999). The NDC concept wastaken to Latvia by a Swedish World Bank advisor (see Schmähl, 1998).

13 On the Kyrgyz NDC scheme see Castel and Fox (1999), on the Estonian one see IMF (1999), onthe Moldovan one see Cashu (1999a), and one the Polish one see Chlon, Góra and Rutkowski(1999).


sible in classical PAYG schemes, but “selling” these adjustments to the voters islikely to be politically more difficult than the introduction of a NDC plan.14

Advantages attributed to the NDC approach include a gain in transparency, endoge-nous adjustment to an increase in life-expectancy and greater incentives for formalemployment as well as late retirement (see Holzmann, 1997b: 13). As regards dis-advantages of NDC plans, they may increase old-age poverty, since NDC plans in-herently withdraw the commitment to benefit adequacy. Concomitant minimum pen-sion schemes can solve the problem, yet implying extra fiscal costs. Unless indexedto the contributions base (as in Latvia), NDC plans will run into financial problemswhen birth rates are falling. Moreover, unexpected increases in longevity will affectcurrent pensions from NDC plans in the same way as they do in private pensionschemes. Finally, the experiences of Latvia and Moldova highlight that in order tofunction at all, an NDC plan presupposes sophisticated computer equipment andadequately qualified staff, requiring substantial investments.

4.2 Mandatory fully funded schemes

The recent introduction of mandatory IFF pension funds in a number of CEE and FSUcountries, following Latin American reform blueprints, amounts to a sui generis in-stitutional transfer from the South to the East, facilitated by the emergence of the newpension orthodoxy (see Müller, 1999).15 While Kazakhstan substituted its PAYGsystem with an IFF scheme, Hungary, Poland and Croatia introduced mixed systems,combining a PAYG with an IFF tier on a mandatory basis. Other transition countriesthat have recently been considering the partial privatisation of their pension schemesinclude Bulgaria, Estonia, Latvia, Macedonia, Romania and Slovenia (Rutkowski,1998).16

The most radical pension reform has been implemented by Kazakhstan in 1998, withinspiration being provided by the Chilean example (Castel and Fox, 1999).17 AllKazakh workers, regardless of their age, are required to contribute 10 per cent oftheir gross wage to one of the newly set up pension funds. Although most of them areprivate, there is one public pension fund providing an asset guarantee – the so-called“State Accumulation Fund”. Interestingly, the latter was the initial choice of over 85per cent of all Kazakh employees (Orenstein, 1999). Although an extra 15.5 per cent

14 “It is the packaging that differs and, in politics, that often is what matters” (Cichon, 1999: 87).15 For early suggestions to replicate Latin American reform precedents in CEE and FSU see

Holzmann (1994), World Bank (1994), Fougerolles (1996); as well as local proposals in individ-ual CEE and FSU countries (e.g. Topiñski and Wiœniewski, 1991).

16 The Russian plan to introduce partial pension privatisation was dropped after the rouble crisis(see Dmitriev, 1999; Nußberger, 1999).

17 An even more radical reform seems to be under way in Turkmenistan, where mandatory pensioninsurance is to be abolished altogether, hence following Friedmanite policy recommendations(see Friedman, 1972).


of gross wage is being collected to finance the existing pension obligations, theproblem of pension arrears has not been solved with the radical reform move and isstill harming current retirees.

The partial privatisation of old-age security in Hungary (1998), Poland (1999) andCroatia (2000) followed the Argentine precedent.18 In all three countries, the newpension system is of a mixed type, combining a mandatory public PAYG tier with apartially mandatory IFF system. The new two-tier scheme offers a purely public aswell as a mixed pension option on a mandatory basis. The first, PAYG tier, to befinanced by employers’ and part of employees’ contributions, is mandatory for allinsured, at least as first tier. The public retirement scheme will cover acquired pen-sion claims by paying some sort of compensatory pension, to be topped up by post-reform pension claims if the insured decides to stick to the purely public pensionoption.

The second, IFF tier consists of a newly created system of private IFF pension funds,being financed by 9 per cent of the insured’s gross wage in Poland (6 per cent inHungary; 5 per cent in Croatia). While Poles over 50 and pensioners are required toremain in the old system, people under 30 are obliged to join the new two-tierscheme. Those between 30 and 50 years of age are free to do the same – alterna-tively, they may stay in the old scheme with the whole of their contribution (̄ ukow-ski, 1999). In Croatia, workers under age 40 are mandatorily affiliated to the newtwo-pillar scheme, while Croats between ages 40 and 49 will have the option to joinit (World Bank, 1999).19 In Hungary, only new entrants to the labour market areobliged to join the new scheme. All other Hungarians who are not yet retired are freeto choose (Ferge, 1999; Simonovits, 1999a, 1999b).

The advocates of pension privatisation claim that the switch to a private, fundedscheme increases long-term saving and investment, resulting in a greatly improvedmacroeconomic growth performance. Due to its strict actuarial relationship betweencontributions and benefits it is thought to remove unfavourable incentives affectinglabour supply and savings behaviour. Moreover, pension privatisation allows for arestriction of the role of government in old-age security, hence reducing publicspending in the long term (see, e.g., World Bank 1994a). It is also considered attrac-tive due to considerable rate of return differentials between private and public pen-sion schemes (Disney, 1999b).20

18 The mixed “Argentine model” has been regarded as the democratic version of the radical Chil-

ean pension reform, reflecting two years of political bargaining in the Argentine parliament whenit came into force in 1994. For a comprehensive comparison between the Chilean and Argentinereforms see Arenas de Mesa and Bertranou (1997), and Hujo (1999).

19 See Andrijaševiæ, Kovaèeviæ and Saboloviæ (1997) for a critical view on the Croation pensionreform plans.

20 For a critique of this type of calculations see Mitchell and Zeldes (1996), and Cichon (1999).


When replicated in CEE and the FSU, neither full nor partial pension privatisationcan be expected to avoid all pitfalls of the Latin American precedents. Considerableinvestment risks for future retirees may result from the fact that in transition coun-tries, capital markets are still shaky or even absent, and that an adequate legal andsupervisory framework is often lacking (see Impavido, 1997; Castello Branco,1998).21 Moreover, the fiscal burden caused by the recognition of existing pensionclaims is substantial, since almost 100 per cent of the economically active popula-tion was insured under the socialist retirement schemes.22

Even though the mixed pension reform entails the chance to diversify the drawbacksof both public PAYG schemes and private pension funds, its specific design andlocal characteristics determine whether this potential can indeed be exploited, orwhether it results in a combination of the negative features of both paradigmatic al-ternatives. Furthermore, partial pension privatisation engenders important secondaryeffects. As contributions are increasingly being drained away from the public system,the mixed model has a built-in mechanism towards shrinking the PAYG tier, makingit ever less viable, fiscally as well as politically: “The ‘unsustainability’ thus mayprove a self-fulfilling prophecy” (Augusztinovics, 1999: 29).

5 Political actors in the pension reform arena

Pension systems have traditionally been considered particularly difficult to reform,as they build up long-term expectations and legal entitlements that are hard to re-verse. Moreover, pensioners constitute a substantial part of the electorate, andamount to the largest single-issue constituency in many countries. The elderly arealso viewed sympathetically by other voters, who may perceive themselves as beingindirectly hurt by cutbacks (Pierson and Weaver, 1993). Hence, it has long beenthought that “any pronounced challenge to the basic structure of the [pension] systemis equivalent to political suicide” (Buchanan, 1983: 340). Contrary to this conven-tional wisdom in social policy research, however, the previous section has shownthat far-reaching pension reform has been possible in CEE and FSU. To shed light onthis puzzle, it is thought useful to identify those political actors who generate theagenda and shape the reform design in old-age security. Their leeway depends onlocal contextual constraints, notably the strength and action resources of reform op-ponents. The concrete interaction between the political forces enabling and impedingpension reform is shaped by the local policy context.

21 Contrary to this, Cangiano, Cottarelli and Cubeddu (1998: 33) suggest that in the FSU, public

PAYG systems have been rocked so hard that the relative risks from shifting to an IFF scheme arelimited. Disney (1999b: 31) suggests that funding simply replaces potential political risk withpotential investment risk.

22 See Holzmann (1998) for possibilities to finance the transition to funding through debt and taxfinancing.


The World Bank, with its prominent stance in international old-age security reform23,amounts to a powerful external actor in transition countries (Nelson, 1998; Oren-stein, 1999). Although in the CEE and FSU pension reform arena, the World Bankexerted its influence first and foremost as an agenda shifter in the local debate, italso used the “classical” channel – conditionalities. Yet, the Bank’s leverage is onlypartially determined by its stakes as an important creditor in many transition coun-tries. More importantly, the Bank’s impact depends on the general level of externalindebtedness. Together with the IMF, it is regarded as a “signalling institution” bythe international financial community, making it politically costly for local govern-ments to disregard its policy recommendations.

Apart from operating as a “knowledge broker” (Koch-Weser, 1997), the Bankhanded out sizeable Structural Adjustment Loans to support its policy agenda,thereby enabling radical reform, notably the introduction of IFF schemes and NDCplans (World Bank, 1999). While pension privatisation is, clearly, the Bank’s fa-vourite policy advice, in some instances it has been advocating a gradualistic strat-egy, “beginning with ... notional individual accounts and, as obligations to currentpensioners lessened, moving to real funding” (Cook, 1999: 25–26; similarly Fox,1997: 382; Palacios, Rutkowski and Yu, 1999: 28).

Yet, in order to be influential, the Bank’s templates require local actors ready toadopt them. The cases of Poland and Hungary have shown that the most likely matchfor the Bank’s ideas is the Ministry of Finance, largely manned with neoliberaleconomists. At first glance, it might seem surprising that the Finance portfolio is con-sidered a potentially important actor in pension reform – a genuine social policyarea. Yet, it has been pointed out elsewhere that fiscal crises turn the Ministry ofFinance into a potential actor in the pension reform arena (see Alber, 1996). Morespecifically, provided that pension finances display a deficit, the resulting depend-ence on budgetary subsidies may grant the Finance Ministry an important stake inreforming old-age security. Somewhat counter-intuitively – given the traditionalBismarckian-Beveridgean leanings of this portfolio – the Ministry of Social Policyalso joined the ranks of radical pension reformers in some transition countries (e.g.Estonia, Romania). Yet in most other transition countries the Welfare Ministrytended to oppose systemic pension reform, suggesting parametric changes to the ex-isting retirement schemes instead (Müller, 1998).

In CEE and FSU, other potential opponents to pension reform include trade unionsand pensioners’ associations. Since many of their members are pensioners, tradesunions in post-communist countries have been dubbed “pensioners’ parties”. Hence,

23 See the assessment of the Bank’s leading pension expert: “The World Bank ... has taken a lead-

ing role in providing advice and technical assistance to a growing number of our client countrieswho are interested in pension reform. ... Over the last five years, the World Bank has establisheditself as a leader in pension reform in a world that is rapidly aging” (Holzmann, 1999: 1-2).


unions must seek to reconcile the interests of contributors as well as beneficiaries tothe scheme, giving rise to shifting and sometimes inconsistent positions on pensionreform. In Moldova and, initially, the Czech Republic, trades unions opposed anychange to the status quo in old-age security. In Slovenia and Romania trades unionshave so far prevented partial pension privatisation from being enacted. Contrary tothis, the Polish and Hungarian unions eventually gave up resistance against radicalpension reform, thereby highlighting the fact that partial pension privatisation entailsthe possibility of handing out attractive stakes to potential opponents: trade unionsturned from staunch reform opponents to entrepreneurs in the mandatory pension fundbusiness (see Cashu, 1999a, 1999b; Müller, 1999; Orenstein, 1999).

The Kazakh case shows that pensioners’ organisations amount to another group ofpotential reform opponents. In a context of massive pension arrears, the elderly werealready highly mobilised when the Kazakh government decided to resort to a shift tofunding. While systemic pension reforms usually do not touch those insured aboveage 50, participation in the new Kazakh pension scheme was made compulsory forthe entire labour force. This created additional unrest among elderly workers. Evenif the pensioners’ street protests and hunger strikes could not stop radical pensionreform under an authoritarian regime, public confidence in the new IFF scheme hasbeen low (see Orenstein, 1999). In Russia and Moldova, the local Associations ofWar and Labour Veterans also act as vociferous opponents against pension reform(Cook, 1999; Cashu, 1999a). Contrary to this, in most CEE countries pensioners’associations are not nearly as influential as trade unions. In a number of post-communist countries (e.g. the Czech Republic, Poland, Russia), specialised pension-ers’ parties have been set up, but they repeatedly failed to gather sufficient votes toenter parliament.

In all, somewhat unsurprisingly, the influence of potential opponents of pension re-form proved to be considerably smaller in the context of political and economictransformation than in a politics-as-usual setting with its entrenched vested interests.Consequently, policymakers had substantial room for manœuvre in the area of socialpolicy, enabling largely autonomous policymaking in a number of CEE and FSUcountries (see Götting, 1998: 280–281; Mouton, 1998: 25).

6 Concluding remarks

When designing blueprints for old-age security in transition countries, the post-1989pension reformers did not start from scratch. Rather, a more difficult task had to betackled – the rebuilding of the already existing institutional framework, exhibitinglargely similar traits at the onset of the transformation process. Yet, by the time pen-sion reform started to gather momentum in CEE and the FSU, local policymakersembarked on divergent reform courses – parametric reform, NDC schemes and pen-sion privatisation. While from an analytical perspective, it is useful to distinguish


between the respective paradigm choices, the reform options are by no means mutu-ally exclusive. Pension privatisations have often been accompanied or preceded bythorough parametric reforms. In Poland, the NDC plan was combined with the intro-duction of an IFF scheme, and there are similar reform plans in Estonia and Latvia.In spite of all differences, these three reform types share a common feature: a delib-erate move from the universalist-redistributive heritage to strongly differentiated,earnings-related benefit levels. Both within and among transition countries, the dif-ferences in level and scope of old-age protection are widening, as a look at re-placement rates and coverage ratios shows (see table above).

The number of CEE and FSU countries that have introduced far-reaching systemicand parametric reforms is significant, when compared with the difficulties facingmore modest pension reform attempts in Western industrialised countries. However,the Polish, Kazakh, Latvian and Moldovan cases exemplify that the radical reformsrecently enacted in post-communist countries still suffer from significant implemen-tation problems, that may render them unsuitable as role models in the region (cf.Konopielko, 1999; Orenstein, 1999; Fox and Palmer, 1999; Cashu, 1999a).

More significantly, a closer look reveals that by embarking on radical reform, CEEand FSU countries did not necessarily tackle the most pressing issues facing pre-reform pension schemes. In Kazakhstan and Moldova, systemic reforms did not con-tribute to solving the dire problem of pension arrears (Castel and Fox, 1999). In Po-land and Moldova the new NDC system coexists with pension privileges for certainprofessions (Chlon, Góra and Rutkowski, 1999; Cashu, 1999a). When the mixedpension reform was enacted in Hungary, some urgent changes in the public PAYGsystem – notably the reform of the inadequate benefit formula – were postponed forover a decade, a fact that exemplifies the reformers’ low priority for restoring thepublic tier’s financial viability. Due to sizeable implicit pension obligations turnedexplicit, full or partial pension privatisation will, in the short and medium run, ratherexacerbate than lessen the pension-related burden on the state budget (Müller, 1999).

Yet, in many transition countries, parametric reform has not been sweeping enougheither. More often than not, policymakers faced insurmountable resistance againstproposed changes, notably by trade unions and pensioners’ associations. Sometimes,this opposition implied shelving the reform projects for several years to come. Inother post-communist countries, pension reform is still in the making, and the para-digmatic outcome is hard to predict, inevitably rendering the present analysis provi-sional. Even though economic transformation amounts to a large-scale move from thestate to the market, policymakers in CEE and FSU seem to have found a variety ofanswers to the challenge of pension reform, not necessarily implying pension priva-tisation.


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