Rethinking the Welfare State, by Martin Rein and Winfried Schmähl

Edward Elgar, 2004, 480 pp, hardback, 1 84376 102 5, £79.95 Order this book

This book considers pensions in OECD countries, in the transition economies of Eastern Europe, and in Latin America, and the picture given is one of diversity but with a general trend towards greater involvement of the private sector.

The introduction is in many ways a concluding chapter in that it draws conclusions from the collection as a whole.

The first conclusion is that it is difficult to find examples of unambiguous models. All the authors can find are hybrid systems. Generally, public schemes survive but are less than adequate, whereas private schemes are being extended to larger sectors of the population. The second and related conclusion is that private pensions have increased in value as well as in coverage; the third that private and occupational schemes are in some cases substituting for public systems (for instance, through the invitation to opt out of SERPS and into an occupational or private scheme) creating a closer link between contributions and benefit levels; the fourth that public pension schemes remain in place, especially in transition economies, and that in many cases we are seeing continuous change in the mix of different types of pension; and the fifth that occupational schemes are in transition from the defined benefit model to the defined contribution model.

From these five conclusions Rein and Schmähl draw the conclusion that income inequality in old age will increase (because high earned incomes can ensure larger private and occupational pensions) – though it is the detail which matters, and some countries are achieving a high public/private mix and a low inequality.

The introduction ends with a discussion of the notions of ‘private’ and ‘public’. Neither is a full description of the schemes in view, for private schemes are regulated and subsidised by governments, and public schemes are sometimes funded by investment in the equity market or administered by private companies.

Of particular interest to British readers will be the first chapter: David Blake on ‘Contracting out of the state pension system: the British experience of carrots and sticks’ – the carrot being the tax incentives offered to encourage companies and individuals to opt out of SERPS, the second state pension, and the stick the continuous reduction in the value of the state pension. The chapter starts with a thorough survey of pension schemes in the UK and of recent reforms, including the means-tested Minimum Income Guarantee (MIG) and the subsequent Pension Credit which penalises saving rather less than the MIG did; it discusses recent reforms of private pensions and the political economy of pension reform (concluding that it was easy to reduce the value of SERPS because it was fairly new and few people felt much loyalty towards it, and that reduction in the value of the basic state pension has been easy to achieve because it is only low earners who rely on it and they have little political influence); and it debates the risks and returns of different types of individual- and employer-funded schemes (concluding that the industry and government could bear more of the risk which pensioners currently bear). The chapter closes with a section on the investment performance of investment fund assets and a concluding section which outlines regulatory changes which might improve the performance of private pensions. The final suggestion is that pensions will only be adequate when contributions are mandatory.

Subsequent chapters are on Japan’s experience of contracting out and contracting back in again; on the mandating of contractual agreements in Australia, Switzerland and the Netherlands; on Germany, the USA and Sweden, where carve-outs have occurred (i.e., government subsidising private or occupational pensions rather than directly funding higher state provision); on the different types of private/public mix available; on governance of pension funds; on Latin America and economies in transition; and on the impact of different systems on pensioner wellbeing.

Two minor points: this book is about pension reform. The introduction, the blurb and the title suggest that the trends identified relate to the welfare state as a whole, but this is not argued. The book is an excellent example of good research leading to well-argued conclusions – except over this important issue. Maybe it was the publisher who wanted the title so the authors agreed to give the non-argument a line in the introduction. They shouldn’t have done.

And there is a problem over terminology. I have used ‘private’ to mean pension plans sold to individuals and funded by them. The

authors use ‘private’ to mean that, to mean occupational pensions, or to mean both. Terminological clarity is important, and it should have been imposed by the editors.

A major point: neither the editors nor any of the authors give any space to options for reform of state pensions – and the final chapter of the book suggests that they should have done:

‘The British, Dutch and Swedish examples would seem to suggest that the hypothesis that ‘the smaller the role of public sources the higher the level of inequality’ needs to be qualified. The proposition holds under certain conditions, namely, when coverage of the occupational pension is limited to a small segment of the population and when public pensions have a low and declining replacement rate. The issue of the relative role of public and private pensions is very much on the political agenda of many countries, hence understanding under what conditions occupational pensions can reinforce rather than threaten objectives to equalize income and reduce poverty becomes important.

‘All countries seem to be moving towards a public-private mix. Our analysis shows that it is not the mix per se that affects the wellbeing of the aged, but how the mix is designed’ (p.432).

If this is the case, then careful attention needs to be given to the adequacy of state pensions, and particularly to the level of the Basic State Pension in the UK and to its design. Redesign of the Basic State Pension as a Citizen’s Pension (as in the Netherlands – see pp.124ff) would be a good way to start.