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The Political Economy of Pension Policy Reversal in Post-Communist Countries (PEPPER-Comm)


Why do governments backtrack on major policy reforms? Reversals of pension privatization provide insight into why governments abandon potentially path-departing policy changes. Academics and policy­makers will find this work relevant in understanding market-oriented reform, authoritarian and post-communist politics, and the politics of aging populations. The clear presentation and multi-method approach make the findings broadly accessible in understanding social security reform, an issue of increasing importance around the world. Survival analysis using global data is complemented by detailed case studies of reversal in Russia, Hungary, and Poland including original survey data. The findings support an innovative argument countering the conventional wisdom that more extensive reforms are more likely to survive. Indeed, governments pursuing moderate reform - neither the least nor most extensive reformers - were the most likely to retract. This lends insight into the stickiness of many social and economic reforms, calling for more attention to which reforms are reversible and which, as a result, may ultimately be detrimental.

PART I: Introduction & Theory
Chapter 1: Introduction
The introductory chapter establishes the importance of studying the reversal of market-oriented reforms generally and of pension privatization specifically. The politics of transitioning to market-based economies have long been a focus of comparative politics. And market-oriented reforms—which include a broad array of specific policies—continue to be the subject of political battles in countries around the world. Less attention has been paid, however, to when and why particular reforms like pension privatization are reversed. Aging populations and expensive pay-as-you-go social security systems have made pension politics a pressing issue around the world. Pension privatization serves as an important topic in its own right and as an example of the political dynamics driving market-oriented reforms.

Chapter 2: Backtracking on Pension Privatization
Chapter 2 describes the trend in reversing pension privatization around the world and explains why existing explanations are insufficient. One third of the countries that adopted pension privatization have backtracked by reducing or eliminating contributions to the second, privatized tier of their pension systems. The pattern in reversals does not correlate with standard explanations like partisanship or public discontent with reform. Thus, we have an empirical and theoretical puzzle regarding why pension privatization fails to survive in some cases.

Chapter 3: A Theory of Reversals
Chapter 3 presents a theoretical foundation from which to understand the reversal of a fundamental and potentially path-departing policy. Existing explanations suggest that a reform’s reversal will be influenced by politicians’ short-term fiscal incentives and whether the reform is entrenched in existing interests. In this case, the annual recurring transitional costs of pension privatization—which was determined by the extent to which countries had pursued pension privatization in the first place—played a central role in its reversal. Reversals should be likely when a moderate degree of pension privatization has been pursued resulting in correspondingly moderate transitional costs. When the financial crisis of 2008 hit, politicians facing moderate transition costs had a strong incentive to access the money being diverted to individual accounts. At the same time, domestic stakeholders in the public and private sector were not strong enough or interested enough to block reversal. There are also implications for the nature of policy diffusion: governments should be more likely to learn from the experiences of countries with similar transitional costs about how and whether the public and investors would react to reversing pension privatization.

PART II: Global Trends in Pension Privatization Reversal
Chapter 4: Evidence from Around the World
I use an original global dataset that includes all of the countries around the world that privatized pensions to evaluate when reversals are most likely. I test how several variables—transitional costs, legislative politics, and diffusion among others—influence when pension privatization would be abandoned. Cross-national trends indicate that countries with moderate reforms—not the least or most extensive reformers—were the most likely to backtrack on pension privatization.

PART III: Pension Privatization under Moderate Reform
I examine the reversal of pension privatization in Russia, Hungary, and Poland and leverage similarities and differences across the cases to better understand why and how governments backtracked.

Chapter 5: Russia’s Staggered Reversal
The Russian case of pension privatization is based on 8 years of field research conducted from 2006 to 2014 including original survey data and 48 interviews with bureaucrats, politicians, representatives of private pension funds, professional association, and policy experts. This chapter examines how and why the Russian government curtailed pension privatization in 2012 and 2013. Russia is a least likely case for backtracking because pension privatization was adopted and reversed under the same party of power, United Russia, and both with the backing of President Putin. The 2008 financial crisis sparked a search for short-term revenue. The individual retirements accounts in Russia’s second privatized tier were relatively easily accessible as a source of short-term revenue.

Chapter 6: Russia’s Domestic Stakeholders & Reversal
In this chapter, I examine more closely the role of private pension funds in shaping policy the lack of public support for pension privatization. The lack of domestic stakeholders backing pension privatization is a central reason why Russian politicians were able to backtrack on pension privatization in 2012 and 2013. The lack of public concern on this issue is also why Russian politicians were able to change course again in the spring of 2015, announcing that part of the second privatized tier would be retained. Original nationally representative survey data from November 2014 reveals that the Russian public was generally uninformed about changes to the pension system and lacked strong opinions about its reversal.

Chapter 7: Variation in Reversals: Hungary & Poland
The Hungarian and Polish cases leverage similarities with the Russian case in showing how and why moderate reforms make reversal more likely and differences with the Russian case in demonstrating how and why reversals varied. In Hungary, an especially poor fiscal situation and a legislative super-majority resulted in a one-time complete abandonment of pension privatization in 2010. In Poland, a somewhat stronger fiscal situation and a more competitive political environment resulted in a temporary and partial reversal in 2011. Private pension funds were unable to lobby effectively to maintain pension privatization in either country. Survey data from Hungary and Poland further shows that the public was not strongly supportive of keeping pension privatization.

PART IV: Conclusion
Chapter 8: Conclusion
The case of pension privatization and its reversals has implications more broadly for economic and social policies. I especially emphasize these broader lessons in regards to the influence of fiscal costs on politicians’ incentives to reverse, the role of domestic stakeholders, and the importance of a policy’s design for whether it remains in place. In this case, the degree of reform played a central role in whether or not the policy survived. Not all pension privatization was the same. I emphasize that moderate pension privatization generated fiscal incentives for politicians to reverse without creating domestic stakeholders among citizens or the private sector. The more optimistic and corollary lesson is that some reforms do not short-term incentives which help them survive in the long-term to address complex and pressing social and economic challenges.