Measures of institutional variation

So far I have sa id little about differences in the more detailed but never-theless extremely important characteristics of any of the public programs, let alone of the supplementary institutions - benefit plans, rules govern-ing coverage and eligibility, methods of financgovern-ing, etc. In the followgovern-ing I shall discuss a range of different indices and typologies of institutional variation that promise to reduce this bewildering complexity to managea-ble proportions and even claim to be sensitive to the more specific but extremely important program features.

In the introduction to this chapter I argued that comparative welfare state research has been (and should continue to be) concerned with social policy institutions as both a dependent and an independent varia-ble. The famous "politics rnatters" thesis involves claims on both counts:

Political factors (agency) are responsible for (parts of) the observed vari-ation in welfare state interventions, and this variation has in turn signifi-cant repercussions for patterns of social and economic stratification in modern society. Thus, the same measure(s) of institutional variation should ideally be capable of featuring both as dependent and as inde-pendent variable, as a criticallink between social, political and economic forces on the one hand and societal outcomes on the other.

In order for a conceptualization of institutional variation to serve this double role as both dependent and independent variable, three basic conditions must be met. First the measure(s) should, of course, be opera-tionalized sa that it can be matched with empirical data, i.e., the criteria for scoring or classifying each case should be as concrete and unambigu-ous as possible. Secondly, the measure should be conceptually independ-ent of the factors that are supposed to explain its variation - that is, the measure should not (by its very definition) tap features of the social and political environment in which the institutions operate. And finaIly, the measure should be conceptually independent of the outcome variables of interest. If these last requirements are not met, the two-fold research question about the causes for and effects of institutional variation is in danger of being seriously reduced - in the worst case to simple tautolo-gies.⁵³ For an example of violations of the last two requirements it is enough to think about the traditional expenditure data. The size of social

53 Korpi's tentative definition of the welfare state in terms of equality in living conditions (quoted in Section 2.3 above), is, if taken literally, an extreme example of a definition that fails to make the necessary distinetion between institutions and outeornes.

expenditures is in fact the result of an interaction between the sodal policy instruments themselves and the sodal and economic environment in which they work, i.e., the scope of sodal expenditures is, strictly spe aking, a kind of outcome.⁵⁴

The demand for conceptual purity does not mean, of course, that one should not attempt to bring out aspects of institutional variation that can, theoretically, be expected to correlate with pertinent political factors and have a significant impact on relevant sodal outcomes. The consdous effort to select what is believed to be the relevant institutional aspects from the irrelevant, is perfectly legitimate. The point is that indices and typologies of institutional variation should, ideally, be based on uncon-taminated "policy" data. Apart from being methodologically sound, the insistence on the use of data that refer directly to properties of policy instruments helps to reinforce the policy relevance of the research effort.

These requirements have to a large extent been met in the growing body of comparative research engaged in the development and use of empirically grounded measures of variation in sodal policy institutions.

The development and application of indices that aim to tap salient aspects of institutional variation began relatively early and has been taken furthest in the area of old age pensions (Day, 1978; Myles, [1984] 1989;

DeViney, 1984; Esping-Andersen, 1990; Palme, 1990). In most cases they were developed with a view to serve as dependent variables: to be expli-cable in terms of political factors and configurations. So far this is cer-tainly the context in which they have most often been used in empirical research. However, as I have argued above, in order to provide real sup-port for a version of the classical "politics matters" thesis, they should als o be demonstrated to bear on patterns of econornic and sodal stratification.

The recent attempts in comparative welfare state research to conceptu-alize and measure cross-national variation in pension systems can be grouped according to their stand on two important issues. How narrowly or widely should one define the set of institutions belonging to the pen-sion system; is their variation a one-dimenpen-sional or a multi-dimenpen-sional

54 Obviously the problems with expenditure data are more acute in areas like unemploy-ment insurance than in the case of old age pensions. Public expenditure on unem-ployment benefits is more likely to reflect the scope of unemployment than the quality of the income protection offered to those who cannot find a job. Expenditures on old age pensions, properly adjusted for the size of the population above the normal retire-ment age, should tend to give a fairly valid irnpression of the overall generosity of the public pension system (see Huber and Stephens, 1993:317).

phenomenon - and, related to this latter question, is it desirable and rea-sonable to group contemporary OECD countries cases into a small number categorical types or mo dels?

Ishall concentrate on what I consider the three of the most important contributions: Myles ([1984] 1989), Esping-Andersen (1990) and Palme (1990).

My/es' index of pension qua/ity

Myles' "Index of Pension Quality" is built very closely on the index devel-oped by Day (1978), and it attempts to summarize variation in salient aspects of the national pension systems found in developed economies into a one-dimensional, basically ordinal, index.

Myles' theoretical approach is focused on the distributive logic of public pensions, and as such it is particularly relevant for the present project. He distinguishes between three distributive principles that are to a varying degree embodied in the design of public pension systems.

Income security concerns the degree to which individual pensioners are guaranteed to uphold income standards from their active years as they enter and move through retirement. The overall degree of income secu-rity provided in a system will be reflected in the average level of benefits relative to average income standards prior to retirement or in the general population. Income adequacy, on the other hand, is concerned with the structure of retirement benefits and more precisely the extent to which everybody is secured a satisfactory minimum, regardless of their pre-retirement income status, employment record, etc. For a given level of average benefit levels, income adequacy is more likely to be satisfied the more egalitarian the structure of public pension benefits. Finally, Myles points to the principle of need that is sometimes reflected in the way public pens ion benefits make adjustments for the family /household situ-ation of the beneficiaries, in particular whether sufficient adjustments are made for the support of a dependent spouse.

In addition to these aspects of the level and structure of benefits, Myles points out two other sets of issues to be considered in relation to the "quality" of public pensions: First, whether the procedures for index-ing benefits guarantee that pensions keep up with prices and perhaps with the development in real wages in society. Secondly, he stresses the importance of eligibility rules and the general accessibility of pensions:

Contrary to flat-rate, universal pensions, social insurance schernes cover

only individuals in gainful employment,55 and they do not always include the entire economically active population. Under the heading of accessi-bility Myles also considers tneans-testirtg (presurnably because means-testing will have the effect of exduding a minor or bigger fraction of the elderly from actually receiving benefits), the possible use of "retire ment-tests" and rules concerning retirement ages and the flexibility allowed for the individual to decide the timing of retirement.

Myles translates these aspects into eight separate indicators Ccompo-nents) of variation in national pension systems, and he gives the follow-ing description of the procedure for measurfollow-ing each country's perf orm-ance on each dimension and for summarizing the information into a single score:

To construct a composite index of public pension quality, analysts first rank-order countries on each component. A system of weights reflecting the theoretical con-struct being measured is then assigned to the components, and the weighted scores are added together to provide a single value for each country. CMyles, [1984]1989:66)

However, the actual procedure used for the scoring of countries on the individual components is more discrete and subjective than the quotation would seem to indicate. In order to represent the level and structure of benefits, Myles/Day use three indicators. First they calculate the maxi-mum pension benefit available to low-paid, average-paid and high-paid wage earners respectively. Then the relevant pension benefits are divided by the average male wage in non-agriculture to obtain a benefit ratio for each type of pensioner. 56 It is dear how a simple average of these benefit ratio scores can be taken to represent the relative generasity of the pen-sion system, while the difference between the ratios can be seen to reflect the degree of inequality in the benefit structure. In order to make the overall "index of pension quality" sensitive to both aspects, Myles gives stranger weight to the benefit ratios of low-paid workers and weaker weights to benefit ratios for high-paid workers, when the three compo-nents are added together with the other five compocompo-nents to form the overall index. Finally, one should note that Myles/Day make the calcula-tion for one specific family type - namely, workers/pensioners with a dependent spouse. In this way the index can claim to be sensitive to the third egalitarian principle discussed by Myles, Le., distribution according

S5 Of course persons (read: home-makers) who are not covered in their own right, might have indirect coverage via the participation of a family bread-winner.

56 Benefit ratios should not to be confused with replacement ratios.

to need. Pension systems that give relatively generous allowances for a dependent spouse, and systems where a dependent spouse can claim a universal pension in her own right, will tend to perform relatively well for this particular family type, and hence they get special credit in the overall index.

The remaining five components in the index are devoted to features related to the stability and accessibility of pension benefits. Here the sub-jective (arbitrary?) element in the scoring procedures becomes more apparent, and Myles' index starts to depart in various respects from Day's original index. Consider for instance the component in Myles' index called "degree of means-testing". Maximum score (0) is given to coun-tries that offer both a universal pension for all citizens and a special sup-plement to people with a low accrual of earnings related public pensions.

A score of 9 is given to countries offering a universal flat-rate pension supplemented by means-tested benefits. The following category (scoring 8) is distinguished by the granting of universal pensions without any means-tested supplements.⁵⁷ Countries without universal pension bene-fits but with means-tested minimum pensions are given the score of 5.

Finally, countries without any minimum pension (means-tested or univer-sal) are given a score of 1. Presumably this is countries where public pen-sions are solely of the social insurance type (Myles, [1984] 1989:74). This attempt to rank-order systems with different mixtures of types of pension benefits is not without merits, but it is certainly very far from being a straightforward operationalization of the "degree of means-testing" as the title for this component would indicate.

Ishall now turn to the indices of institutional variation in pension sys-tems suggested by Esping-Andersen (990) and Palme (990). Esping-Andersen and Palme make use of (slightly different) versions of a common data-source, namely the so-called SCIP data-files. ⁵⁸ They both see variation in pension systems as fundamentally a multi-dimensional phenomenon, and they eventually use the building of various indices as a stepping stone towards a more categorically oriented classification of

57 50 it is bener to offer means-tested benefits on top of a universal floor than to rely ex-clusively on universal benefits.

58 The full English title of the database is the "Social Citizenship Indicator Program". It covers all the major social transfer programs in 18 OECD countries since 1930. The data have been collected and developed at the Swedish Institute for Social Research under the direction of Gøsta Esping-Andersen and Walter Korpi. See Korpi (1989) and Esping-Andersen (1990) for a more detailed description of this data collection pro-gram.

pension systems (or welfare states more generally) within advaneed eap-italist demoeracies.

Esping-Andersen's indices

Esping-Andersen's index of "deeomodification in old age" is more simple than the indices of Myles/Day (Esping-Andersen, 1990:48-54). As the name suggests, its theoretieal foeus is different from that of Myles's index, and in particular it is less eoneemed with Cinequality in) the benefit struc-ture. 59 The index summarizes information from five eonstituent measures.

The first two are built on ealculations of benefit ratios for low-ineome and standard-ineome workers, respectively. Contrary to the benefit ratios used in Myles' index, the benefit ratios that enter the "deeomodifieation index" are based on net (after-tax) figures. This means that the benefit ratios pick up variation in the level and strueture of taxation of pensioners and pension ineome between the country eases as well as variation in the (relative) level of gross benefits.

In addition Esping-Andersen considers the maximum eontribution period required to obtain full benefits (the longer the period, the lower the score), the individual's share in pension eontributions (the bigger the share, the lower the rank score) and finally the take-up rate - i.e., the ratio of benefit recipients among the population above the normal retire-ment age.⁶⁰ Esping-Andersen proceeds by making a partial ranking of the eases on eaeh of four out of the five dimensions. He then adds the rank-score on the four dimensions together without weighing, and finally he includes the fifth dimension (take-up rates) multiplieatively. Although the proeedure to create this index is somewhat more transparent than in the case of Myles' index, it is not free of ambiguities and eontroversial subjee-tive judgments (see Castles and Mitehell, 1991; 1993 and the diseussion beIow).

In Esping-Andersen's theoretical framework, welfare states (and pen-sion systems) vary not only with respeet to their potential for deeomodi-fication, but also aecording to the type of social stratification that they nurture. Esping-Andersen uses a wide range of indices of stratification in welfare provision in order to build his case for a basic three-fold typology of eontemporary welfare states. In order to eharaeterize variation in

59 As we shall see below, Esping-Andersen uses various separate measures to capture the

"stratification" aspects of national pension systems.

60 Note that the concept of "take-up rate" usually has a more narrOw meaning, namely the share of actual recipients among those who legally qualify for a certain benefit.

pension "regimes" in particular, Esping-Andersen considers four different aspects with associated indicators: the share of private pensions in total pension expenditure ("market bias"),61 the share of public pensions in total pension expenditure ("sodal security bias"), the share of public employee pensions in total pension expenditure ("etatism") and finally the number of occupationally distinct public pension programs ("corpo-ratism") (Esping-Andersen, 1990: 120-126).

The inclusion of "market bias" and "social security bias" clearly dem-onstrates how much more comprehensive is the approach adopted by Esping-Andersen as compared to Myles' exclusive focus on public pen-sion systems. In empirical terms "market bias" and "sodal security bias"

are hardly distinguishable, and they both measure differences in the public/private mix of pensions among the country cases. 62 As such they are of central relevance to the present project, but they go a little far in the direction of measuring outcomes rather than concentrating on varia-tion in pension policy. The scope and character of private pension provi-sion is not in itself a policy parameter. ^It is likely to be influenced by a host of structural and institutional factors in addition to the nature of public pension policies as broadly conceived to include direct and indi-rect stimulation and regulation of private pension provision. The sensitiv-ity of private pensions to differences in the qualsensitiv-ity of public pensions (and attempts at regulation and stimulation) is an important theoretical and empirical issue, which I prefer to keep open in the present study (see the discussion in Chapter 3).

"Etatism" and "corporatism" can be conceived of as genuine policy features, but they are questionable as major predictors of distributive out-comes. There is no doubt that they reflect distinct political cultures and historical legacies in (mainly catholic) central and southern Europe, and so they perform well as dependent variables with indicators for the strength of catholicism and Christian Democracy as explanatory variables (see Esping-Andersen, 1990:122-125). It is more doubtful whether they in their own right can be expected to be of strong relevance for the expla-nation and prediction of distributive outcomes.

"Etatism", operationalized as the relative share of expenditures on public employee schemes, is likely to reflect different modes of interaction

61 Private pensions are here defined as including individual insurance and all private oc-cupational plans whether they are mandated, contracted or company based.

62 The perfect collinearity between these two indicators is disturbed only by differences in the scope of expenditure on public employee pensions.

between such schemes and the general social security pensions, rather than being a valid measure of the relative generosity of pension provision for public employees per se. As I argued above, the privileged position of (core segments of) public employees in terms of pension provisions seems to be a universal feature throughout the OECD area. The fact that public employee pensions account for a relatively large share of total pension expenditure in countries belonging to the Continental sodal insurance tradition is mostlya technical artifaet, produced by the horizon-tal segmentation of pension provision for this and other occupational groups.

"Corporatism", operationalized as the number of occupationally dis-tinet public pension programs, can also in itself be expected to play a minor role in a distributive perspective, since at least some of the coun-tries scoring high on this variable have achieved a high degree of stand-ardization among the different schemes and since general revenue financing is often quite important, with the associated mechanisms for cross-subsidization between various occupational groups. 63

However, one of the indices used by Esping-Andersen to characterize stratification of income transfers in general, called "benefit equality", would probably be more directly relevant for explaining distributive out-comes in area of pensions.⁶⁴ "Benefit equality" is calculated as the ratio between minimum benefits and maximum benefits in the three most

However, one of the indices used by Esping-Andersen to characterize stratification of income transfers in general, called "benefit equality", would probably be more directly relevant for explaining distributive out-comes in area of pensions.⁶⁴ "Benefit equality" is calculated as the ratio between minimum benefits and maximum benefits in the three most