PENSION REFORM: THE CONDITIONS FOR ITS SUCCESS Michal Rutkowski Director, Human Development

1. PENSION REFORM: THE CONDITIONS FOR ITS SUCCESS Michal Rutkowski Director, Human Development The World Bank FORMER DIRECTOR OF OFFICE FOR PENSION REFORM GOVERNMENT OF POLAND (1996-97)

2. ORGANIZING PENSION REFORM • 1. COMMITMENT-BUILDING • 2. CONCEPT • 3. CONCEPT PRESENTATION • 4. CONCEPT DISSEMINATION, FEEDBACK AND CONSENSUS BUILDING • 5. WORKING ON NEW LEGISLATION • 6. PASSAGE OF LAWS • 7. IMPLEMENTATION

5. PHASES COMMITMENT-BUILDING (PHASE 1) Hungary : 10 months (June 1995-April 1996) Poland: 16 months (December 1994-April 1996) Kazakhstan: 0 months Latvia: 10 months (October 1994-August 1995) COALITION-BUILDING (PHASES 2-6) Hungary: 15 months (April 1996-July 1997) Poland: 32 months (April 1996-December 1998) Kazakhstan: 7 months (November 1996-June 1997) Latvia: 50 months (August 1995-October 2000) IMPLEMENTATION STARTED Hungary: January 1998 Poland: January 1999 Kazakhstan: January 1998 Latvia: July 2001 (NDC since January 1996)

6. COMMITMENT - BUILDING • Duration • Coverage • Multiplicity of actors • Open disagreements

7. CONCEPT • Cutting edge knowledge • Other countries’ experience • Analysis and projections • Opinion Polls • Focus Groups

8. CONCEPT PRESENTATION • Key messages • Special role of young workers and NPV of their pensions • Role of organizations

9. VICIOUS CIRCLE, VIRTUOUS CIRCLE • In a PAYG DB monopoly, under existing demographic scenarios, an individual worker will always have an advantage in not complying with payroll tax or moving to the informal sector, and an individual pensioner will always have an advantage in bargaining over higher pensions. The bargaining spiral, however, is against the interest of all workers and pensioners together since the taxed output goes down and the tax rate has to go up to finance pension benefits. The situation resembles “the tragedy of the commons”. The more successful pensioners are in bargaining over current pensions: • - the more unsustainable the system becomes, • - the higher the future necessary payroll tax rate becomes, • - the less current workers expect to receive back in the future in the form of pensions because their expected net present value of future pensions to be obtained from paying a dollar in current taxes goes down. • SOLUTIONS: • bringing the net present value of future payments close to the level of current contributions paid, by introducing defined contribution systems, funded or notional; making young workers expecting that the state will honor its future obligations; • activating young workers in the pension debate, turning the debate explicitly into an intergenerational discussion; • relying on organized workers, pensioners, financial sectors representatives etc., since the more organized the actors are, the more likely they also are to take into account macroeconomic externalities of the bargaining process.

10. CONCEPT DISSEMINATION, FEEDBACK AND CONSENSUS-BUILDING • * Media • * Core friendly group of journalists • * Key veto and proposal actors • * Interest groups • * Donors and international organizations

11. WORKING ON NEW LEGISLATION * Sequencing * MPs * Unions * Constituencies * Experts * Lawyers * Feedback to the concept * Interest groups * Lobbyists * Timeline

12. PASSAGE OF LAWS * Celebration

13. IMPLEMENTATION * Quality of Institutions * Administration * Communication * “Holding a fort” * Enemies and Dissents * Timeline again

14. Assessment of the organization of the reform process • * existence of sound analysis; • * existence of political mandate; • * empowerment of the reform technical group; • * quality of information about public opinion views on the existing system and reform proposals; • * political consensus; • * inclusiveness; • * role of trade unions and other large organizations; • * effective management; • * robustness with respect to politics; • * consensus building.

15. CONCLUSIONS • Policy legacies influence present reform choices. Pension reform design elements will build upon the legacies of pre-existing pension institutions. • Designated office to run the reform process is very important. • “There’s got to be a message even if there is no message yet”. • The impact of interest groups depends on their relations to and distance from important veto and proposal actors, their ability to mobilize constituencies to exert pressure at critical veto points, and their ability to act as veto or proposal actors themselves. It is important to work with a selected set of interest groups • There are tradeoffs across fora to consult the reform (consultative fora). In particular: • Choice of fora systematically influences reform outcomes because certain fora empower certain types of actors; • Exclusion of actors from one forum will often cause them to be more active in another. • There are tradeoffs across phases of reform. In particular: • The smaller the number of veto and proposal actors involved in design of reform at the commitment-building phase, the faster and more radical the reform. • However, excluding veto and proposal actors at the commitment-building phase may pose threats and require greater compromises in later phases. • Inclusive negotiation of basic design issues at the commitment-building phase will reduce the potential threats to reform at later stages, at the expense of time and less radical reform.

16. CONCLUSIONS • Extensive surveys and opinion polls help to shape the reform • Early PR campaign is critical • Increasing the net present value of future pensions is the critical factor in terms of: • improving contribution collection • increasing participation • being one of the key messages of what the reform is about • Building alliances for pension reform is first and foremost and intergenerational struggle; mobilizing the young is crucial • Unions can support pension reform • Implementation capacity can easily be overestimate