From State to Market and Back: The Politics and Economics of Pension Privatization in Eastern Europe

During the past two decades, Eastern European governments have increasingly opted for assigning a greater responsibility to market forces in the area of old age provision. Before the Great Recession, the privatization of pension systems became one of the most widely accepted solutions to the problem of ageing in the region and around the world. However, the fiscal problems that governments faced as a result of the crisis, have shaken the political support for the reform and consequently have sparked a wave of policy reversals that ranged from temporary cut-backs in second pillar contribution rates, to full scale nationalizations of funds’ assets. In this paper we ask what factors account the decisions to introduce and then roll back private pension pillars. Using a dataset that covers both privatizing and non-privatizing Eastern European countries between 1995 and 2014, we estimate a zero one inflated beta regression model to account for the degree of pension privatization. Our results show that domestic political and economic variables best account for variation in reform outcomes. We find evidence that the degree of pension privatization is shaped by the political regime type, with democracies being on average more likely to have larger second pillars. However, authoritarian regimes are more likely to opt for policy extremes: choosing either to entirely reject privatization or to fully privatize their pension systems.