Is the Egg Basket Worth Its Price? The Fiscal Implications of Pension Privatization in Eastern Europe

This paper discusses the policy lessons learned from the two waves of pension reforms in Eastern European EU member states. It focuses, in particular, on the changing approach to the fiscal implications of pension privatization. In the next section, we provide an overview of the two waves of pension reforms as well as the political and economic factors that conditioned the outcomes. Then, we focus on the problem of financing the funding gap related to the diversion of contributions from the public pension system to private schemes, a key issue that was sidestepped in the first wave of reforms, largely because of a lack of understanding of the problem. The funding gap was underestimated, mainly because of a mistaken argument that explicit debt can be ignored as it replaces implicit debt. The third section addresses the actual solutions to this problem, showing that it remained largely unresolved in the first wave of reform, despite the learning process that accompanied the implementation of pension privatization. The final section then discusses the new rationale that informs the second wave of reforms: the ‘diversification argument’. Its growing importance in the policy debate indicates a learning process in which many of the myths that influenced the policy debates in the first wave of reforms were dispelled. However, the diversification argument itself can be seen as old wine in new bottles because its underlying rationale is largely based on one of the myths of the first wave of reforms — that is, the assumption that pre-funding can hedge against the macroeconomic shock induced by demographic ageing. Once this and other misunderstandings are put aside, what remains as a rationale for pension privatization in the second wave is not so much a positive-economics argument, but a mistrust of the state and collective provisions of social insurance. The comparison of the costs and benefits of diversification thus suggests that the second proverbial basket comes at a rather steep price.