Welfare regimes and distributional principles: A conceptual and empirical evaluation of pension reform in Europe

ARZA, CAMILA

EUI Working Paper RSCAS 2006/30

European University Institute

Lugar: Fiesole; Año: 2006 vol. 2006 p. 1 - 22

The major wave of pension reform taking place in Europe over the past two decades has radically reshaped existing systems for old-age income protection. As a result, traditional frameworks used for the analysis and classification of countries in welfare clusters have become less suitable to capture the new pension regime types, the dynamics of institutional change, and the distributional principles underpinning new reform directions. The paper proposes a conceptual framework to evaluate and compare the underlying distributional principles of recent pension reform. It is focused on three dimensions: (1) the distribution of rights (eligibility to benefits), (2) the distribution of resources (benefit calculation and distribution), and (3) the distribution of the risks of old-age financing. The empirical analysis is focused on four countries with different pension regime structures, which allows to discern reform directions in originally dissimilar systems. The study shows that, to a greater or lesser extent depending on the specific institutional and historical features of each country, there tends to be a common direction of pension reform towards a similar distributional model. This shared reform direction includes two key features: first, the separation of the functions of poverty-prevention and income-replacement into two different layers of system and, second, the redefinition of the distributional logic of each of these two layers. In the income-replacement layer, pension benefit levels become actuarially determined, according to individually made contributions and life expectancy projections, and risk-pooling within and between generations is sharply reduced. In the poverty-prevention layer the trend is towards means-testing, residual benefits, and an expansion of the pooling of the risk of old-age poverty via general-taxation financing. Although effective outcomes across countries may continue to differ as a result of the different social, demographic and especially labour market structures, the pathway towards a new distribution pattern is found across the four case-studies.