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

AuthorMargarita Gelepithis
Date01 August 2018
Published date01 August 2018
Subject MatterArticles
/tmp/tmp-17i2SCGYGkFWR3/input 726923PSX0010.1177/0032321717726923Political StudiesGelepithis
Political Studies
2018, Vol. 66(3) 735 –751
Institutional Mismatch, Party
© The Author(s) 2017
Reprints and permissions:
Reputation, and Industry
DOI: 10.1177/0032321717726923
Interests: Understanding
the Politics of Private-Heavy
Pension Systems

Margarita Gelepithis
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.
means-testing, reputation, pension reform, dualization, private pensions
Accepted: 25 May 2017
In the comparative study of welfare states, both private pensions and means-tested wel-
fare 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),
Department of Politics and International Studies, University of Warwick, Coventry, UK
Corresponding author:
Margarita Gelepithis, Department of Politics and International Studies, Social Sciences Building, The
University of Warwick, Coventry CV4 7AL, UK.

Political Studies 66(3)
Rothstein (1998) and Myles and Pierson (2001), that such benefit arrangements under-
mine 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 num-
ber 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 decou-
pled 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 contri-
butions, 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 increas-
ingly 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 pri-
vate 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 ben-
efit 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 ben-
efit 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 dec-
ades, 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 govern-
ments, 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...

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