Institutional Mismatch,Party Reputation,and Industry Interests: Understanding the Politics of Private-Heavy Pension Systems

Abstract

Private-heavy welfare systems, in which low or moderate state benefits are topped up by private welfare arrangements, are expected to undermine political support for the extension of social rights and perpetuate benefit fragmentation over time. And where low state benefits are means tested, political support is expected to be particularly prone to erosion. In this article I develop the argument that the combination of private pensions and means-testing does not always perpetuate fragmentation. Rather, it structures the policy preferences of pension industry representatives and right-of-centre parties such that these actors push for reforms to make the state pension more universal. I make my argument by examining the reform history of nine private-heavy pension systems in the three decades since 1980. A fuzzy-set qualitative comparative analysis maps the conditions under which universalizing reforms have occurred, and two case studies link institutional conditions to reform outcomes via the policy preferences of key political actors.

Keywords

means-testing reputation pension reform dualization private pensions

Introduction

In the comparative study of welfare states, both private pensions and means-tested welfare arrangements – where benefits are ‘targeted’ on the basis of need – are considered to be dualizing, fragmenting the benefit system and leading to different rights, entitlements and services being provided to different categories of recipients. Moreover, there is a formidable consensus, from Moene and Wallerstein (2001) to Korpi and Palme (1998), Rothstein (1998) and Myles and Pierson (2001), that such benefit arrangements undermine political support for the extension of state-provided social rights and perpetuate fragmentation over time.

Where private insurance is prevalent, fewer people rely on state benefits, making them more prone to retrenchment (Pierson, 1996). For Korpi and Palme, it is class not the number of welfare beneficiaries that matters, but the argument is much the same. Residual state benefits that leave room for the market are more vulnerable to erosion than benefits that are encompassing or universal, because the interests of the middle-classes are decoupled from those of the working class (Korpi and Palme, 1998). And where benefits are means tested or ‘targeted’ on the needy, it is particularly obvious that the beneficiaries of the welfare state and those who finance it are rarely the same individuals – benefits become susceptible to retrenchment on the grounds of ‘fairness’ (Rothstein, 1998: 158).

For no policy area are these logics likely to apply so strongly as for the policy area of pensions – a classic example of path-dependent change (Myles and Pierson, 2001). Both ‘basic social security’ pensions that provide a low level of entitlements based on contributions, and ‘targeted’ pensions where eligibility to a low level of benefits is means tested, leave the middle-classes reliant on private pensions. As a result, they are expected to undermine the cross-class coalitions necessary for their preservation, and become less generous over time (Korpi and Palme, 1998).

In short, public pensions that focus on poverty relief are expected to become increasingly residual. This is the ‘paradox of redistribution’ (Korpi and Palme, 1998), the politics behind which describe the divided interests not only of the working age population but also of the population of retirees who are already in receipt of some combination of private and public retirement income. In private-heavy pension systems where the ‘grey’ voice is likely to be divided, even demographic change increasing the electoral clout of the elderly should do little to prevent the state pension from becoming more residual.¹

In this article, I develop the argument that rather than eroding political support for state-provided pensions and perpetuating fragmentation over time, the combination of means-testing and private pensions generates political pressure for more universal benefit arrangements.² Specifically, by more universal benefit arrangements, I mean any policies which loosen targeting, include new categories of people under social insurance, loosen eligibility requirements to the state pension or alter the benefit calculation formula such that people previously receiving means-tested benefits now receive benefits as a contributory right. In the post-industrial context of ‘permanent austerity’ (Myles and Pierson, 2001), I argue that left-of-centre parties find themselves constrained by their reputations for unsustainable welfare expenditure such that universalizing reforms are more likely to be driven by non-left governments. I develop my argument in three stages.

First, I present a ‘least likely’ case. Australia’s ‘targeted’ pension system has a ratio of private to public pension expenditure that lies high above the Organisation for Economic Co-operation and Development (OECD) average (OECD, 2013a, 2013b). According to current understandings of how welfare institutions structure pension politics, we should fully expect to see an erosion of the Australian state pension and the perpetuation of benefit fragmentation – Australia is a ‘least likely’ case for universalizing reform. Yet in the early 2000s, the Australian state pension was reformed to become more generous and more universal. I show how the combination of targeting and private pensions structured the preferences of Australian pension industry representatives such that they began to advocate a more universal state pension, and how their demands led to universalizing reforms under a right-of-centre Coalition government.

Next, I test the generalizability of my argument. I show that over the past three decades, state pensions have not become more residual in countries with prevalent private pensions. Rather, among the set of ‘private-heavy’ pension systems (the nine countries where the ratio of private to public expenditure is higher than the OECD average), there has been a surprising trend towards more universal state pensions – at the very time when means-testing and the dualization of social entitlements have generally been increasing (Emmenegger et al., 2012: 8; Palier, 2010). With the exception of Ireland, the qualitative comparative analysis (QCA) presented in this section of the article shows that every reform that made the state pension more universal in private-heavy pension systems since 1980 had at its root a mismatch between private pensions and means-testing.

The QCA makes it possible to identify political and institutional conditions under which this mismatch brings about more universal pensions. It shows that the combination of means-testing and private pensions has led to reform under right-of-centre governments, where there is a low rate of national saving, and where the earnings-related state pension is small. While the importance of a right-of-centre government and a low rate of national savings will already be apparent from the Australian case, Australia provides insufficient temporal variation to examine the role of the earnings-related state pension. In addition, the UK emerges from the QCA as a seemingly deviant case of reform under left-of-centre government. I therefore complete my argument with a final case study, zooming in on the UK where the earnings-related state pension has been dramatically eroded over time. I show how despite appearances, it was the political right that drove the UK reforms. I begin by setting out the rationale for why the combination of means-testing and private pensions can lead to more universal state pensions.

Why Means-Testing and Private Pensions Can Lead Non-Left Governments to Push for More Universal State Pensions

I take as my starting point the idea that there is an institutional mismatch between means-testing and private pensions that leads to pressure for more universal pensions. This is because means tested benefits base eligibility on need, defined either to include only the poor or to exclude only the rich and proxied by individual or household assets, income or both. Where private pension income is not excluded from the calculation of means-tested benefits, means-testing can disincentivise private retirement saving, as people anticipate that such saving reduces their state pension entitlements (See Chomik et al., 2015). Green-Pedersen (2003) draws attention to this in his analysis of recent Danish pension reforms, where moves in the universal direction were mostly driven by right-of-centre parties focusing on making work and savings pay. He argues that right-of-centre parties pushed for more universal benefits because they were more ‘market conforming’ than means-tested benefits.

Rather than expecting universalizing reform to result from an ideological commitment of right-of-centre governments to encouraging the market, the argument developed in this article emphasizes the electoral popularity of reforms that reduce disincentives to save by making the state pension more universal. Where state pension entitlements are means tested, some of those who have saved privately for retirement may find their state pension reduced and may benefit from universalizing reforms such as lowering the rate at which public pensions are withdrawn with growing private pension income or lowering contribution requirements to the state pension. This logic, which stems from the mismatch between means-testing and private pensions, is hereafter referred to as the ‘private savings’ logic of reform.

Notwithstanding the uneven coverage of voluntary private pensions in favour of those on high incomes, I expect that in private-heavy systems, private pension income is sufficiently prevalent that those affected by means-testing will cut across the political spectrum, and both right and left-of-centre parties will count among their constituents a significant number of individuals who stand to gain from universalizing reforms. However, in a post-industrial setting, expansionary reforms are difficult, and scholarly emphasis has focused on explaining retrenchment and recalibration (Huber and Stephens, 2001; Myles and Pierson, 2001). While some insist that right-of-centre parties shrink state entitlements and left-of-centre parties defend or expand them (Hicks, 1999; Korpi and Palme, 2003; Scruggs and Allan, 2004), others claim that party roles have been reversed, with left-of-centre parties now more capable of retrenchment than right-of-centre parties (Cukierman and Tommasi, 1998; Green-Pedersen, 2001; Ross, 2000). These authors point to the effect of a ‘Nixon goes to China’ logic. In a nutshell, since left-of-centre parties are associated with defending the welfare state, they may have more leeway in retrenching or restructuring it.

Drawing on this idea, I expect that universalizing reform may be less feasible for left-of-centre parties than it is for right-of-centre parties. Just as left-of-centre parties continue to ‘own’ the welfare state issue (Jensen, 2015), right-of-centre parties may be said to ‘own’ the fiscal rectitude issue. A right-of-centre party could gain from initiating popular expansionary reforms and has little to lose, as left-of-centre parties are unlikely to gain votes by attacking welfare state expansion. It is therefore right-of-centre parties that can be expected to initiate universalizing state pension reforms.

In sum, the starting point for my argument is that the combination of means-testing and private pensions generates pressure to make the state pension more universal. This is because those who save privately for retirement and find their eligibility for state benefits reduced under the means-tested status quo could benefit from universalizing reform. In the post-industrial context, I expect that universalizing reform is more likely to be introduced by right-of-centre governments with a reputation for fiscal rectitude. In the next section, I show how the ‘private savings’ reform logic has been at work in the case of Australia, a targeted, private-heavy pension system that has become more generous and more universal since the mid-1990s.

Australia: A Least Likely Case of Universalizing Reform

The Hawke Labour government came to power in the midst of recession in 1982 determined to gain the support of business and prove its fiscal reliability. It departed from the policies of the previous Australian Labour Party (ALP) government with a major restructuring of the welfare state marked by increased means-testing (Castles and Mitchell, 1993; Scruggs, 2004). Pensions were among the first benefits reformed. To the approval of Australian business, the flat-rate general taxation financed Age Pension – loosely targeted and covering over 80% of the population – became more tightly means tested (Power, 1988).

In addition to tighter means-testing, compulsory occupational pensions introduced in 1992 in the form of the ‘Superannuation Guarantee’ would further reduce eligibility to the Age Pension over time as more people built up private savings and became ineligible for state benefits. Public pension spending was expected to decline, and national savings – a media obsession since the late 1980s (Commonwealth Treasury of Australia, 2001) – to improve through a combination of public and private saving (Power, 1988; The Australian Financial Review, 1989).

The Coalition of the Australian Liberal and National Parties that came to power in 1996 was committed to deficit reduction, and initially pursued a retirement policy similar to that of the ALP. Further tightening of the Age Pension means tests was immediately announced, justified by the need to increase national savings (Goot and Watson, 2007; McAllister, 1996).

This was unpopular with the superannuation industry, which had grown significantly as a result of ALP policies and now expressed concern that tighter means-testing was disincentivising private saving (Kavanagh, 1996). For the Institute of Actuaries, what was needed was a fully universal Age Pension (Smith, 1998). The rest of the superannuation industry simply demanded looser means tests (Liberal et al., 1996: 3).³

The peak lobby group Association of Superannuation Funds of Australia (ASFA) argued that private rather than public saving was the best way to improve the current account deficit (Smith, 1998). It issued high-profile statements to this effect, reframing the debate about national saving so successfully that the issue of increasing private savings soon became ‘the nation’s prime economic soap opera’ (Megalogenis, 1999). The Coalition government began to realize that this argument could be used to justify a shift from budgetary restraint to expansionary loosening of the means tests. This would imply popular benefit increases for many whose private savings would otherwise have reduced their entitlement to a state pension (Smith, 1998).

Thus, despite strained relations between the Coalition and ASFA (which was tightly linked to the ALP and headed by former Labour minister Susan Ryan; Costello, 2000), the prospect of electoral gain led the government to push aside calls from the Business Council of Australia for tighter targeting of the Age Pension (Business Council of Australia, 2001: 11). In the run up to the 1998 election the government announced an increase to the income test ‘free’ areas and a loosening of the Age Pension taper rate. These changes were justified on the grounds that they would ‘improve incentives to save for retirement’ (Costello, 1998).

The ALP denounced the reforms as an attempt to buy votes, but – crucially – did not dare to suggest that a Labour government would reverse them (Kelly, 2001; Steketee, 2001). Meanwhile, superannuation industry representatives continued the campaign to improve low private savings (Frith, 2001; Richardson, 2001).

In 2006, the Coalition announced its ‘Santa Claus Budget’ (Costello, 2006), the most expensive part of which was a more generous assets test for the Age Pension. The taper rate was halved, and the assets test threshold almost doubled (Tanner, 2006). Once again, the justification for loosening targeting was that it constituted a ‘large disincentive to save’ (Negline, 2007; Parliament of Australia, 2006), and on this basis, the reforms received cross-party support (Parliament of Australia, 2006; Ryan, 2006). The Treasury announced that the Age Pension should be considered integral rather than peripheral to retirement incomes (House of Representatives, 2006). The Coalition government had not just made the Age Pension significantly more encompassing, it had also moved away from the ALP’s vision of increasingly residual state pension provision.

The Australian case shows how a left-of-centre government, eager to prove its fiscal rectitude to business, tightened pension eligibility conditions and extended private saving with the explicit intention of making the state pension increasingly residual over time. By contrast, the Coalition had the reputational leeway to partially offset the ongoing residualisation of the Age Pension resulting automatically from the maturing of mandatory superannuation (Kudrna and Woodland, 2013): by introducing a succession of popular expansionary reforms easing the mismatch between targeting and private pensions that was affecting increasing numbers of people.

Even for the Coalition, however, the decision to loosen the means test was not an obvious one. When it came to power, the Coalition initially continued to emphasize deficit reduction and tighter targeting. It was only after superannuation industry representatives started to publicly emphasize low private savings that means tests were loosened. Although these reforms were popular, the Coalition had played a large part in the construction of the fiscal imperative during its time in opposition and felt the need to justify expansionary pension policies by highlighting how they would reduce disincentives to save and improve national savings.

Low national savings facilitated but did not drive the reforms. When low national savings were first identified as a primary policy concern in the 1980s, the ALP responded by targeting social spending more tightly to increase state saving. Similarly, in its first term in government, the Coalition framed the problem of low national savings as business representatives and the ALP had done, as one of fiscal profligacy to be tackled primarily by increasing state saving. But by its second term, the Coalition had taken the superannuation industry’s lead and reframed the problem of low national savings to emphasize deficient private saving. The narrative shows that the ‘private savings’ logic of reform is not a functional response to low savings. It is eminently political, driven by the potential electoral popularity of universalizing reforms.

The next section maps the changes that have occurred in other private-heavy pension systems since 1980, and finds a trend towards more universal state pensions. To test the generalizability of the ‘private savings’ logic as an explanation for these reforms, I conduct a fuzzy-set qualitative comparative analysis (fsQCA). This formalized process of comparison involves breaking cases up into variables – a number of conditions and an outcome – which can be systematically compared to find the conditions that are present or absent when an outcome of interest is observed. It works well with small-to-medium n research designs where in-depth case knowledge is possible, and is capable of capturing conjunctural causation, where causally relevant conditions do not display their effects on their own but only together with other conditions. This is crucial for the argument of this article, where means-testing and private pensions lead to universalizing reform only when combined, and under favourable political circumstances.

Testing and Refining the Argument – A fsQCA of Private-Heavy Pension Systems

I define private-heavy pension systems as those where the ratio of private to public expenditure is higher than the OECD average (OECD, 2013a, 2013b), and focus on the 18 mature welfare states included in The Three Worlds of Welfare Capitalism (Esping-Andersen, 1990) and commonly used in comparative research thereafter.⁴ This yields a set of nine private-heavy pension systems: Australia, Canada, Denmark, Ireland, the Netherlands, New Zealand, Switzerland, the United States and the United Kingdom.⁵

The Trend towards More Universal State Pensions in Private-Heavy Systems

Overall, between 1980 and 2008, there has been an increase in the number of universalizing reforms to the state pension in private-heavy pension systems, and a simultaneous decrease in ‘de-universalizing’ reforms that increase the role of targeting. Table 1 presents the number of universalizing and de-universalizing reforms that occurred per decade.

Table 1.

Total Number of Universalizing and De-universalizing Reforms.

Decade	Number of universalizing reforms	Number of de-universalizing reforms
1980s	2	7
1990s	4	6
2000s	6	2

Source: author’s own database of reform, see online appendix.

This trend towards more universal state pensions has been driven by Australia, the UK, New Zealand and Ireland.⁶ In Ireland, reforms over the last three decades have pushed the pension system in a consistently more universal direction. They have dramatically increased the number of people qualifying for pensions based on their social insurance record rather than through means-testing, by extending the coverage of the contributory state pension to the self-employed (1988) and to part-time workers (1991), introducing a system of disregards for carers (1994) and loosening the means test (2007).

In Australia, New Zealand and the UK, reforms shifted away from universalism in the 1980s but have been replaced in recent years with universalizing reforms. As discussed in the case study, reforms in the 1980s made the Australian Age Pension less universal by tightening the means tests (1983, 1985), but the trend since has been reversed with the introduction in the 2000s of two universalizing reforms that together extended coverage significantly by loosening the means test. In New Zealand, the affluence test that was introduced in 1986 and increased further in 1990 was repealed in 1997, leaving a universal flat-rate state pension conditional only on residence. The UK moved towards targeting initially, by moving from earnings to price indexation of the state pension in 1980. But in the last decade, the UK passed three reforms that made the state pension more universal, introducing credits for carers and disabled people with broken work records to enable them to build up entitlements to the state pension (2000), loosening the means test on the Minimum Income Guarantee (2002), and re-introducing earnings uprating as well as lowering the required contributions for a full basic State Pension (BSP) from 45 to 30 years (2007).

In Switzerland and Denmark, no clear trend emerges. In Denmark, reforms loosening the income test for the pension supplement (1987) and introducing contribution credits for benefits recipients (1996) alternated with reforms that shifted towards targeting (1993, 2003), while in Switzerland, reforms tightening the means test (1983) and shifting individuals towards targeting (2003) have been punctuated by the introduction of contribution credits (1995). In the meantime, the US, Canada and the Netherlands did not introduce any relevant reforms.

Thus, although private-heavy pension systems overall have seen an increase in reforms that make the state pension more universal, there is cross-national variation around this trend, which has been driven by four countries – the UK, New Zealand, Australia and Ireland. The fsQCA harnesses this variation to identify the conditions under which moves towards more universal state pensions have occurred.

Setting up the fsQCA

The fsQCA covers reforms in the nine private-heavy pension systems between 1980 and 2009. The data are split into three decades 1980–1989, 1990–1999 and 2000–2009, and the analysis is not run with 9 country cases, but 27 country-decade cases. This offers analytical leverage by introducing variation in causal conditions over time.

The choice of country-decades as cases strikes a balance between the idea that change in relevant causal conditions leads to reform and the idea that reform is not an instant reaction to such change. In addition, the fsQCA was conducted using country-five-years. The results, which are included in the online appendix, are consistent with the analysis of country-decades and lend further support to this choice of analytical unit.

The outcome of interest is the presence of universalizing reform. For each country-decade, membership is calibrated in the fuzzy-set ‘reform’ according to how much any needs-based or contributory arrangements restrict coverage.

Three of the five causal conditions included in the model follow directly from my theoretical argument and case study. The first of these conditions is the prevalence of targeting within the pension system (hi_targ), which, in combination with prevalent private pensions, should result in key political actors having an interest in universalizing reform.

Since all the countries in my analysis are private-heavy, I do not include a separate condition to capture the ‘private savings’ logic of reform. However, to capture the expectation that in the post-industrial context it may be difficult for left-of-centre governments to respond to this logic, the second condition included in the analysis is the presence of a right-of-centre government (non_left), as proxied by its cabinet seat share. Notwithstanding the fact that the ideological profiles of political parties have changed significantly over recent decades (Döring and Schwander, 2015), a constant measure of partisanship serves to capture the ongoing reputational effects of issue ownership that are emphasized in this article.

A low rate of national savings (lo_natsav) is included as a condition since the Australian case shows how low rates of national saving can be used by governments to legitimize a shift in focus, from fiscal restraint to the encouragement of private savings.

Two further conditions are included in the model on the basis of the case knowledge gained during the iterative QCA research process (Ragin, 2000; Schneider and Wagemann, 2012: 81). The first of these conditions is the absence of a significant earnings-related state pension (lo_erel), which turns out to be a crucial part of the private savings logic of reform. As the UK case study will show, a low earnings-related state pension mobilizes pension industry representatives to put disincentives to private saving on the political agenda.

The second is the presence of social insurance finance rather than general taxation finance (broad_fin). This condition is included to capture the exceptional nature of the Irish reforms. In the 1980s and early 1990s, Ireland was unique among private-heavy systems in excluding large social groups from the contributory pension. By the early 1990s, the restricted coverage of the contributory pension had created a reliance on means-testing that in turn generated an interest in universalizing reforms among those who paid for both their own pension through social insurance contributions as well as the means-tested benefits of others through general taxation. This interest was manifested politically in the union-driven extension of contributory pension coverage first to the self-employed and certain public sector workers in 1988, and then to part-time workers in 1991 (Schulze and Moran, 2006a). Thus, rather than reflecting a private savings reform logic stemming from a mismatch between means-testing and private pensions, early Irish reforms reflect a ‘cost-sharing’ logic stemming from a mismatch between means-testing and a restricted contributory system.

The measurement and calibration of both outcome and causal conditions are presented in detail in the online appendix. Fuzzy-set conditions contain more information than crisp-set conditions and are used wherever possible. The resulting analysis is therefore fuzzy-set, and conducted using the specialist software fsQCA2.5. Since an analysis of necessary conditions found no causally relevant necessary conditions for universalizing reform, the discussion focuses on sufficient conditions.

Conditions Associated with Universalizing Reform in Private-Heavy Systems

The results of the analysis of sufficient conditions are summarized in Table 2.⁷ The Boolean algebraic solution term at the top of the table reveals three combinations of conditions that are sufficient to bring about more universal pensions in private-heavy systems. Together, these three combinations of conditions cover every significant universalizing reform in market-heavy pension systems in the past three decades, and they each do so with a solid degree of consistency, meaning that there is little empirical evidence to contradict the statement of sufficiency set out in the solution formula. The statement of sufficiency is not logically contradicted by any cases.

Table 2.

Analysis of Sufficient Conditions for the Outcome ‘significant universalizing reform’, Intermediate Solution.

Solution	hi_targ* lo_erel* lo_natsav* non_left	hi_targ* lo_erel* ~broad_fin* non_left	hi_targ* lo_erel* lo_natsav* ~broad_fin
Single country coverage	DEN80, NZ90, AUS00	IRE80, IRE90, IRE00	UK00
Consistency	0.768802	0.702703	0.748092
Raw coverage	0.413793	0.350825	0.146927
Unique coverage	0.367316	0.304348	0.100450
Solution consistency: 0.785612; Solution coverage: 0.818591

Model: reform = f(hi_targ, lo_erel, lo_natsav, broad_fin, non_left). Intermediate solution.

Frequency cut-off: 1.000000. Consistency cut-off: 0.755396.

Cases in bold are uniquely covered by the relevant solution term.

Assumptions: non_left (present); lo_natsav (present); lo_erel (present); hi_targ (present).

The first combination of sufficient conditions consists of a non-left government, a low rate of national saving, the absence of a significant earnings-related pension, a reliance on targeting and general taxation financing. This combination of conditions uniquely covers the Danish reform of 1987 that loosened the income test for the pension supplement, the abolition of the affluence test in New Zealand in 1997 and the Australian reforms of 2000 and 2007 that loosened the means tests for the Age pension. No cases logically contradict the statement of sufficiency, and the consistency score is adequate at 0.77.

I interpret this combination of conditions to be a manifestation of the ‘private savings’ logic of reform, in which a mismatch between the prevalence of means targeting and the prevalence of private savings means that large parts of the electorate are likely to have an interest in universalizing reform. In line with the expectation that in a time of austerity it will be difficult for left-of-centre governments to respond to this logic, the reforms in Denmark, New Zealand and Australia all occurred under non-left governments. Low rates of national saving were also present in all these reforms, supporting the idea that low national savings allow right-of-centre governments to legitimize a shift in focus, from fiscal restraint to the encouragement of private savings. The reforms also all occurred in the absence of a significant earnings-related pension. The UK case that follows offers an explanation as to why this may be the case.

The second combination of conditions consists of a non-left government, the absence of a significant earnings-related pension, a reliance on targeting and contribution rather than general taxation finance. It uniquely covers the Irish reforms that occurred in the 1980s, the 1990s and the 2000s. Again, no cases logically contradict the statement of sufficiency, and the consistency score is passable at 0.7. This ‘Irish path’ to universalizing reform reflects the exceptionalism of Irish pension politics since the 1980s.

The third combination of conditions consists of the absence of a significant earnings-related pension, a reliance on targeting, contribution rather than general taxation finance and a low rate of national saving. It uniquely covers the universalizing reforms introduced by the UK in the 2000s, with a consistency score of 0.7. Although the UK thus seemingly emerges from the analysis as an exceptional case of universalizing reform under a non-left government, the next case study shows that the causal logic behind the UK reforms was in fact no different to that which drove the universalizing reforms in Australia, Denmark and New Zealand.

Aside from the Irish state pension reforms therefore, which were largely driven by a mismatch between targeting, on one hand, and a contributory system from which large social groups were excluded, on the other, the analysis in this section suggests that recent trends towards more universal state pensions can be explained by a single logic. This logic has at its root a mismatch between private pensions and targeting, which leads to reform to make the state pension more universal when combined with the absence of a significant earnings-related pension, a low rate of national savings and the presence of a non-left government. Despite the fact that QCA does not assume causal symmetry (Schneider and Wagemann, 2012), this ‘private savings’ logic extends to explain why reform did not occur in most of those cases where it was absent.⁸

The next section examines the UK, which seemingly emerges from the QCA as a ‘deviant’ case of universalizing reform. The case study offers further support for the idea that reputational politics are involved in universalizing reform. It further clarifies the ‘private savings’ logic, and why the absence of an earnings-related pension emerged from the QCA as part of this logic.

United Kingdom: A Deviant Case of Universalizing Reform?

In the 1980s, pension politics in the UK were contested in a rather straightforward way. The Conservative government wanted state responsibility to be confined to poverty relief through means-tested benefits, with earnings replacement provided by private pensions. Unable to abolish the State Earnings-Related Pension Scheme (SERPS) that supplemented the flat-rate contributory BSP, the Conservatives instead extended incentives to ‘opt-out’ of the SERPS into private schemes, as demanded by employers and pension industry representatives (Oude-Nijhuis, 2009; Pemberton, 2010). In addition, the state pension was re-indexed, gradually eroding its value and pushing onto means tested benefits people who otherwise would have received their pension on the basis of contributory right (Schulze and Moran, 2006b: 73).

By contrast, throughout the 1980s, the Labour party was strongly committed to contributory rather than means-tested benefits (Hills, 1998). In its 1983 and 1987 Manifestos, Labour promised to restore wage-indexation and reverse the decline in the value of the BSP, and the party went to the 1992 general election insistent that the top rate of tax and middle-income national insurance contributions should be increased to finance adequate earnings-related state pensions (Hills, 1998).

After four successive electoral defeats, the message drawn by the new Labour leadership was that the party had to lose its tax and spend image (Driver, 2002). The Labour party conference in 1996 was a turning point in this direction. The party abandoned its commitment both to wage-indexation and to restoring the SERPS. By the time New Labour came to power in 1997 promising to stick to spending limits set by the Conservatives, it was no longer social insurance but rather poverty relief that was the party goal (Hills, 1998: 22).

New Labour’s first pension reform, the Welfare Reform and Pensions Act of 1999, introduced a new means-tested pension. The ‘Minimum Income Guarantee’ was to be substantially more generous than its predecessor and hold its position against average earnings while the value of the price-indexed BSP continued to shrink. One year later, the Child Support, Pensions and Social Security Act replaced SERPS with the flat-rate Second State Pension (S2P), moving the state gradually out of earnings replacement and marking the unambiguous end of the Labour party’s commitment to social insurance.

These reforms faced fierce internal opposition from both party traditionalists (Driver, 2002) and from modernizers worried about the disincentive effects of means-testing (Castle and Townsend, 1996). They also faced increasing opposition from pension industry representatives. The pension industry had long been united in its focus on minimizing the crowding-out of private saving by the earnings-related state pension – it did this by lobbying to protect and extend financial incentives to ‘opt-out’ of the SERPS. As the SERPS was eroded however, pension industry representatives shifted their attention to how means-testing was creating disincentives to save. They began to lobby in favour of a more universal state pension, receipt of which would be less affected by private retirement savings.

The National Association of Pension Funds (NAPF) was the first organization to propose reforms in this direction. The proposed reforms were radical. The NAPF wanted the various state pension strands combined to create a universal, non-contributory ‘citizen’s pension’ with eligibility based on a residency test (Hills, 1998: 20).

The Labour government rejected the NAPF’s proposal outright on grounds of cost (Skypala, 2002). The opposition’s response, however, was much more accommodating. The Conservatives promised to back proposals for a single state pension sufficiently generous to take people off means-tested benefits if these proposals commanded support from ‘the occupational pension fund movement and employers’ (Timmins and Eaglesham, 2002).

Support from the pension industry was consolidated in early 2003 when the Association of British Insurers (ABI) joined the NAPF in calling for ‘a simpler, less means tested system’ (Timmins, 2003). Three months later, the Conservatives began to publicly advocate a more generous state pension, less reliant on means-testing, in order to restore private saving. They proposed scrapping the S2P and providing in its place an average earnings-linked BSP, which would be ‘much higher’ than it was at the time, and ‘arguably higher’ than the means-tested pension (Timmins and Newman, 2003; Timmins and Turner, 2003). This new policy stance was a clear move away from Thatcherite attempts to residualize the state pension. Cost concerns from traditionalists within the party were pushed aside (Timmins and Turner, 2003), as were the reservations of the Confederation of British Industry (Timmins and Newman, 2003).

Pension saving was now ‘set to be a main issue in the general election’ (Timmins, 2004a). Faced with the opposition’s pledge to expand the state pension, the Labour party began to rethink its policy stance. In September 2004, the Financial Times reported that after 3 years of denying the disincentive effects of their pension policies, ‘the government is acknowledging that its critics have a point’ (Hall, 2004). At the Labour party conference, the Prime Minister announced that in a third term, Labour would redesign the state system, putting more money into pensions while ensuring that the non-means-tested basic pension was ‘at the core’ of the redesign (Timmins, 2004b).

This policy u-turn was soon supported by the independent Pension Commission, who identified an ‘emerging consensus’ that means-testing had damaged incentives to save (Pensions Commission, 2005a: 26), and recommended reforms to make the state system less means tested and more universal (Pensions Commission, 2005b). The government’s specific proposals to uprate the BSP to average earnings and loosen eligibility conditions for both the BSP and the S2P closely followed the recommendations of the Pension Commission, and received cross-party support when brought before parliament in the form of the 2007 Pension Act.

The UK had taken the biggest step towards universalism in over 30 years. Since the reforms were introduced by Labour, a party reputationally constrained from pursuing expansionary measures, the UK emerges from the fsQCA as a deviant case of reform. However, the preceding narrative shows that it was not Labour but rather the Conservatives that played the crucial role in the introduction of universalizing reforms. It was the dramatic shift in policy stance of the Conservative opposition that forced New Labour to rethink the strategy of targeting that it had adopted less than a decade previously.

As in the Australian case, pension industry representatives shaped the development of the Conservative’s new policy stance. As the earnings-related state pension was eroded and no longer threatened to crowd-out private savings, pension industry representatives turned their attention to the disincentive effects of increased means-testing, and both the ABI and the NAPF pushed decisively for a more universal state pension. Despite employer ambivalence, the Conservatives responded by adopting the language of ‘incentives to save’ to justify their first universalizing policy proposal in living memory and force the Labour party into a policy u-turn.

Conclusion

With the exception of Ireland, where early reforms to make the state pension more universal stemmed from a mismatch between targeting and a contributory system with restricted coverage, the fsQCA presented in this article shows that every reform that made the state pension more universal in private-heavy pension systems since 1980 had at its root a mismatch between a reliance on private pensions and a reliance on targeting.

Contrary to established institutionalist logics, private pensions and targeting do not necessarily shape political preferences such that the state pension becomes more residual over time. Rather, where the prevalence of means-testing and the prevalence of private pensions coexist, this can lead to a less residual state pension with looser eligibility conditions and more people receiving the state pension as a matter of contributory right.

Prevalent means-testing has led representatives of the pension industry in private-heavy systems to develop an interest in universalizing reforms that aim to reduce disincentives to save for retirement. And unlike employers whose ambivalence regarding universalizing reform has been sidelined, the pension industry has been influential in bringing about reform. This pattern of interest group influence can be understood in light of the fact that pension industry representatives have not succeeded in the introduction of universalizing reforms by lobbying. Rather, as the case studies presented in this article illustrate, they have succeeded by using their expertise to reframe these electorally popular expansionary reforms as economically beneficial.

Consequently, it has been in the electoral interest of right-of-centre parties to promote universalizing reforms. Having built up strong reputations for macro-economic management, right-of-centre parties in both the UK and Australia have felt able to propose fiscally costly yet electorally popular universalizing reforms in the name of reducing disincentives to save. They did this against a policy backdrop in which New Labour and the ALP, primarily concerned with proving their fiscal rectitude to the electorate, were targeting state benefits more tightly on the needy and supplementing targeted state provision with the regulatory extension of private pensions.

The analysis in this article thus reveals a systematic relationship between political parties and reforms that make the state pension more universal. Yet contrary to the stylized picture that means-testing is driven by the secular right and universal state pensions by the left, the universalizing expansion of state pensions in the post-industrial context has been driven by non-left parties. Even in the seemingly deviant case of the UK, the Conservatives played a crucial role in the reform process.

The idea that targeting and private provision erode political support for state benefits features prominently among institutionalist understandings of welfare state change. By showing that the combination of targeting and private pensions can generate pressure for reforms that make the state pension more universal, and spelling out the conditions under which this pressure has led to universalizing reform, this article develops a more nuanced understanding of how the increasingly prevalent institutional patterns of targeting and private provision have interacted to shape pension politics.

The analytical focus of this article has been the period between 1980 and 2009, that is, the three decades of pension reforms that took place in private-heavy pension systems in the wake of the Keynesian consensus, and before the financial crisis. In the spirit of case-oriented historical institutionalist research, the argument developed in this article is of modest explanatory scope, contributing primarily to scholarly understandings of the ‘distinctive political dynamic’ that has characterized the development of private-heavy pension systems over three decades of permanent austerity (Myles and Pierson, 2001: 317).

While the QCA approach supports ‘limited historical generalization’ (Ragin, 1987: 31) to similar cases (Berg-Schlosser et al., 2009: 12), it is too early to say whether the argument of this article will continue to have explanatory power in the post-crisis period. On the one hand, post-crisis developments in the pension systems of Australia and the UK point towards the continued relevance of the argument of this article. While the Conservative-led Coalition government has introduced further universalizing reforms in the UK (Disney, 2016), in Australia, national savings have recovered, and the Coalition government has reverted back to tighter targeting of the Age Pension justified on the grounds of fiscal sustainability and fairness (Kudrna, 2016a).

On the other hand, the post-crisis reform context may turn out to differ in significant ways from that which has been the focus of this article. At a time of rapidly changing patterns of party competition (Schumacher and Van Kersbergen, 2014), welfare coalitions (Gingrich and Häusermann, 2015) and reform discourses (Keskinen et al., 2016), it is for future research to determine whether the reputational politics that underpin this article are changing in such a way as to produce new logics of pension reform.

Footnotes

Funding

The author(s) received no financial support for the research, authorship and/or publication of this article.

Supplementary Information

Additional supplementary information may be found with the online version of this article.

Notes

Author Biography

Margarita Gelepithis is a comparative political economist with a particular interest in welfare states. She is Assistant Professor in Public Policy at the Department of Politics and International Relations at the University of Warwick, and a Visiting Fellow of the European Institute of the London School of Economics.

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