The interplay of public and private pensions and private pensions

As we have seen in Section 3.2, the equalizing potential of public pen-sions depends on the scope and distributive profile of private income provision in retirement and how these might respond, in the aggregate, to variation in the nature of public pensions.

There is no general agreement, however, that we should necessarily and always expect private income provision to deviate sharply in its dis-tributive profile from public soeial insurance pensions.

Some authors see private pensions as a functional equivalent of public provision, and they are indined to argue that cross-national variation in the institutional mix between the two only masks an essential conver-genee among advanced capitalist economies. The total leve1 of welfare production laoks rather similar across countries when the role of private provision is considered (Katzenstein, 1984), and in the final analysis the performance of different we1fare mixtures might not be all that different (Rein, 1983; Rose and Shiratori, 1985).

Others maintain a dearly dualistic view of the two types of we1fare provision. Private we1fare providers and in particular occupational pen-sion schemes, are assumed to be extremely in-egalitarian in their distrib-utive profile, tending to reproduce and further intensify inequalities that have their origin in labor market stratification (Titmuss, 1955; 1958). Thus,

122 On this issue Baldwin (990) has developed an argument about path dependency, claiming that the move from "Beveridge" to "Bismarck" is more politically feasible than the move from "Bismarck" to "Beveridge".

cross-national differences in the balance between public and private insti-tutions are seen as a key symptom of welfare state variation (Esp ing-Andersen and Korpi, 1987; Esping-ing-Andersen, 1990).

The latter view does seem to be supported by the finding, based on national income surveys provided by the Luxembourg Income Study, that private income sources are everywhere highly regressive components in the income packages of retired households (Pestieau, 1992). But then this could simply be a reflection of the fact that, in contemporary societies pri-vate retirement provision tends to be relegated to the role of comple-menting the more or less progressive systems of public income mainte-nance.¹²³ If the "regressiveness" of private income provision is merelya function of the progressivity of public pensions, then the hypothesis of

"functional equivalence" could still hold up.

Substitution or complementarity?

Both these contrasting theoretical perspectives seem to entertain the assumption that public and private welfare are dose substitutes in quan-titative terms: that individuals and/or collective actors, like companies and unions, consider public and private pensions as alternative means to achieve "adequate" income levels after retirement. In other words, the scope for public and private pensions is determined by a fairly, stable and well-defined need for retirement income. It is predicted that private actors will respond to increases in public pens ion benefits by relaxing their efforts through occupational pens ion schemes and individual pension insurance and savings.

This assumption of a clear-cut substitution between public and private pensions has recently been called into question by a number of authors.

Some even argue that the relationship can, at least occasionally, work in the completely opposite direction: The expansion of public pensions might be a cause of growth in private pensions (Hannah, 1992; Dobbin and Boychuck, 1996). One possible mechanism behind such a

comple-mentary relationship concerns the process of preference formation and could be termed "the recognition effect" (Barro and MacDonald, 1979).

As many scholars have pointed out, retirement is by and large a social invention of the twentieth century (Hannah, 1986; Myles, [1984] 1989), which suggests that the need for a certain level of retirement income is socially constructed rather than a natural constant. It is therefore not

123 "Progressive" meaning here that the distribution of public pension benefits is less un-equal than the distribution of pre-retirement incornes.

unreasonable to assume that the introduction and improvement of public pens ion benefits could in specific historical circumstances lead to inflated expectations about what constitutes an "adequate" income level after retirement, and therefore stimulate increased demand for private supple-ments. Dobbin and Boychuck (1996) have suggested an alternative, more concrete, mechanism behind complementarity with specific reference to employer financed occupational pensions. Improvements in public pen-sion benefits will tend to make it less costly, on the margin, for employers to establish and run occupational pension plans that guarantee a certain income replacement in retirement. Hence, the introduction and improve-ment of public pensions could facilitate growth in coverage with occupa-tional pension plans among the workforce. 124

A different strand of critique regarding the hypothesis of substitution asserts that the development of private occupational pensions is largely independent of public pension systems and tied up with different causal structures. Von Nordheim-Nielsen (1988; 1991; 1996) has pointed out how occupational pensions are functionally related to institutions and processes in the labor market and the capital market. He argues, there-fore, that the assumption that. private pensions are filling a need for retire-ment income left over by public pensions is misplaced with respect to occupational pensions.

Same seattered empirical evidence

Settling the debate about substitution or complementarity would seem to be a fairly straightforward task for empirical research, but the existing lit-erature conveys a mixed if not contradictory picture.

Both sociologists and economists have wrestled with the question whether the relationship between public and private pensions is one of substitution or complementarity. Do private pensions dwindle as public pension systems are expanded, and will they grow in importance if and when public provision is cut back?125

124 Note that the argument presupposes rather fixed expectations about the level of income replacement to be secured by an occupational pension plan including any public pension benefits. It seems most directly relevant to a situation where occupa-tional pensions are organized as defined-benefit plans - see Section 3.5 below.

125 I do not eite any of the numerous studies that contribute to the big debate, primarily among economists, about a possible negative relationship between the generosity of public pensions and the aggregate savings rate- see Magnussen (1994) for a good, recent survey. The issue of a possible irnpact on the savings rate is related to but not identical with the topic concerning us here, the scope of private income provision in retirement.

Many scholars have pointed to the simple and undeniable fact that in most developed countries public and private pension systems have grown in tandem throughout the post-war era (van Gunsteren and Rein, 1985;

Hannah, 1992). Moreover, the notion of complementarity has found sup-port in historical case-studies. For instance, Dobbin and Boychuck (1995) argue that coverage with occupational pensions increased in the US as a consequence of the introduction of sodal security pensions in the New Deal reforms of the late 1930s. Also Munnell (1982) and Blinder (1983) make note of the fact that the development of a private occupational pen-sion scene in the US is by and large a phenomenon of the post-New Deal era. The provision of sodal insurance pensions in the US did not crowd out an already existing, well-developed system for private income provi-sion in retirement. Rather it seems to have fadlitated its growth.

Other studies have found evidence in favor of substitution. On the basis of time-series data for the US, Munnell (1982) found astrong substi-tution effect between public and occupational pens ion accrual among the work force. It is interesting to note that, while she found almost a one-to-one substitution between public and occupational pensions, individual savings behavior appeared to be largely unaffected by changes in public pensions.¹²⁶ Also some tentative studies of cross-national data have pointed to a negative relationship between the scope of public and pri-vate pensions (Esping-Andersen, 1987; 1990; Kangas and Palme, 1992;

Hippe and Pedersen, 1992). However, the tendency for substitution revealed in these latter studies is rather weak. In fact, Esping-Andersen (1987) notes that no country changed rank-order in terms of spending levels when total pension expenditures was made the ranking criterion instead of just public spending (see also Rein and Rainwater, 1986:17).

The finding that differences in public pension systems explain rather little of the existing cross-national variation in private pensions could well be seen to support the thesis that they are not directly related. One could also argue that the recent decline in coverage with occupational pension plans in the US is a further indication of independence. Bloom and Free-man (1992) show that a significant part of the decline can be explained by the decline in union density and changes in the wage structure, while it is fairly obvious that changes in public pension benefits have no part in the story.

126 According to some theoretical arguments made in favor of complementarity or inde-pendence we would have expected the opposite picture - see von Nordheim-Nielsen (1991:135).

The glaring discrepancies among empirical studies in this area are of at least two different types. First of all, there is disagreement about which aspects of public pensions, is supposed to affect which aspects of private retirement provision, i.e., the operationalization of independent and dependent variables differs strongly. Concerning the independent varia-ble, indices of benefit generosity (Kangas and Palme, 1992) or direct measures of pension accrual (MunnelI, 1982) are likely to be more rele-vant than the more commonly employed expenditure data. With respect to the dependent variable, different studies focus on different aspects and indicators for the scope of private pensions: coverage with occupational pension schernes among wage earners, the relative size of contributions and pension funds, or the share of private pensions in the income pack-ages of retired households, etc. The study by Munnell suggests that the dynamics of individual savings behavior might be quite different from the dynamics of occupational pension provision.

Secondly, the necessity to control for social and economic background factors is not always recognized or taken seriously. There is reason to believe that same important background variables have a positive impact on the scope of both public and private pensions. To the extent that this is the case, it will create a spurious impression of complementarity, or at least partly obscure a possible "real" tendency for substitution. In order to unravel a ceteris paribus relationship between public and private provi-sion, it is necessary to control for factors that might jointly influence the two. The level of real income enjoyed by the general population is clearly one of the factors that needs to be controlled in both time-series and cross-sectional analysis, since both the politically and privately revealed demand for income security (replacement rates) in old age appears to grow with rising incornes. The strength and cohesion of trade unions is another factor that could be suspected to influence the scope of both public and private pension provision in a positive direction, and thus be a possible source of bias if the analysis is based on the simple bi-variate relationship. Finally one could mention the general trend over the last decades towards the lowering of effective retirement ages - arguably linked with conjunctural and structural pressures in the labor market -that has helped increase the overall need for retirement income, public and private.

The discussion in this section has been confined to rather general the-oretical expectations taken from the welfare state literature and empirical observations at the macro-Ievel about the relationship between public

and private pensions. In order to proceed any further it is necessary to look more closely at the possible micro-foundations of the various hypotheses about the nature and dynamics of private retirement provi-sion. In the following sections I shall first introduee theories about indi-vidual savings behavior and then go on to discuss different views to be found in the literature on the dynamics of occupational pensions.

3.5 Individual retirement provision