The Politics of Pension Retrenchment in Transitional Regimes: A Political
Institutional Analysis of Russia, Romania, and Latvia
Interim Research Paper (Russian Data: Major Findings & Tentative Conclusions)
OSI, International Policy Fellowship Program
The growing mismatch between social policy resources and commitments hasprompted
many post-communist governments to retrench their welfare systems.Retrenchment
refers to policy changes that reduce the generosity, coverage,or quality
of welfare benefits. As the largest program of social expenditure,pensions
have become an obvious target for retrenchment. Have post-communistgovernments
advocating pension retrenchment initiatives been able to translatethem into
actual policy reforms? What factors account for their retrenchmentsuccess
and what explains their failure? How far can governments bent onretrenchment
go before losing all political support? How effective have theefforts to
assemble pro-retrenchment coalitions been in helping the governmentsimplement
Theory and Research Design
The politics of scaling back the Western welfare states has generated
a great deal of research during the last two decades (Weaver & Pierson
1993; Pierson 1994; Bonoli 2000; Bonoli, George, & Taylor-Gooby 2000;
Pierson 2001). All these studies share the concern of conceptualizing the
welfare state policy changes, measuring the degree of change, and identifying
factors that facilitate or hamper their implementation. If conceptualization
and measurement results have been modest at best, then robust hypotheseshave
been advanced related to major explanatory factors.
First, policy design determines the range of possible reform
options, thus making retrenchment vary across policy areas. Previous policies,
like PAYG (pay-as-you-go) public pension schemes, lock in a particular path
of development by raising the cost of radical reforms. Second, politicalinstitutions
(majoritarian Vs separation-of-powers) influence the government’sability
to cut spending. They affect the number and status of veto actors,i.e., an
individual or collective actor whose consent is necessary for achange in
policy (Tsebelis 1995). Third, previous policies and politicalinstitutions
offer opportunities for interest groups to shape the policyreform process.
Forth, retrenchment advocates are advised to deploy strategiesof obfuscation,
i.e., limiting the visibility of cuts, and compensation,i.e., buying off
the loyalty of opposition, in order to advance their unpopularreform proposals.
And, fifth, they could exploit the fiscal crisis of socialpolicy programs
to assemble a powerful coalition in favor of spending cuts.In general, however,
the excessive political and electoral risks associatedwith retrenchment initiatives
discourage policymakers from pursuing suchcuts in the first place. For this
reason, welfare state retrenchment is adecidedly incremental process.
How do these hypotheses bear our in accounting for similar phenomena in post-communist
countries or transitional regimes? How different, if at all, is the process
of welfare state, and pension in particular, retrenchment in the East? Rys
(1998) posits that politicians in the transition countries enjoy a larger
room for retrenchment maneuvering, partly because of the magnitude of the
fiscal crisis of their welfare systems and partly because of the generally
higher popular tolerance for painful reforms. In contrast, this study takes
a different approach on the welfare retrenchment process by stressing the
relevance of political and institutional factors. It places its researchfocus
on the relationship between different political institutions and thepolicymaking
Hypothesis 1: The government’s ability to control the policy making
process depends the structure of political institutions.
Hypothesis 2: The structure of political institutions determines the number
and status (permanent Vs temporary) of veto actors.
Hypothesis 3: The higher the number of permanent veto actors in a certain
political system the lower the ability of government to implement radical
pension spending cuts.
The paper examines the impact of a super-presidential system (Russia), asemi-presidential
system (Romania), and a parliamentary system (Latvia),on the ability of their
governments to cut pension spending. In particular,it captures the impact
of the institutional variables like: the executive-Dumarelations (Russia),
fragmented party system (Romania), and referenda (Latvia).It accounts for
the influential role of transnational financial institutions,like the International
Monetary Fund and the World Bank, in social policyreform processes at the
domestic level, as well as for the underdevelopedsystems of interest representation,
and hence, limited influence of civilsociety organizations.
Russian Data: Major Findings & Tentative Conclusions
How does the Russian experience with pension retrenchment hold up against
this theoretical framework? The Russian case partly corroborates most ofretrenchment
hypotheses. Even in a country with fluid political institutionsand a weak
civil society, politicians fear undertaking direct assaults onthe public
pension system. Losing the potential support of thirty-eight millionRussian
pensioners could turn out to be suicidal for any public office holder(Kapstein
& Milanovic 2000). On the contrary, there is evidence on pensionexpansion
consistent with proximity to elections. Russian politicians (e.g.,Boris Yeltsin
during June 1996 elections) often resort to pension increasesin order to
maximize their chances for election and/or re-election (Treisman& Gimpelson
Retrenchment-related changes in pension policy are generally introduced in
the early stages of a politician’s office tenure (e.g., Yeltsin’s
early 1997 radical pension reform plans after his July 1996 defeat of his
communist rival Ziuganov). As a rule, these policy changes are designed to
redress the fiscal imbalance of the Pension Fund by permitting the government
to save on restricting benefit eligibility criteria or one-time benefit cuts.
In particular, they include: changing indexation mechanisms (e.g. from prices
to wages), irregular indexation, raising retirement age, eliminating retirement
privileges to selected professional categories, discontinuing pension payments
to working pensioners, etc.
The Russian government’s retrenchment strategies centered on altering
those components of the pension system that were least likely to be visible
and generate political controversy. Not accidentally, the choice fell onrules
guiding indexation and compensations of pensions. In an inflationaryenvironment
like that of post-reform Russia, they determined the real valueof benefits,
and respectively, the level of pension spending. At issue wasthe control
over setting the indexation and compensation rates sternly contestedby the
president (executive) and Duma (legislature). By virtue of their vetopower,
they could block each other’s proposal for increasing or slashingpension
spending, act unilaterally or forge coalitions in order to carryout policy
reforms. The politics of pension retrenchment in Russia has beena clear case
of dominance by the executive authorities through a whole rangeof lobbying
and manipulative techniques.
From the very outset of transition, the Pension Fund became an item of severe
political contestation between the then Supreme Soviet and president Yeltsin
(McFaul 1999:220; Aslund 1997:141). Following the military defeat of theSupreme
Soviet in October 1993, Yeltsin placed the Pension Fund under thegovernment’s
control. He also instituted the mechanism of pension compensationto parallel
that of indexation. Officially compensations served to speedup the process
of restoring the eroded value of pension against inflation.In practice, however,
neither mechanism proved capable of keeping pace withinflation (MP Pashuto,
Duma Transcript, 29 March 2000, p. 36). Instead, itstrengthened the executive’s
control over pension spending. The timingand rate of pension compensations
were decided through presidential decrees,likewise, overcoming the potential
veto of the Duma (Interview with Tuchkova,29 March 2001).
The shift from price to wage indexation stipulated in the 113 law ‘On
Calculating and Upgrading State Pensions’ of February 1, 1998, reflected
the executive’s intent to further consolidate its grip over pension
spending. Under the promises of higher pensions, the executive managed to
secure the support of the Duma, and most importantly, obtain the right to
determine the quarterly average wage. The latter was the key determinantof
the benefit level in the new pension formula. Neither the deputies northe
public could hide their indignation when the executive presented a lowerestimate
for the quarterly average wage for implementing the new law thanthe figure
presented by the State Committee on Statistics (Duma Resolution16 January,
1998). The executive’s figure reflected the financial capacityof the
Pension Fund. Its inability to collect social security contributionsin full
perfectly justified the lower basis for calculating and indexingpensions
(Petrov, Party of Pensioners, 2000:26-27). In spite of numerousprotests from
both the Duma and the Federation Council (Duma Resolution,21 January 1998;
Federation Council Address to the President, 1 April 1998),did not backed
off. The result was a 30-40% cut in pension spending (MP Saikin,Transcript,
Duma Hearing on Pension Reform, 20 March 2001, p. 7).
Unlike manipulations in the indexation mechanisms, pension arrears appeared
as a distinct retrenchment practice characteristic to former Soviet republics,
and Russia in particular (Desai & Idson, 2000). Delayed pension payments
tend to indirectly reduce, through inflation the value of pension benefits.
The pension arrears crisis engulfed Russia in mid 1995 and immediately became
one of politically most salient issues. Repeated efforts on behalf of the
government to eliminate or reduce the backlog of arrears were generally successful
before elections, as politicians tried to placate elderly voters (Cashu &
Orenstein 2001). On average, the delay of pension payments would reach ninety
days across Russia. Only by September 1999 did the Russian government manage
to halt the non-payment crisis in large part due to high world prices for
oil (Deputy PF Chief Kurtin, Duma Transcript, 29 March 2000, p. 31).
In its pension retrenchment efforts the executive did not only confront the
Duma, but also tied to create inclusive political structures. The most illustrative
example of this kind was president’s Putin decision to create the National
Pension Council (NPC) in February 2001. Its main function was to bring major
political forces on board, offer them a forum for advancing their own suggestions,
and, resultantly, foster a consensus over the pension reform policy direction
and design. Since it included representatives from the Duma factions, government
ministries, trade unions, employers’ association, and civil society
organizations, the NPC was an indisputably inclusive political structure.
Also, Putin appointed Mikhail Kasyanov as the chairman of NPC, likewise,shifting
the political costs of pension onto the prime minister (Komersant,8 February
The move to inclusive political structures signaled the preference of the
Russian state authorities for negotiated over unilateral policy solutions.
However, to a great extent, the move was dictated by the nature of the pension
policy problem and the structure of the Russian political system. According
to Joan Nelson, social-sector reforms are likely to unfold in a quite different
political climate than initial macroeconomic measures. Interests groups,legislatures,
and the general public are likely to be more resistant to autocraticstyles
of executive leadership imposing measures designed by technocratswith minimal
consultation (Nelson, 2001:236). It was the understanding ofthe Putin administration
that the success of pension reform would be impossibleto achieve without
taking the interests of these groups seriously, hencethe establishment of
Also, the structure of the Russian political system prompted the need for
a strategy of integration. Integration strategies, argues, Giuliano Bonoli,
are characteristic to political systems with a high density of veto actors
(Boloni 2000: 57-58). Unlike majoritarian systems, the Russian separation-of-powers
system contains multiple veto points where external actors could block government’s
proposals. Such a point would be the legislative debates, and respectively,
the ability of the Duma to block or substantially modify the government’s
pension reform proposal. Interestingly, not only the Russian experience confirms
Bonoli’s proposition about political structures and policy reform strategies.
With a similar political system but with a much more retarded pension reform
process, president Leonid Kuchma of Ukraine established in May 2001 his country’s
version of National Pension Council. Kuchma’s intent was to securethe
support of the Verkhovna Rada (Supreme Soviet) that, thus far, has resisted
all government’s plans for pension reform (Interview with Katya Petrina,
World Bank Kyiv Mission, 23 July 2001).
An Evaluation of NPC’s Role
Was NPC an effective mechanism that permitted compromises over the majoraspects
of pension reform, or, a fashionable package of a certain idea whichthe government
tried to promote? One way to answer this question is to comparethe initial
actors’ preferences with agreed upon provisions of theproposal. The
answers would expectedly depend on the political orientationsof the actors.
The government team qualified NPC as a mechanism that helped establish aconsensus
over the final contours of the reform proposal. According to DeputyMinister
of Economic Development and Trade (MEDT) Mikhail Dmitriev, mutualtrust and
constructive debates characterized NPC meetings (Dmitriev, Transcript,Duma
Hearing on Pension Reform, 20 March 2001, p. 25). Through NPC and tri-partite
commission, the government settled major disagreements with the unions. In
response to transparency concerns of the employers, it planned to conduct
on an annual basis an independent and international audit of the funded component
(Interview with Dmitriev, www.strana.ru/2001/05/07). MP Elvira Ermakova,of
the Union faction, claimed that the government incorporated all the suggestions
that deputies expressed within NPC (Ermakova, Transcript, Duma Debates of
the Reform Proposal, 13 July 2001, p. 11).
Of course, there was nothing unusual about this evaluation. The government
set the rules of the NPC game, and predictably, reaped the benefits. Putin
sealed the proposal that mirrored the interests of the Pension Fund Chief
Mikhail Zurabov. As a result, the he retained control over the investment
of the PF’s reserves and only had the method of granting pensions changed.
Solid support from top political leaders helped Zurabov push his proposal
through; NPC only legitimized it. These two conditions would have to be met
if the funded pillar so fervently advocated by Dmitriev, were to be implemented
at all. Otherwise, pension reform in Russian would remain limited to a significant
modification of the PAYG system.
The non-government actors had a fundamentally different assessment of NPC
however. According to Oleg Eremeev, the employers’ representative to
NPC, the council could not be regarded as an inclusive political structure
because the outcome of the pension reform was known a priori. In Eremeev’s
words, “When we (employers) would ask a question, the government representatives
would promise that our concerns would be accounted for along the process.
In response to someone’s remark, Zurabov would thank for it and underline
its importance. Then during the subsequent meeting of the council the organizers
would distribute the list the list of remarks made during the previous meeting
and their initiators. Usually, they would reject most suggestions citingtheir
incompatibility with the concept of reform. It was the end of discussion.
This was the typical government’s attitude to all parties represented
in NPC” (Interview with Eremeev, 2 August 2001).
There were no independent evaluations of the government’s reform proposal.
All meetings of the NPC looked neat and consensus-generating mainly because
no competing actuary calculations would attend those supplied by PF and MEDT
(Interview with Shanin, 1 August 2001). Since most NPC members lacked the
necessary expertise, most of their questions were of a sketchy nature. They
were usually easy to answer without delving much into the mechanisms of how
the new provisions would be enforced. Usually, Zurabov would often make the
inclusion of the members’ suggestions contingent on their approvalof
the government’s proposal. The promised concessions would be forgotten
shortly after he secured the members’ consent (Interview with Eremeev,
2 August 2001).
Even in those cases where the government claimed it conceded
to the demands of external actors, it ultimately did it its own way. Onetelling
example of the kind was that of the basic (minimum) pension. Underthe pressure
from the trade unions and international organizations, the governmentintroduced
such a provision in the reform proposal. Yet not only the levelof the basic
was unbearably low but it was set as a concrete number (450rubles). Such
a formulation of the norm did not suit the unions. In theirview, it was inappropriate
to set concrete levels of the basic pension withinRussia’s unstable
economic environment. Although the government committeditself to gradually
bringing the level of the basic pension to that of thesubsistence minimum,
it did not specify the terms of the increase. In addition,it reserved the
exclusive right to setting the indexation coefficient ofthe basic pension
depending on changes in the consumer prices (Interviewwith Shanin, 1 August
The diverse composition of NPC and the complexity of pension
reform dampened the chances of speedily reaching a solid consensus over the
reform proposal. Four months (February – May 2001) was a relatively
short period to fully explore all advantages of NPC as a compromise mechanism.
Also, the short time lag between NPC meetings and the taking of decisions
by the government made it hard to believe that they were scientifically,socially,
and politically justified (the first two meetings were held onthe same day
with those of the government; only the last one took place twoweeks later).
Everything was so intelligently arranged, so as to avoid anydisagreements
among members. Uncomfortable people were excluded from thestart. That was
the case the Deputy Chairman of the Duma Labor and SocialPolicy Committee,
Valentina Savostianova. Savostianova’s traditionalstyle of demanding
explanations and proofs for every provision of the proposalplus the leadership
role within the group of deputies who contested Putin’sdecree on the
status of PF in the Constitutional Court, blocked her seatin NPC (Interview
with Tuchkova, 29 March 2001). In sum, NPC was yet anothermechanism of advancing
the reform proposals of the executive.
The analysis of the pension reform process under Putin administration partially
confirms Joan Nelson’s hypothesis about the nature of social sector
reforms in post-communist countries. Successful reforms require inclusive
policy styles that would permit interests groups and legislatures to influence
the process. The move to negotiated settlements is therefore characteristic
to governments with both a limited and multiple number of veto actors.
Putun’s decision to establish the National Pension Council expressed
the authorities’ desire for negotiated policy solutions. Yet one has
to carefully assess the tendency to dialogue in separation-of-powers systems
with an overpowerful president, like that of Russia. The government did not
play by the NPC rules it created but rather resorted to a whole range ofMachiavellian
tactics to manipulate the outcomes. For this reason, NPC wasmore of a lobbying
mechanism under the veil of inclusiveness, rather thana mechanism that permitted
The role of the legislature was limited too. Like NPC, the pro-Kremlin Duma
majority was created by the government to rubber-stamp its policy reformproposals.
That was the case with Putin’s pension reform package. Also,the politics
of reform centered on securing control over the funded componentof the system,
rather than finding the best reform proposal capable of wrestingwith demographic
pressures. The final vote in the Duma did not alter theraporte des forces
in the pension policy field. It only strengthened thepower of the executive
vis-à-vis the legislature.
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