Another look at causes and consequences of pension privatization reform reversals in Eastern Europe

Abstract

In order for ‘carve-out’ pension privatization to improve long-term sustainability, the transition should not be predominantly debt financed, and private pension funds should deliver (net) rates of return tangibly higher than gross domestic product (GDP) growth. We show that none of the reforming countries in Eastern Europe was successful in fulfilling these two preconditions, even before the emergence of the global financial crisis. While existing literature mostly describes a recent wave of reform reversals as politically driven short-sighted policies that deteriorate long-term sustainability, we argue the contrary: that pension privatization structural deficiencies and disappointing performance allow reversals to improve the short-term stance without necessarily undermining long-term pension sustainability. We conclude that unless political consensus exists to support the multi-decade fiscal austerity required to finance pension privatization, reform adjustments and reversals can be a rational alternative to maintaining economically suboptimal or politically unstable pension systems in some Eastern European countries.

Pension Reforms and Risk Sharing Cycle: A Theory and Global Experience

“…Based on global experience, as will be discussed in the second part, we argue that risk premium expectations evolve to political pressure and pension reversals or structural changes (Altiparmakov, 2018). If a system is not seen as beneficial by the electoral majority, namely, if it does not help them maintain their pre-retirement living standards, it could be voted out (Bradley et al, 2016;Grech, 2018).…”

“…At the onset of the global economic crisis, most countries that had adopted pension privatization reforms either halted them, drastically reduced the private element or completely abandoned them (Arza, 2012;Naczyk and Domonkos, 2016;Orenstein, 2013;Sokhey, 2017). The financial market crash in 2008 has challenged the merits of privately funded pensions as their assets experienced a substantial decline within a short time (Grech, 2018;Altiparmakov, 2018). Consequently, over the last decades, the trust in the new pension pillar system's sustainability has been shattered (Ebbinghaus, 2015).…”

“…Another strand of literature has examined the pension systems processes across Eastern Europe and Latin-America, as countries in these regions started to roll back from a DC pension scheme to a PYAG DB pension scheme with an unstable landscape. Many of them present various reasons for the reversals-political, fiscal stress, and more (Natali, 2018;Altiparmakov, 2018;Zandberg and Spierdijk, 2013).…”

Debt and Deficit Growth Rate Reporting for Post-Communist European Union Member States

“…Moreover, since annual budgetary expenditure does not change, based on budget threshold, public finance will remain a key beneficiary of any implemented inflation-based tax (i.e., core to annual budgetary expenditure). The OECD (OECD 2017) considers several types of GGD as essential to an economy's health and key to the sustainability of government finance, they include: (1) domestic vs. foreign-both dependent on currency value and ownership of debt (i.e., citizenry or institutions); (2) short-term (i.e., liquidity for an established budget) against long-term expenditure (e.g., property); (3) gross (i.e., the ability to cover public liabilities either of domestic or foreign entities that are not part of the public sector) versus net (i.e., gross GGD minus the liabilities from nonpublic entities within the public sector); (4) nominal value of liabilities versus real value (i.e., nominal values revised by inflation); (5) real (i.e., required liabilities of balance) versus potential (i.e., guarantees provided by the public sector); (6) central (i.e., the central State) versus local (i.e., self-government); and (7) declared versus hidden (i.e., other financial contracts and State liabilities for future expenditures (e.g., retired persons and annuitants)) (Dzwonkowski 2013;Tobera 2013;Łaszek 2013;Altiparmakov 2018;Högenauer and Howarth 2019). These types of GGD allow us to consider the specific origin of debt by making it easier to understand, observe, and reduce it.…”

The development of private pensions in Serbia: caught between a generic blueprint and an unconducive local environment

“…Nonetheless, it was believed that this radical approach would be a worthy social investment that would not only enable higher pensions for future beneficiaries but would also expand contributor coverage and accelerate economic growth (World Bank, 1994). However, after many of the ambitious reform expectations had failed to materialise a decade later, the emergence of the global financial crisis triggered a wave of reform reversals, whereby Hungary and Poland dismantled their second pension pillars, while Slovakia, Latvia, Lithuania and Bulgaria opted for second pillar downsizing (Altiparmakov, 2017).…”