Abstract
As documented in this special issue, advanced democracies have sought for over two decades to transfer public liabilities for retirement income into private hands in order to contain welfare state costs and boost financial markets. As a result, European pension systems, in which market principles played a marginal or even negligible role in the past, have been redesigned, with non-public, market-based pensions introduced or reinforced (see Hyde et al., 2003; OECD, 2009). This paper stresses the importance of the international differences in the manner in which hybrid pension systems are institutionalized. Because pension system constituents, characteristics and interconnections are far from homogeneous, the roles played by funded pensions differ. These differences call for very clear and differentiated usage of the extensive category of ‘funded’ pensions and furthermore, they involve specific implications for future pensions of different social groups of citizens. I argue, therefore, that meaningful insights into the impact of funded pensions can only be drawn from an analysis of current hybrid pension systems in total (i.e. from an analysis of how marketized pensions are institutionalized in the overall pension system).
Funded pensions are not a new phenomenon. ‘Private’ pensions, often tax-subsidized, have formed an additional income for many elderly, in particular the better-off and/or the self-employed. What is new, however, is that funded pensions have become part of the ‘pension norm’ – the institutionalized and nationally defined target level for old-age protection – in other words, a component of an ‘adequate pension’ (in the terminology of European policy documents) which, in economic and market-based terms, is sometimes called the ‘target replacement rate’. Most national systems, whether of Bismarckian or Beveridgean design, differentiate between an ‘adequate’ pension level which is publicly institutionalized and tax-supported, and a basic level of poverty-prevention institutionally related to basic needs or social assistance (Frericks, 2011). Other old-age investments to maintain living standards have existed, but apart from the pension norm. What needs to be studied, therefore, is the change in calculation norms in the current systemic transition from public to hybrid systems of ‘adequate’ old-age protection, and how this influences the chances of different groups of citizens to reach this target level of protection.
Differences in the institutionalization of funded pensions significantly determine the level of social protection provided to various social groups and the share of future pensioners with adequate pensions. Major risks of underinsurance – the acquisition of pension rights below the adequate pension level – result from life-course transitions (unstable labour-market biographies and thereby irregular contribution payments) and the kind of investment undertaken in funded pensions. Most relevant life-course transitions are faced by women, in particular, since providing (informal or semi-formal) care for children and elderly people remains highly gendered, and also by migrant workers when changing country. For understanding the impact of the various hybrid pension systems we need to know how funded pensions are integrated into social security systems by regulations that try to adapt market principles to public purposes and how responsibilities of stakeholders, contributors and taxpayers are apportioned (Frericks et al., 2010). This depends on substantiating the three classical operations of social policy, namely: establishing sources and resources, defining the attribution of resources and specifying the conditions of exercise of rights over resources (Harvey and Maier, 2004).
These operations determine what resources are used and what rights are financed in both the pay-as-you-go (PAYG) and the funded subsystems. All PAYG systems are based on principles of social insurance (albeit differently realized in the various countries). Shifts in resources undermine this past institutional logic, and policy-makers currently seek to prop it up by various forms of regulation in an attempt to render private schemes publicly accountable (Frericks, 2010). The institutionalization of funded pensions into the overall pension calculation norm defines what future groups of pensioners there are and levels of ‘adequate’ pension provision depending on whether they include, for instance, tax subsidies for pension investments, pension credits for non-contribution periods, or guarantees on and regulation of particular investments.
Funded pension systems might increase social risks due to life-course transitions if there are no redistributive mechanisms, such as for periods when contributions are not paid (e.g. during informal care work or unemployment). Pension credits for informal care provision, corresponding to social insurance principles, are found in the French occupational (funded) pensions and the German ‘private’ (funded) pensions, called the Riester pension. First-generation migrants have particular difficulties building up pensions when overall pension systems including the funded sub-systems assume continuous residence (this is the case in the Netherlands). For anybody who has worked in another country, future ‘adequate’ pensions rely on the transferability of acquired public pension rights and private pension contracts. And for medium and low income earners, among whom primarily women and migrants, future adequacy of pensions depend on whether funded sub-schemes are obligatory (Sweden) or voluntary (Germany), whether investments are regulated and monitored (the Netherlands), or potentially guaranteed (Germany), whether there are independent advisors (Sweden, Italy) or not (Germany), and so forth. Finally, so-called savings traps, i.e. non-investment by different social groups who consequently end up below adequate pension levels, characterize some hybrid pension systems (e.g. the German one) but not others (e.g. the Dutch one) (Börsch-Supan et al., 2008; Frericks, 2011). In countries where considerable savings traps exist, public means are distributed to a restricted group, better-protected through the subsidizing of funded pensions; this, then, contradicts both market and social insurance principles.