Many advanced industrializedcountries are facing a crisis,

as current pension policiesbecome incapable of dealing withdemographic changes. Across

Europe and North America significantdemographic shifts are occurring as lifeexpectancy increases, population growthdeclines and the baby boomer generationleaves behind a legacy of a baby bust. As aresult of these changes, individuals who havepaid into public pension systems may reaponly meager benefits. As forecasters predictthe failure of current pension schemes policy-makers are struggling to find policy solutionsto ameliorate the situation.

Past studies suggest that strong laborunions, domestic public protest1 or a country’shistorical legacy has defined and shapedpension policy reform (Epsing-Andersen,1990, 1985; Flora, 1986; Ross, 2000; Guillén,1999, 1992; Schmitter and Lembruch,1979). Today, however, the impetus forpension policy reform is no longer

dependent solely upon domestic economicand political actors. Instead new globalfactors are not only shaping, but alsoperhaps driving the pension reform agenda.Specifically, changes in global finance andinternational effects upon domestic socialand political structures have introduced anew dynamic to pension policy formulation.In the context of Western Europe, this hasbecome increasingly apparent with thedeepening integration of the European Union(EU). Thus, in light of global changes, howhave international economic and politicalforces affected the impetus for pension policyreform? More specifically, has the uniquesituation of an integrated Europe affectedsuch reform?

To answer these questions, myself,along with Dutch economist Pieter Omtzigtat the Università dell'Insubria in Varese,Italy, are examining the impact of interna-tional capital markets and the EuropeanUnion’s affect upon pension policy reformin three member states: the Netherlands,Italy and Spain. These countries have beenchosen according to their demographicconditions and the type of pension policythey currently have. Italy and Spain alreadyhave the eldest populations in the EU andare forecasted to maintain that position (seeappendix). The Netherlands on the otherhand faces a less steep increase in the

elderly dependency ratio (Eurostat, 2000).Pensioners in Italy and Spain rely almostentirely upon a state-run public system thatprovides generous benefits, whereas theNetherlands has both a public state-run andprivate pension system. As a result, theNetherlands has the highest reserves ofpension funds, relative to GDP, within theEU (Eurostat, 2000).

The strength of this study is that it istruly interdisciplinary. We are incorpo-rating both economic and political scienceapproaches to examine the ongoing effortwithin West European countries to find asolution to the bleak future of pensionpayouts. Specifically, we are addressing thedifferences in demographic changes inEurope, variations of current pensionschemes and their ramifications. Moreover,we examine the political and economicimpact of the EU as well as the effect of the“new” global economy.

Using these cases we will specificallyaddress two related research questions:

1) To what extent does the global economy affectpension reform? In particular, do moneysinvested in private pension funds affect interna-tional capital flows and in turn influence othercountries to adopt or refrain from adoptingprivate pension systems?

2) To what extent does the European Unioninfluence member state pension policyagenda setting?

The Global Economy and Pension Reform: The Impact of Capital FlowsAccording to Epsing-Andersen’s (1990)seminal work one of the fundamentalelements to identifying and classifyingwelfare states, of which pension policy is acentral component, is dependent upon whatrole the government delegates to the publicand private realms. Under this theoreticaldistinction Epsing-Andersen distinguishesbetween two types of pension schemes:public and private. Public systems basicallyrefer to the pay-as-you-go (PAYG) system,whereby present taxation and socialsecurity contributors finance currentpension payouts. On the other hand,private systems, otherwise calledcapitalized systems, include either occupa-tional pension plans or individualannuities. Basically, workers or theiremployers put aside a sum of money in adesignated pension fund, which is used topurchase stocks and bonds.2

At the current rate of demographicchange, many industrialized countries witha strictly PAYG system will find themselvesin a difficult position as the number payinginto the system is much less than thenumber of pensioners. On the other hand,those countries that have adopted a “mixedsystem,” which include both a PAYG andcapitalized system, may find themselves in abetter position as the higher return on private funds may compensate fordemographic shifts. Associated with privatepension schemes is also the impact suchinvested funds will have upon economicgrowth along with foreign and domesticinvestment.

Private pension schemes, particularlyamong countries in the European Union,have led to foreign investment. Althoughprivate pensions have sparked such foreigninvestment economists have not specificallyaddressed how such private pensionschemes will affect capital flows and theeconomic well-being of those countries that

do or do not adopt a capitalized system.The uniqueness of this project is that ittakes into account these capital flows andexamines our theoretical assumption that ifa country utilizes a capitalized system thiswill lead to increased investment indomestic and international markets(Omtzigt, forthcoming). As a result, savingsmay flow away from the country adopting acapitalized scheme and flow into othermarkets. Such flows may lead to increasingstock prices and higher wages due to greatercapital intensity, both in the reformingcountries and other countries (Feldstein,1999). In countries that do not adopt acapitalized system, reforms elsewhere maylead to more foreign ownership of keyeconomic assets and an increased tradedeficit. If this economic theory is correct,then it is imperative for countries tocoordinate their pension reforms.

To understand better the impact ofinternational capital flows it is imperative,in the context of EU member states, toexamine how the European MonetaryUnion (EMU) and its creation of a singlecurrency, has affected the investmentbehavior of pension funds in the EMU

The Role of the European Union in National Pension ReformCarolyn M. DudekAssistant ProfessorDepartment of Political Science

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area.3 Specifically, we are looking at howpension funds in Europe have changed theirportfolio following the introduction of theEuro. For example, in the case of theNetherlands, membership in the Euroinfluenced the Dutch pension funds to shifttheir asset holdings by greatly increasingthe proportion of foreign stocks and bonds.

Until now, national governments havebeen able to constrain their pension funds tokeep their assets within national boundaries.For instance, both Germany and Italy havestrict legislation to limit the maximumforeign asset holdings. European integration,however, has lead to free capital mobility inall sectors and the European Commission4

intends to extend that capital mobility withina few years to pension funds as well.Furthermore, the introduction of the Eurohas led to the disappearance of exchange raterisk. Thus, we are examining how pensionfunds in countries that can choose theirinvestments freely have reacted to theintroduction of the Euro.

Pension Reform in an Integrated EuropeSpain, Italy, Greece and Portugal haveadopted similar pension schemes basedpredominantly upon a PAYG system. Thesecountries have found themselves in aprecarious situation as their populationgrowth has stagnated even greater thantheir northern European counterparts (seeappendix). Thus, it is even more pressingfor these southern European countries toadopt pension reforms to compensate forthe generational population imbalance. Inaddition, since these countries are membersof the European Monetary Union theirforeseen problems with pension distri-bution may adversely affect the economiesof other member states. The disparitiesamong the forecasted success of pensionschemes across Europe has led to seriousconcern regarding “social dumping” and theneed to coordinate social policy.

According to Liebfried and Pierson(1996) social policy in the European Union isshared among different levels of government(national, sub-national/regional and suprana-tional), thus creating a “multi-tiered”political system. The EU, including itspolicies and institutional structure inBrussels, has fundamentally affected theresponsibility and competency over policysectors that national and sub-nationalgovernments once enjoyed. Most significantis the EU’s role in monetary and regulatorypolicy, which were traditionally the responsi-bility of national governments. Social policy,however, is claimed to have remained mostly

in the hands of national governments “buttheir influence has been increasingly circum-scribed and embedded in a dense, complexinstitutional environment” (Liebfried andPierson, 1996: 4).

However, such claims to the predom-inance of the central government in dealingwith particularly contested issues of socialpolicy, such as pension reform, were madeprior to the creation of the EuropeanMonetary Union and the Euro. On a politicallevel, it seems that as national governmentsbecome more involved with one anotherwithin an institutional structure, as embodiedin Brussels, there is more opportunity for thetransference of pension reform policy optionsand ideas across borders. In addition, asEuropean countries find their economiesclosely linked to their neighbors', pressuresmay arise from foreign governments or theEU itself to convince other countries to adoptmore sound policy initiatives. For instance,in a recent European Commission communi-cation the Commission has acknowledgedthat pensions are a matter for member statesto legislate, but the Commission suggestsmember states should adopt a mixed pensionsystem (European Commission, 2000).

The EU presents a unique politicalarena that can significantly alter the policyoptions available to reform pensionschemes. First, the EU itself is a forum fordiscussion and debate. In this way,countries interact on a regular basis andshare ideas. Thus, different policy ideas canbe introduced to pertinent political agentsthat may otherwise have not emergedwithin domestic dialogues regardingpension reform. For instance, geographerGordon Clark (2001) suggests that theAnglo-American pension policy model isbecoming more in vogue throughoutEurope, which may lead to countriesaccommodating their own policies to besimilar to that of the United States andGreat Britain. Such accommodation issimilar to the global adoption of neo-liberaleconomic policies.

Second, the interdependence of theeconomies of members of the EU andparticularly the 12 members of themonetary union presents an unusualsituation, whereby member states areincreasingly concerned with the economicwell-being of their partners for their ownself-interest. Thus, member states maybecome more vocal regarding the domesticpolicies of other members. In the past, itwas unheard of for foreign governments tocritique the type of pension policy chosenwithin a country.5 With deeper European

integration we are beginning to seecountries that have relatively moresuccessful pension policies pressuring thecountries of weaker policies to reform. Forinstance there have been some rumblingsfrom Dutch officials demanding the Italiansto reform their PAYG pension system.

Third, the EU itself has become anagenda setter for national policy makers.Although the EU in certain sectors cannotusurp the powers of the national or regionalgovernments it can present certain parametersthat promote the adoption of certain policyoptions above others. In this way, the EU canconstrain the policy-making autonomy ofnational governments (Ferrera, 2000).European Monetary Union and other policyinitiatives have placed the Commission in aunique position to have significant influenceupon member states’ pension policy choices.In particular, convergence criteria for EMU,established in the Maastricht treaty, placessignificant restrictions on member states’spending. Thus, members of EMU cannotadopt policies that induce spending of greaterthan a 3 percent deficit.

Fourth, the EU provides a useful bufferfor political leaders. Within a strictlydomestic arena, as mentioned earlier,political pressures regarding pension reformcan come from labor groups and capitalgroups. It is clear that pension reform is ahighly contested policy area and there aremany strong domestic actors that can blockchange since it could be politicallyunfeasible. On the other hand, the EUprovides a “scapegoat” mechanism thatallows public officials to adopt unpopularpolicy options that are EU suggested orimposed. In response to public outrage,public officials can point the proverbialfinger at Brussels and as a result avoidpolitical heat. Such practice was seen inItaly and Spain while they implementedausterity measures to meet the convergencecriteria of monetary union membership.

ConclusionPension reform is of grave concern for manycountries and in a Western Europeancontext, especially in Italy and Spain. Itseems, however, that pension reform mustbe understood under the lens of increasedEuropean integration and greater global-ization. As the Bush administration movesforward in proposing pension reform, andparticularly the privatization of pensions,these reforms may have global effects aspension funds are invested internationally.An examination of Italy, Spain and theNetherlands can provide further insight to

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guide other advanced industrializedcountries in understanding the possibleglobal implications of pension reform.

Endnotes1. For example, in France during Alain Juppé’s

term and in Italy under Silvio Berlusconi thepublic protest regarding pension reform weremassive and significantly contributed to thefall of these governments.

2. An example of a capitalized system mostAmericans are familiar with is a 401K plan.

3. The European Monetary Union includes the 12member states that have adopted the Euro as theircurrency and have allocated monetary policydecisions to the European Central Bank in Frankfurt.

4. The European Commission is the executivebranch of the EU and is a major institutioninvolved in EU policy Implementation.

5. We can see this change in the concern for themember’s domestic policies regarding bordercontrol and immigration policy. With the freemovement of people throughout Europe,European governments have been outspokenregarding the practices of border control andimmigration policy of their member countries.

Works CitedClark, Gordon. “European Pensions and GlobalFinance: Continuity or Convergence?” paperpresented at the American GeographersAssociation Annual Conference. February 12, 2001.

Epsing-Andersen, G. Three Worlds of WelfareCapitalism. Cambridge: Polity Press, 1990.

----. Politics Against Markets. Princeton, NJ:Princeton University Press, 1985.

European Commission. "Communication Fromthe Commission to the Council, to theEuropean Parliament and to the Economic andSocial Committee." Brussels, October 11, 2000.

Eurostat. European Social Statistics, Demography,2000.

Feldstein (ed.) Privatizing Social Security.Chicago: University of Chicago Press, 1999.

Ferrera, M. "The 'Southern Model' of Welfare inSocial Europe." Journal of European SocialPolicy. 6:1, pp 17-37, 1996.

Flora, Peter. (ed.) Growth to Limits: The WesternEuropean Welfare States Since World War II.Berlin: De Gruyter, 1986.

Guillén, Ana. “Social Policy in Spain: FromDictatorship to Democracy (1939-1982).” InZsuzsa Ferge and Jon Eivind Kolberg (eds.)Social Policy in a Changing Europe. Boulder:Westview Press, 1992.

----. “Pension Reform in Spain (1975-1997):The Role of Organized Labour.” EuropeanUniversity Institute Working Paper, EUF No.99.6, 1999.

Interview. Dutch member of parliament,conducted by Pieter Omtzigt, July 2000.

Leibfried, S. and Pierson, P. (eds.). EuropeanSocial Policy: Between Fragmentation andIntegration. Washington D.C.: Brookings, 1996.

Omtzigt, Pieter. “Pension reform in a monetaryunion,” working paper, Università dell'Insubria 2001.

Ross, Fiona. "Framing Welfare Reform inAffluent Societies: Rendering RetrenchmentMore Palatable?" European University InstituteWorking Paper, RSC No. 2000/15. 2000.

Schmitter, Phillipe and Lembruch, G. (eds.)Trends Toward Corporatist Intermediation.London: Sage Press, 1979.

AppendixPopulation Aging(persons aged above 65 relative to persons aged 20 to 65; in percent)

Sources: CBS (1999) for the Netherlands, Eurostat(2000) for other European countries, and UN(1998) for other OECD countries.

Table from: Kreers, Jereon. "Pension Reform:Issues in the Netherlands." Paper for the NBERVolume on "Coping With the Pension Crisis --Where Does Europe Stand?" November 10, 2000.

Carolyn Dudek asserts that demographicchanges have necessitated pension reform inmany advanced industrialized countries. Shealso realizes that, unlike the past, political andeconomic global factors inevitably will shapepension reform agendas within WesternEuropean countries as a result of the deeperEuropean integration.

Professor Dudek earned a B.A. in politicalscience and international relations fromCanisius College, and an M.A. and Ph.D. inpolitical science from the University ofPittsburgh. She is the recipient of numerousprestigious awards and fellowships, including aFulbright Fellowship to Spain, a MellonGraduate Fellowship, a European CommunityStudies Scholarship, and a Jean MonnetFellowship at the European University Institutein Florence, Italy.

Prior to joining the Hofstra faculty in fall2000, Professor Dudek was a researcher at theRobert Schuman Centre’s European Forum atthe European University Institute in Florence,Italy, where she examined the impact of theEuropean Union upon regional nationalist polit-ical parties in Europe. Professor Dudek’sresearch interests include decentralization andregionalism within Europe, regional economicdevelopment, domestic effects of the EuropeanUnion, European Union regulatory policy, andinternational cooperation of pension reform. Asa specialist in Spanish politics, Professor Dudekhas conducted field research in Spain concerning recent significant changes in pension legislation.

As an educator, Professor Dudek’s teachinginterest is focused on comparative politics,including politics of the European Union,Western European politics, regime transition,regionalism in Western Europe, regional eco-nomic development, and Spanish politics. Inaddition, Professor Dudek has participated invarious forums relating to European issues,including a Fulbright European Union/NATOseminar in Brussels and Luxembourg. She alsoorganized and participated in a roundtable dis-cussion, "New Spain in the New Europe," at the University of Pittsburgh’s European Union Center.

As highlighted in her article, ProfessorDudek seeks to examine the global implicationsof pension reform in European Union MemberStates and hopes to provide further insight to other industrialized countries facing similar issues. - SK

Europe 2000 2050 Increase

Spain 27 66 39

Italy 29 67 38

Germany 26 53 27

France 27 51 24

Belgium 28 50 22

United Kingdom 26 46 20

Netherlands 22 40 18

Denmark 24 42 18

Sweden 30 46 16

Other OECD

Japan 27 64 37

Canada 21 44 23

Australia 20 40 20

United States 21 39 18

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