4. THE POLITICS OF PENSION REFORM IN SOUTH

EUROPEAN WELFARE STATES *

THEODOROS SAKELLAROPOULOS

and

MARINA ANGELAKI

Panteion University, Athens 1. INTRODUCTION

Pension reform figures prominently on the political agenda in many industrialized

countries for over two decades. This trend stems from the pressures exercised to the

structure of welfare states from a series of challenges such as population ageing,

changing socio-economic and family patterns and globalization. The fact that

pensions receive priority in the restructuring of the welfare state debate should not

come as a surprise as pensions - along with expenditure on health and education -

represent a significant part of social expenditure and by consequence of GDP, having

knock-on effects on patterns of consumption, saving and investment. Thus, social

security reforms pertain to crucial and competing interests of social groups and

classes. These interests are mediated - among others - by policies, politicians,

employers’ and employees’ associations, ultimately taking the form of politics.

Within this framework overarching goals such as adequacy, income maintenance,

viability and sustainability of pension systems, economic competitiveness and

effectiveness are not only put forward but also compete with one another. The politics

of social security reform interpret the way in which the above-mentioned goals

participate in the outcome of a reform. * This is pre-publication version, and the first publication will be in May 2007 in the, van Langendock, J. (ed.), The Right to Social Security, Antwerpen-Oxford-New York, Intersentia, with the copyright held by Intersentia. Readers should refer to the published version of the book: van Langendock, J. (ed.), The Right to Social Security, Antwerpen-Oxford-New York, Intersentia, pp. 121-144 (ISBN 9050956343) Key words: Greece, Spain, Portugal, Europeanization, social policy, pension reforms, Institutionalism, path dependency. Address for correspondence: Theodoros Sakellaropoulos, Panteion University 136, Syggrou Ave., 17671 Athens ,Greece, epeksa@otenet.gr

The present paper examines the politics of pension reform in Southern Europe, by

focusing in particular on the politics of reform in Greece, Portugal and Spain. The

presence of a number of common features relating to their socio-economic structures

and welfare state development has resulted in the categorization of Southern countries

under a separate model (Ferrera, 1996; 1997) or in their identification as distinct

clusters of Esping-Andersen’s (1990) state-corporatist model (Katrougalos and

Lazaridis, 2003). According to the former, Southern countries shared until the end of the 1990s a series

of common characteristics; a highly fragmented and corporatist income maintenance

system, a low degree of state presence in welfare provision, a strong influence of the

catholic church (with the exception of Greece), the persistence of clientelism and

selectivity in the distribution of cash subsidies, the coexistence of a corporatist

tradition with universalistic national health services, the lack of efficient

administration and finally an over-representation of political parties in the mediation

of social interests hindering the formation of consensus. According to the second

approach (Katrougalos and Lazaridis, 2003) south European welfare states are

considered as sub-category of the state-corporatist continental welfare model sharing

common characteristics such as their delayed expansion attributed to their socio-

economic underdevelopment and late democratization, the predominance of the old

age pensions in cash transfers, high inequalities, and the persistence of poverty and

the absence until recently of social minima. Both approaches are very important for understanding the political economy of the

pension systems and subsequently the political economy of the reforms undertaken.

However, all these characteristics of the southern welfare group have been under

successive and urgent changes in the last years. This is more so for the pension

systems which are still the strongest element within this welfare type. In this context

crucial questions arise: why do pension reforms in South European countries

demonstrate a continuous and ongoing character? Why are pension provisions, terms

and arrangements under constant change? The aim of the present paper is to provide

an answer to these questions through the examination of the special politics of the

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reforms, namely the changing political context of South European countries

influenced by the diverse and competing goals of political and social agents. The literature on welfare state politics has been heavily influenced by Pierson’s

(1994; 1996) seminal work drawing in turn on the new institutionalism approach. As

argued by Pierson the new politics of welfare retrenchment taking place in the last

decades are different from the old politics of welfare expansion in terms of policy-

makers’ goals and changes in the political context. Therefore, the process of

retrenchment cannot be regarded as the mirror image of expansion. The politics of

retrenchment constitute a “tricky” exercise involving concrete loses in return for

diffuse gains, while the reaction of the public seems to be more sensitive when it

comes to loses than in the case of gains. The new politics are essentially those of blame-avoidance, as policy-makers attempt

to minimize the political costs arising from the introduction of unpopular policies.

This contrasts with the credit-claiming strategy of previous decades entailing the

expansion of welfare programs. Within this context, retrenchment is made possible by

recourse to strategies of obfuscation, division and compensation. Bonoli (2001)

emphasizes the role of coalition building in facilitating reforms through a strategy of

implicating adversaries in the reform process, a point not particularly developed in

Pierson’s analysis. This approach can be related to the notion of “political exchange”

developed by Pizzorno in the 1970s and subsequently used by other scholars, whereby

social partners, and in particular trade unions, give their consent to proposed reforms

while the government in return devolves part of its decision making authority to them

(Natali and Rhodes, 2003). On the other hand the development of the welfare state has created “dense interest-

group networks”- such as the beneficiaries of social programs and their administrators

- opposing changes in the status quo even in cases where the traditional advocates of

the welfare state (left-wing parties, trade unions) have lost power. These “immovable

objects” create path-dependencies and lock-in effects that ultimately exercise pressure

to the “irresistible forces” for reform (Pierson, 1994; 1996).

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An alternative approach highlights the subpolitics of welfare politics. Besides

traditional actors, recent years have seen the emergence of new ones taking an active

interest in reforms. The banking and insurance sectors, through the provision of

related products, are interested in increasing their involvement in policy making and

thereby influencing outcomes. The media on the other hand may prove a significant

ally given their power to influence public opinion by creating a climate in favor or

against a particular reform (Ney, 2001). The role of the media in informing the public

can prove an important factor in facilitating reform. Boeri a.o. (2002) have shown in a

recent study of four countries (France, Germany, Italy and Spain) the existence of a

correlation between weak information and high confidence in the system’s prospects. Although useful in understanding the problems confronted by policy-makers in their

attempts at reforming welfare states, the new politics model is insufficient for

understanding the nature of reforms (Natali and Rhodes, 2004). The analysis cannot

be limited to the notion of retrenchment, as not all reforms result in less welfare state

(Palier, 2001). Elaborating further on his initial analysis, Pierson (2001) defined

reform content in terms of recommodification, cost-containment and recalibration.

Based on this model each welfare regime is expected to pursue a specific type of

reform; the conservative regime is expected to emphasize cost-containment and

recalibration, the social-democratic cost-containment and the liberal

recommodification. Natali and Rhodes (2004) argue however that, though helpful,

this model also presents some weak points. More precisely they assess the three

reform options as too vague for an in-depth analysis and in turn propose a different

model of categorization relating reforms to the more precise (policy) goals of

financial viability, economic competitiveness, equity and effectiveness. As to the nature of reforms, Palier (2001) drawing on Hall identifies three types of

changes; a first order (or instrumental) change altering the levels or settings of

instruments, a second order (or parametric) change altering the nature of instruments

and a third order (or paradigmatic) one, altering the instrument settings, the

instruments themselves and the hierarchy of goals. First and second order changes are

considered as path- dependent, while third order ones as innovative. The above

analysis offers a qualitative approach in the assessment of welfare reforms, beyond

limitation to quantitative criteria. Within this framework, a point of interest relates to

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the “paradox” of successful innovative reforms and unsuccessful path-dependent

ones, following fierce opposition, a fact that can be explained by the social impact

entailed in each case. Therefore, even in cases of path-dependent reforms opposition

will be strong if these entail radical changes. Consequently, path- dependency is not

sufficient in guaranteeing the acceptance of a reform proposal. In a recent paper Natali and Rhodes (2004) examine pension reform in four

Bismarckian countries (France, Germany, Italy and Spain) through recourse to the

notion of “double trade-offs” between policy and political goals, the latter defined as

vote-seeking, office-seeking and policy-seeking. The existence of different priorities

increases the conditions for the emergence of trade-offs between them. In this

framework, policy-makers act as “creative opportunists” in an attempt to expand their

room for manoeuvre and in winning trade unions’ consent. In terms of outcomes these

are not limited to retrenchment but seem on the contrary to respond to the demands of

different actors. The above-mentioned approaches (Pierson 1994; 1996, Natali and Rhodes 2004,

Bonoli 2001, Palier 2001) provide a framework for explaining the motives, the goals

and the nature of welfare and pension reforms in a given time and place. In other

words they provide a static model of the politics of a specific reform. Nonetheless, the

Bismarckian welfare states, and in particular the state-corporatist countries of

Southern Europe, have rather engaged in incremental reforms, spreading over an

extended period, characterized by the alternation of political actors, changes of

political contexts and a number of other factors impacting on reforms. Within this

context trade unions emerge as important structural actors, besides policy-makers.

Given their decisive role in shaping outcomes one is led to wonder about the reasons

that have impeded the conclusion of agreements defining the context of a definite

reform, as in the case of Sweden, that would consequently put an end to the ongoing

and fragmented nature of current reforms.

The core hypothesis is that the incremental character of reforms results from the

absence of institutionalized relations between the government and the trade unions

that would allow the building of mutual trust on which to base long-term and stable

agreements. Trade unions have had an active role in the defense of PAYG systems

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and the adoption of path-dependent reforms, an attitude that is well understood when

considering their active role during welfare state development just a few decades ago.

The cases of unsuccessful reforms are quite illustrative of the above position, while

also stressing the fact that trade unions are not in general opposed to the introduction

of new forms of insurance, but have on the contrary fiercely opposed and even

succeeded in revoking reforms entailing substantial reductions in benefit levels and

ultimately in social insurance rights.Our analysis is based on the examination of

reforms over a longer period in an attempt to move beyond the static character of

previous studies. In the following section we will therefore examine the social

insurance reforms in the three above mentioned countries in an attempt to trace the

factors that have contributed to the success (or failure) or reforms, while the last

section presents our conclusions on the causes explaining the incremental nature of

social security reforms. 2. THE PENSION REFORM IN GREECE, PORTUGAL AND SPAIN

The social security systems of the countries under examination have been based on

the Bismarckian model of a state-corporatist system (Katrougalos and Lazaridis,

2003). They constitute the main expression of the welfare state and are in parallel

characterized by various degrees of fragmentation. The wider economic and social

changes that have taken place following the restoration of democracy are also related

to the consolidation and expansion of their social security systems in terms of

population coverage and the introduction of new structures. The following section

analyses the changes that have taken place in each country. Greece

Income maintenance in Greece is organized according to the Bismarckian paradigm,

i.e. based on occupational status, coupled with a high degree of fragmentation by

sector, tier of protection and cohort and dualism between the core sector of workers

and those outside it. Recent reforms have however to some extent reduced

fragmentation. The largest pension providers are IKA (private sector employees) and

OGA (farmers) while a separate scheme exists for the self-employed. Private pensions

5

are rare. This can attributed to the system’s generosity towards those segments that

traditionally have recourse to such kind of provisions. Another distinctive feature of

the Greek system relates to the pattern of poverty, mainly concentrated among the old,

especially those living in the rural sector where non-contributory pensions are low.

Nonetheless, even in the case of IKA 70% of its pensioners receive a flat-rate pension

due to the existence of minimum pensions which ultimately results in the de-linking

of pensions from contributions. More recent measures include the introduction of a

means tested pension supplement (EKAS) in 1996 and the transformation of OGA

into a contributory scheme where the state covers 2/3 of contributions. However,

Greece still lacks a minimum income guarantee scheme, while the impact of social

transfers on poverty reduction is significant lower when compared to EU standards. The first significant reform attempts took place in the beginning of the 90s following

the advent in power of the Conservative Party. The laws introduced in 1990 and 1991

comprised moderate changes: increases in contributions, tightening of the rules

regarding disability pension, changes in the calculation of pensions. Even these

measures met however the strong opposition of trade unions. The demonstrations led

by public and private sector unions that preceded the passing of the law forced the

government to concede ground and exclude certain funds from the reform. The Conservative government’s second attempt at reforming the system took place in

1992. The events preceding the 1992 reform (discrediting of government

commissioned committee as being hastily prepared, trade unions accusing the

government of using the report as smokescreen) culminated in a series of strikes.

These soon spread from public sector workers, to those in state banks, transport

organizations and public utilities. The government, possessing a slim parliamentary

majority, was further threatened by some of its party members opposing certain

provisions (Featherstone, 2001; 2005). Under these circumstances the government

engaging in a blame-avoidance strategy shifted the burden on future generations while

the interests of those over-represented by the trade unions remained largely untouched

(Mastaganis, 2002). The government’s falling back from its original radical plan

made it possible to strike a deal with the socialist-dominated GSEE. The fact that

GSEE had arrived at an agreement with the Conservative government resulted in a

strong collision with the Socialist Party.

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The pension reform of 1992 created a new system, uniform for the non-rural social

security sector, and considerably less generous for those entering the labour market

after 1/1/1993. Its main provisions are: age limit set at 65 for both men and women,

lower replacement rates -60% for primary and 20% for supplementary pensions-

higher contributions, provision for state contribution on behalf of every new worker

of 1/3 of total contributions to be paid into his fund, tripartite financing that would

gradually supersede other forms of state grants. As stated in the Joint Report (2003)

the law created a “caste” of new workers with radically lower entitlements, without

this differentiation being justified by any criterion of horizontal equity, which could

eventually undermine the public acceptance of the system. The socialists who had opposed the 1992 reform and had promised to reverse it once

in power won the elections of 1993. During the period that preceded the resignation of

the PM A. Papandreou the pension issue did not seem to constitute a priority of the

government. Papandreou’s successor, C. Simitis, prepared on the other hand the

ground through initiatives such as the introduction of EKAS, the transformation of

OGA into a contributory scheme and the “mini pension law” of 97 dealing mainly

with procedural aspects of the system. The debate reappeared on the political agenda

only after the 2000 elections giving the socialists a new mandate under the leadership

of C. Simitis who had identified pensions - along with labour market reform - as top

priority issue in his modernization agenda (Tinios, 2005). It seems that the pressure

exercised by the Germans on the Greek government along with its desire to enter the

euro-zone, and the recurrent recommendations by international organizations

contributed to the strengthening of the case on pension reform (Featherstone, 2003;

Matsaganis, 2004).

The government’s proposals on pension reform were prepared under utmost secrecy

from a small circle of officials and made public in April 2001. The provisions

included: an increase in retirement age set at 65 for all, insurance period for the award

of seniority pension extended from 35 to 40 years, reduction of replacement rate to

60% defined as the best 10 of the last 15 years, replacement of the lower replacement

rate for mothers of under age children by contribution credits of two years per child,

minimum pension raised but means tested. The proposals remained firmly within the

7

boundaries of a public PAYG, DB system that would become a bit more viable (the

reform was expected to ensure the system’s viability for another 20-25 years), less

inequitable and less fragmented (Ministry of Labor, 2001). Nonetheless the proposals were perceived by trade unions and public opinion as

extremely harsh. Trade unions conducted a separate study that came up to similar

results; differences were more of political rather than of technocratic character,

ultimately relating to the system’s policy goals (Eleftherotypia, 2001). More precisely

the trade unions’ main objections related to the rise in retirement age and the

reduction of replacement rates, while on the contrary they favoured the increase of the

state’s contribution in the financing of the system, the effective use of the funds assets

and strongly opposed the setting up of private funds (Eleftheros Typos, 2001). The

country was swept by massive demonstrations and general strikes. Participation in

certain sectors, such as the banking and public utilities reached 100%. The socialist

party was also threatened by split as a result of internal conflicts. Within a climate of severe opposition the government withdrew its proposals on the

eve of the general strike and called for a renewed social dialogue (EIRO, 2001a). On

the government’s side the failed reform attempt of 2001 marked deeply the political

landscape, diminished significantly the PM’s popularity (Eleftherotypia, 2002) and

affected the socialist party’s future. It widened the gap with the trade unions,

aggravated conflicts within the socialist party, increased the government’s distrust and

according to some scholars contributed to the socialists’ electoral defeat in the

elections of 2004. On the trade unions’ side the government’s retreat was considered

as a victory, even though the government had not answered any of their demands. It is

therefore not surprising that during this period the president of GSEE was the most

popular Greek political figure. The failed attempt did not stop the government from initiating a new one. This was

after all seen as its final opportunity to bridge the differences and regain the citizens’

and trade unions’ trust, while sending a message to the European Commission and

international organizations regarding the government’s readiness for undertaking

reforms. The coverage of IKA’s deficits and the increase of the level of minimum

pensions were identified as the main goals of the reform. The rhetoric essentially

8

attacked the 1992 reform of the conservative government (Christodoulakis, 2002).

The strategy adopted by the new minister during the 2002 reform was based on

confrontation avoidance and consensus seeking (Matsaganis, 2002). As pointed out in

the Joint Report (2003) the basic challenge was to restore the trust of Greek citizens in

the system and its prospects and therefore the 2002 reform is assessed positively in

this respect. Following lengthy consultations with the social partners and the radical

reformulation of the 2001 proposals a new reform was approved in 2002. The

introduction of occupational schemes constituted the new element of the reform.

Further provisions entailed the following: emphasis on pension adequacy; promotion

of uniform treatment and social justice for all; securing the financial autonomy of

IKA until 2030; creation of a stable legislative framework; facilitation of the

introduction of instruments adding credibility and flexibility such as occupational

schemes; distinction between auxiliary and primary pensions; achievement of a

satisfactory balance among the basic principles of social insurance through social

dialogue; release of Funds providing lump-sum payments from organizational

restrictions and institution of a National Actuarial Authority (NSR, 2003). The 2002 reform was a truly path - dependent reform, as it affirmed the tripartite

contributory character of 1992, instead of the government paying 3/9 to IKA

according to the provisions of the 1992 reform. The state assumes the coverage of

deficits through the establishment of an annual state payment to IKA of a sum equal

to 1% of GDP in order to build up a reserve fund. For Socialists and trade unions the pensions issue is closed, an argument also

supported at their pre-electoral campaign. For the Conservatives the issue is far from

being closed and this explains the government’s recent attempt at re-opening it. The

ground seems to have been prepared by international organizations. The IMF in 2003,

based on the envisaged increase of expenditure as % of GDP after 2020,

recommended further reforms. The EU stated in the Joint Report (2003) that the

reform should be seen as a starting point for a long-term reform strategy, providing a

road map for future changes. For while reform addresses a large range of issues with

the aim of making the system more credible and socially sustainable…significant

further efforts will be required.

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From a long term perspective, reforms in Greece can be characterized as incremental

(Tinios, 2005), following a path-dependant approach. Featherstone (2005) argues that

pension reform in Greece should be seen as a non-cooperation game, based on

perceptions of a zero-sum game and of low trust from both sides. According to some

scholars, on the government side, the commitment to reform is jeopardized by

opposition from cabinet members, while the absence of a community of policy

expertise offering “technocratic legitimation” enhances the government’s difficulty in

discrediting union opposition and sending a clear message about the objectives of the

reform (Featherstone, 2001). By contrast the unions show greater consistency and

unity. Furthermore, the lack of tradition in consensual policy-making means that

concessions are made only in order to appease social mobilization and are not the

product of concertation. Portugal

The Portuguese pension system has been shaped through a process of constant

reforms taking place since 1974. It currently has the following structure. The public

social security system incorporates a contributions based welfare subsystem and a non

contributory solidarity subsystem, financed from state budget transfers. A separate

scheme exists for civil servants, police and the military force. Therefore, compared to

the Greek and Spanish systems it exhibits the lowest degree of fragmentation. The

second pillar is particularly underdeveloped. Pension schemes of the second pillar

take the form of pension funds administered by private institutions, while membership

in such schemes has declined over recent years. The third pillar is private, individual

and voluntary. Until 1974 the Portuguese system was based on the corporatist model established

during Salazar’s dictatorial rule. Despite attempts of the regime to extend coverage its

effectiveness remained low. The Carnation Revolution and the consolidation of

democracy signified the beginning of an ongoing process characterized by a constant

shift between two competing models; the contributory and the universalistic. This

process extends to the present. The revolutionary period (1974-1979) was marked by

the introduction of social pensions (of non contributory nature) and the increases in

the statutory minimum pension. These measures enhanced therefore the universal

nature of the system. Following the approval of the Portuguese Constitution and the

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advent in power of the Socialists in 1976 the organic law on social security was

approved in 1977. Although it pertains to the administrative organization of the

system, a universalistic philosophy can be discerned. The universalistic elements of

the system were strengthened further in the following years through the widening of

coverage by the social pension and the introduction of a minimum scheme comprising

universal and means-tested benefits (Guillen, Alvarez and Silva, 2001). The 80s were marked by the strengthening of right wing forces. The centre-right and

right-wing parties coalition brought along the downgrading of the universalistic

components of the system through the revocation of the universal minimum income.

The approval of the first social security base law under a coalition government

between the Socialists and the Social-Democrats in 1984, essentially establishing the

framework of social security, enhanced further this path by giving social assistance a

residual role. In parallel, a trend can also be discerned towards the reinforcement of

the earnings-related mechanisms and the strengthening of the role given to

complementary pensions through the introduction of incentives (Ferreira, 2005). The re-election of Socialists in 1995 brought a new shift aimed at emphasizing once

more the universal features. This had after all been expected, following the Socialist

Party’s pre-electoral promise of strengthening the universalistic components of the

system, even though the universalistic agenda was also influenced by other factors

like the political instability. This course was similar to the one taken during the period

1976-79. In line with this position and under the EU’s influence-through Council

Recommendation of 1992 on sufficient resources, -the government introduced in 1996

a guaranteed minimum income. Its receipt is however conditional on participation in

social integration activities (Matsaganis et. al., 2003). Further measures entail the

introduction of positive differentiation in the contributory system, such as family

allowances and rises in the lowest contributory pensions (Ferreira, 2005). A new reform was undertaken in 2000. The new base law for social security was

approved following prolonged discussions with the social partners. The law aimed at

dealing with the shortcomings that had been identified in the government’s White

Paper, i.e. the level of social protection provided and the financial problems to be

encountered within the next 15 years. Its main provisions include the abolition of the

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separation between contributory and non contributory components, the rise of state

transfers and the establishment of a solidarity subsystem while the importance of the

contributory system was diminished (Ferreira, 2005). The new law therefore

maintains the basic state-managed nature of social security, while the operation of

complementary pension funds remains on a voluntary basis. This period is also marked by another event having significant impact upon the

structure and the future of the Portuguese social security system; the conclusion of a

social pact in 2001 and the role of occupational pensions (Ferreira, 2005). The social

pact of 2001 was signed by all social parties, including CGTP. This can be considered

as the culmination of a process that started in the late 1970s with the creation of a

second trade union (UGT) by the Socialists and the Social Democrats, besides the

existing CGTP dominated by the Communist Party and continued in the 1980s with

the establishment of a Permanent Council for Social Concertation (EIRO, 2000;

2001b). The social pact also contained provisions allowing investments in private

schemes (EIRO, 2001c). In terms of the role of occupational pensions the issue has

been present since the 1980s with the creation of a framework law introducing a

ceiling to contributions that would thereby create incentives to complementarity.

However this was never implemented, while the introduction of incentives was made

possible through the legislation regarding the creation and regulation of pension funds

and through the introduction of favourable fiscal conditions. The latest reform in 2002 under the conservatives was related once again with the

change in government and consequently to a change relating to the philosophy of the

social security system. Law 32/2002 entails the creation of a supplementary system;

the introduction of contributory ceilings above which individuals are given the choice

between state social security and the supplementary system; the transformation of the

“social action” programme into an independent system designed to prevent and

improve situations of socio-economic deprivation, marginalization and exclusion; the

creation of an additional family element in minimum pension for married persons

over the age of 75; the introduction of preferential mechanisms that would take better

account of the work-life balance. Finally, the reform established a three pillar system

(NSR, 2005).

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The analysis of social security reforms in Portugal indicates that the antagonism

between the two models has resulted in a welfare mix. This antagonism between the

Bismarckain model and the universal one has been reflected in the political parties’

philosophy relating to the nature of welfare reforms. It is thus not surprising that the

alternation of political forces in power coincides with an analogous shift in the

philosophy of the system’s architecture. On the other hand the absence of unity

among trade unions, namely CGTP’s† refusal to sign social pacts other than on three

occasions (1991, 2001) coupled with the lack of trust between trade unions and

political parties makes impossible the conclusion of long term agreements. The lack

of trade union unity has furthermore enhanced the state’s centrality facilitating in this

way the passing of reforms (Santos, 2000). This process of gradual and incremental approach regarding pension reform has

ultimately had limited effects on the system’s viability. Concerns about the viability

have been expressed repeatedly. OECD (2004) recommended deeper reforms and

suggested a number of parametric changes, while the Joint Report of the European

Commission (2003) had also stated the same need. In line with this the government

elected in 2005 has stated its commitment to carry out an in-depth evaluation of the

new measures to be adopted. Thus, the pensions issue is far from being closed. Spain

The Spanish pension system is also based on the Bismarckian model. It comprises a

general contributory, earnings related scheme, mandatory for all employees and the

self-employed, while civil servants working for the central government or the justice

system and those working in the armed forces are covered by special schemes.

According to Ferrera (1996) the Spanish system is characterized by “medium” level

fragmentation. The non contributory pension provides a basic universal provision to

those with insufficient or no contributions and is based on means-testing. Despite the

fact that the Toledo Pact foresaw the separation of financing, the non contributory

pension is still not totally financed out of state revenues. The second pillar providing

supplementary funded pensions is not widespread at the moment. The significant

† Despite this “negative” attitude CGTP stayed in negotiations in an attempt to influence them.

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recent growth of the third pillar on the other hand has been favoured by the

introduction of incentives. The initially under-developed Bismarckian social protection system of Spain has

undergone significant changes since the restoration of democracy in the 1970s. The

first period of the democratic consolidation process (1972-1982) was marked by

continuity rather than change as more pressing issues (economic crisis, transformation

of political institutions) coupled with the lengthy process of reaching political

consensus made the introduction of radical changes more difficult (Guillen and

Alvarez, 2004). During this period a significant expansion of social protection can be

witnessed in terms of coverage and expenditure. The advent of the Socialists in power

in 1982 signified the beginning of a period of reforms. The pension reform of 1985

intended to put an end to what had been known as the “pension buying” strategy, i.e.

the declaration of fictitious employment in order to be awarded a pension or the

maximization of contributions during the years prior to retirement so as to receive the

highest possible pension (Chulia and Garrido, 2003). The fact that the reform was

imposed and not negotiated with trade unions, coupled with the government’s refusal

to apply a law on non contributory pensions, thus compensating for the negative

effects, led to the first general strike in 1985. Ultimately the reform marked the end of

the alliance between the socialist party and the socialist trade unions UGT (Guillen

and Matsaganis, 2000; Cabrero, 2002). Following the successful strikes of 1988,

pensions were indexed to past inflation as had been promised in 1985. The second major reform was undertaken in 1997, amidst a period where EMU entry

requirements, the economic recession of the early 90s and the publication of national

and international surveys made evident the need to rationalize the system (Chulia and

Garrido, 2003). Its framework was set by the Toledo Pact (1995) - when the Socialists

were in power - was signed by all political forces, trade unions and employers’

associations and was therefore considered as a landmark in the development of social

consensus. The Pact aimed at ensuring the viability of the pension system through a

process of gradual reform (Guillen and Matsaganis, 2000). The main provisions of the

1997 law include the separation of the sources of financing, the setting up of a reserve

fund, changes in the pension calculation formula and the criteria governing the

14

entitlement of disability pensions and better conditions for those with

short/discontinued contributory careers. The preparation (Toledo Pact) and implementation (law of 1997) phase were an

expression of a complex and fragile balance of political and social forces. The Pact

signed by all parties incorporated different attitudes; for trade unions and the socialist

party it provided for policies aimed at the financial sustainability of the PAYG

system, while for employers and right-wing parties it was seen as a set of temporary

measures that would eventually lead to a private system. The law on the other hand

was passed by a conservative government that needed political allies both within and

outside parliament as it did not enjoy absolute majority. The agreement for the

development of the law was signed by the trade unions that nonetheless expressed

concern about pension cuts for certain categories. The employers’ associations did not

sigh it, while the United Left also rejected the law, arguing that it was not in

accordance with the Pact (EIRO, 1997). A third reform was undertaken in 2001 under the Conservatives, this time enjoying

absolute majority. The new pact on pensions was followed by strikes and was signed

by employers’ associations and only one of the trade unions, CC.OO (communists).

UGT’s refusal to sign the pension reform agreement put an end to the long held unity

among trade unions (EIRO, 2001). This fact, coupled with the government’s earlier

labor market reform that had been passed without the agreement of the social partners

ultimately marked the end of the social and political alliance. The reform comprised

measures aimed at the complete separation between contributory and non-

contributory benefits, the consolidation of the reserve fund‡, the introduction of

incentives to encourage older workers to extend their careers by lowering social

security contributions and by offering the possibility of moving gradually and flexibly

towards retirement through part-time contracts (for those over the age of 65),

increases in minimum and survivors’ pensions, while the development of private

pension plans was recommended (OECD, 2005).

‡ The fund’s assets are used for paying contributory pensions and any related cost exclusively, with an annual limit of 3%. Appropriate control and administration is secured via a management committee comprising representatives from the government and the social partners (NSR, 2005).

15

The introduction of innovative elements has been gradual. The first attempts date

back to the 1980s and more precisely relate to the passing of a law by the socialist

government (1989) allowing the development of a new private pension system

complementing pensions (NSR, 2002). Following the Toledo Pact the role of

complementary private pensions was further enhanced, while in 2003 the conservative

government signed an agreement with the social partners concerning the introduction

of mandatory supplementary schemes for public sector employees. In terms of the

third pillar its recent growth has been favoured through the introduction of tax

incentives (Natali, 2004). Measures to promote private investment are expected to

encourage and bring about a series of economic, social and employment policy

objectives, in particular the development of financial markets. The most recent

measures for pension plans and funds are included in a Royal Decree of 2004,

incorporating EU legislation and updating, systematizing and complementing

regulations relating to pension plans and funds (NSR, 2005). Since the first reform attempt of the pension system in the mid-1980s, Spain has

adopted a path-dependent strategy on pension reform based on large political

consensus and aiming at the rationalization of its PAYG system. This approach has

taken place in parallel with a “noiseless strategy” - using the terms of Chulia and

Garrido (2003) - entailing the introduction of innovative elements by offering

incentives for investment in private pension funds, as a complement to the first pillar.

Trade unions have repeatedly expressed their concerns about the likely consequences

of the latter initiative on the first pillar, while political parties have tried to appease

such fears. Spanish employers’ organizations on the other hand tend to favor private

schemes within the framework of a mixed system in which the public component will

nonetheless maintain its central role. The reform of the Spanish social security system seems to be still open (EIRO, 2003b;

2004b). The European Commission, although stating that the Spanish pension system

seems to perform well in terms of adequacy, emphasizes the need for further reforms

that will ensure its future financial viability (JR, 2003). Similar recommendations

have been made by other international organizations such as the IMF, OECD and the

World Bank.

16

The process of social security reform in Spain, similar to the ones undertaken in

Greece and Portugal, is essentially a lengthy and gradual reform of the existing PAYG

system, coupled with the introduction of new, innovative structures of the second and

third pillar. In parallel there is a higher degree of social consensus, as evidenced by

the Toledo Pact, whose impact is not limited to the 1997 reform as it has inspired all

reforms up to present. This social consensus is nonetheless of fragile nature and is

subject to the alternation of political parties in power. The analysis of social security reforms in Greece, Portugal and Spain indicates the

presence of common features. Over the last three decades significant structural

reforms have taken place in these countries entailing common - yet often competing -

goals such as the expansion of coverage, the retrenchment of benefits, the

rationalization at the institutional, administrative and economic level, the adjustment

to new socio-economic and demographic challenges and the response to

Europeanization pressures. The early consolidation and expansion of the PAYG

systems was accompanied by measures preventing early retirement, cutting benefits,

reducing generosity and abolishing special privileges, increasing the retirement age,

modifying pension calculation or index formulas, differentiating between old and new

(future) beneficiaries, reorganizing institutional structures etc. At the same time social

minima were introduced (except Greece) as well as occupational funded and private

schemes though without any significant results so far. In terms of the reform process itself, the above analysis - supported also by the

literature (Tinios, 2005; Featherstone, 2003; Chulia and Garrido, 2003) - suggests that

pension reforms in these countries assume an incremental character, while their

timing seems to be correlated to the alternation of political parties in power. Greece is

located on the one extreme, undertaking major reform almost once in a decade (1982,

1992, 2002) while Portugal is placed on the other end with reforms taking place in

smaller intervals. In terms of their basic principles, the majority of these reforms are

path-dependent. Therefore, they entail the restructuring of current PAYG systems

through the introduction of parametric changes. Portugal is not however easily

integrated within this model, given that the reform of its social security system has

essentially entailed the alternation of two competing models - the Bismarckian and the

universalistic - and the struggle for predominance over the other. Within this process

17

the trade unions have been the government’s main negotiating partner. The trade

unions’ resistance towards reforms essentially concerns initiatives impacting upon

existing structures and not so much the introduction of new elements, like

occupational schemes (EIRO, 2005b). However, despite this long process of continuous reforms the systems of these

countries are still faced with important challenges. Apart from Spain that seems to

perform well (Joint Report, 2003), adequacy still constitutes a major challenge for

Greece and Portugal. On the other hand, all countries face significant problems in

relation to the viability of their systems. It is thus not surprising that the EU (Joint

Report, 2003) explicitly stresses the necessity of further reforms, given the minor

effect of the measures undertaken until now. The need for further reforms has also

been emphasized by other international organizations, such as the OECD and the

IMF. Therefore the reform of their social security systems is far from being closed. 3. CONCLUSIONS

The politics of welfare reform as developed by Pierson and other scholars, mentioned

in the introduction, may prove sufficient in explaining separate and concrete phases of

reforms during the expansion or “retrenchment” of welfare states. They do not,

however, provide a common basis for explaining the long-term, evolutionary and

incremental character of social security reforms in general. This applies even more in

the case of countries like Greece, Portugal and Spain where welfare expansion,

consolidation and rationalization represent a relative recent phenomenon accompanied

by the need to adjust to internal and external (EMU) pressures. The above analysis has demonstrated that the ongoing and open character of social

security reforms in South European countries is related to three deficits; the absence

of political consensus between political parties on significant issues, the inability to

establish - thus far - of tripartite concertation, i.e. between government, employers

and the labor movement and the absence of social pacts on pension reform, the

Toledo Pact being the main exception, as in recent years (2001) social pacts on

18

pension reform have also been signed in Portugal. These are structural deficiencies

generating huge implications that transcend the field of social welfare. Governments - whether centre-right or centre-left - and trade unions in Southern

Europe appear to be situated at the two ends of a continuous confrontation line,

dominated by mutual mistrust, competition and conflict. The lack of institutionalized

relations for conflict resolution between the government and trade unions inhibits the

conclusion of commonly agreed long - term reforms of the social security system, as

for example in the case of Sweden. Ultimately, this leads to ongoing reforms in the

social security field. On the government’s side the inability or unwillingness to pursue

the conclusion of structural pacts or long-term trade-offs is related i) to its recent

paternalistic and corporatist past, with underdeveloped structures of social dialogue,

and ii) the pressures stemming from EU and EMU. More precisely, the countries of Southern Europe characterized by unstable and

fragile socio-economic structures pursued sudden and abrupt changes, suffering

insufficient elaboration, in their attempt to comply to EMU entry requirements.

Concertation with the social partners would have required dialogue and time, that

were however not available. On the unions’ side the conclusion of agreements is

inhibited by i) the confrontational character of industrial relations conflict resolution

and ii) the fragmentation, besides Greece, of trade unions to 2-3 competing ones, a

fact that poses obstacles to the creation of a united front. The confrontational

character of the unions has been especially proven in the big, national and successful

“political” strikes following the government’s reform plans. According to EIRO and

other sources the working hours lost in Greece and Spain in 2001 and 2002 were

significantly higher than the yearly average (EIRO, 2003a; 2005a) This framework

explains the absence of concertation between the government and trade unions and

consequently the nature of the politics of social security reform from a long-term

perspective. Middle-term concertation has also had limited success in these countries. Even in the

cases where social pacts have been concluded these were of fragile nature and short

lived, while in certain cases they proved to be nothing more than a disguise for the

introduction of sudden and unilaterally imposed solutions. According to scholars,

19

social concertation in Southern Europe has been used as a “catchword” (Pochet and

Fajertag, 2000). In Greece the conclusion of social pacts in 1997 remained on paper,

suffering from the absence of strong leadership (Ioannou, 2000). In Spain the Toledo

Pact lasted only for a short period, while in Portugal social pacts have been repeatedly

rejected by the strong communist trade unions. On the other hand, once EMU entry

had been achieved social pacts lost their importance or were questioned (Hanke-

Rhodes 2004). Ultimately, it seems that the only option was specific agreements on concrete pension

reforms, based on political exchange. The 1992 reform of the Greek system was made

possible following an agreement between the centre-right government and the trade

unions, whereas the socialist party denounced it following a vote-seeking strategy. In

Spain once the Conservative government secured absolute majority in parliament

(2001), it tried to circumvent the Toledo Pact and impose unilaterally its reform

proposal in cooperation with COCOA trade union. In the absence of political

exchange, as in Greece in 2001, the reform failed. This point does not seem to be confined solely to the three countries under study. In a

recent paper examining the role of trade unions in pension reform in Italy and France

Natali (2003) concludes that reforms in these countries - also marked by the absence

of institutionalized relations - have been made possible only through a process of

“political exchange” whereby the government delegated authority to trade unions in

return for their tacit consent. On the contrary, when the government tried to impose its

proposals without the unions’ consent, as in the cases of the Berlusconi (1994) and

Juppé (1995) reforms, the end result was a failed reform. The paper focuses

nonetheless to the study of isolated reforms over a short period of time. However, it

must be pointed out that even in cases of highly institutionalized relations between

government and trade unions like in Austria (EIRO, 2004a), radical reforms of PAYG

systems generate strong social reactions indicating that the reform of PAYG systems

as such contains highly “explosive power”. The predominance of the trade unions in negotiating the political trade-offs and

canceling the unilaterally imposed policies of governments was enhanced by two

additional developments. The first relates to the significant role played by trade

20

unions in the establishment and expansion of the PAYG systems in these countries in

the recent past. Yet as retrenchment took place immediately after expansion, with no

interval between the two processes, the same actors that contributed to the system’s

expansion are now called to participate in its retrenchment. It is therefore well

understood that by agreeing to measures modifying their previous policies, their

credibility will be questioned, as in most cases trade unionists were almost the same.

Hence, the support of the ‘old good’ system is also a matter of personal involvement. The second development relates to the political and ideological vacuum created by

centre-left parties in Southern Europe in the run up to EMU. Socialist or centre- left

parties were and still are particularly strong in Southern Europe, at least in relation to

other European countries, presenting themselves as the agents of social welfare and

modernization-Europeanization (Moschonas, 2002). Their commitment to comply to

EMU entry requirements and their subsequent entry was realized to the detriment of

the first goal, leading to successive electoral defeats at the dawn of the new century

despite their new centre-left orientation. It is worth noting that opinion polls on the

eve of the last two elections in Greece showed that voters intended to vote for the

socialists because of better achievements in foreign policy, defense and European

maters and not in social issues. This vacuum concerning social justice, solidarity and

redistribution, traditional social-democratic values, was filled by organized labour that

has become particularly popular (particularly their leader), despite unions’ low

density in Southern Europe (EIRO, 2002; 2005b). Hence, bearing in mind the history of pension reforms in Southern Europe as well as

these two developments we can conclude that future piecemeal or radical reforms will

be impossible without the unions’ active participation. The terms under which this can

happen relates to the domestic political context and to developments at the EU level.

As to the latter the context generated by EMU and the Lisbon process, although it

does not point to a direct link between the deepening of European integration and the

need to conclude social pacts, seems to have contributed to the re-emergence of social

pacts of more encompassing character comprising wage restraint, labour market

flexibility and social security. The inclusion of a variety of issues could facilitate

agreement through a process of political exchange aiming at meeting the demands of

all actors involved (Ebbinghaus and Hassel, 2000; Leonard, 2005). Yet, even though

21

EU seems to enhance the importance of social pacts and consequently the role of

social partners, this option is ultimately contingent on domestic factors (Donaghey,

Teague, 2005). 4. ACKNOWLEDGEMENTS

The authors would like to thank Ana Guillen and Silvia Ferreira for their valuable comments on an earlier draft of the paper.

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