Pension Politics in Three Small States: Denmark, Sweden and the Netherlands

This article emphasizes class politics and path dependence in accounting for the development of pension regimes in Sweden, Denmark and the Netherlands. The political strength of the Swedish Social Democratic Party in alliance with the trade unions resulted in the emergence of a statist pension system. In the Netherlands and Denmark, a politically weak and divided left settled for collectively regulated but privately organized supplementary pensions. However, the Dutch and Danish cases suggest that several types of pension regime structure are capable of producing "social democratic" outcomes such as poverty alleviation, reducing income inequality, and covering various risk profiles. In both countries, private occupational pensions thus produced outcomes similar to those of Sweden. These historical choices decisively shaped the subsequent development of pensions. Resume: Cet article met l'accent sur la politique de classes et la continuite institutionnelle (path dependence) pour expliquer le d6veloppement des regimes de pension en Suede, au Danemark et aux Pays-Bas. La puissance politique du Parti Social D6mocrate suedois dans le cadre de son alliance avec les syndicats a provoqu6 l'emergence d'un systeme de pension 6tatiste. Aux Pays-Bas et au Danemark, une gauche divis6e et politiquement faible s'est content6e d'un systeme de pensions complementaires r6gule collectivement mais organis6 de maniere priv6e. Cependant, les cas neerlandais et danois suggerent que diff6rents types de structures institutionnelles peuvent produire des r6sultats "sociaux d6mocrates" tels que la reduction de la pauvret6, la r6duction des in6galit6s, et la couverture de diff6rents profils de risque. Dans ces deux pays, des pensions priv6es ont donc produit des r6sultats semblables a ceux du systeme su6dois. Ces choix historiques ont profond6ment influenc6 les d6veloppements ult6rieurs de ces systemes de pension. Implicit in much of the welfare state development literature is the assumption that only the public sector can deliver outcomes commonly associated with the "social democratic regime" (Esping-Andersen, 1990). This is especially true for pensions, where publicly organized retirement provision was frequently Canadian Journal of Sociology/Cahiers canadiens de sociologie 29(2) 2(X)4 289 290 Canadian Journal of Sociology considered the best vehicle for alleviating poverty in old age, reducing income inequality among pensioners, and promoting income equality between pensioners and wage earners. Comparative analysis of pension regimes in Sweden, Denmark and the Netherlands suggests that the public sector is not necessarily the only path leading to equality and solidarity. All three countries provide universal basic pensions, but the three systems diverge in terms of supplementary coverage. The Swedish system includes public, earnings-related benefits for all wage earners, whereas Danish and Dutch occupational pensions are organized in the private sector. Although occupational pensions are privately organized, the Danish and Dutch pension regimes deliver outcomes similar to Sweden's. Old age poverty levels are similar in all three countries, as is income inequality among pensioners. Comparison of the Swedish, Dutch and Danish pension systems suggests that there are multiple institutional pathways toward similar outcomes (Huber, Ragin, and Stephens, 1993; Van Kersbergen, 1995), and this article draws on this tradition by emphasizing the role of party politics and path dependence. The article emphasizes the political mobilization of the left and its coalitions with other societal groups to explain different paths toward similar outcomes. In Sweden, Social Democratic hegemony and union strength resulted in the emergence of a statist pension system. In the Netherlands and Denmark, the weakness of the political left necessitated cooperation with confessional and liberal groups respectively, and these left their mark primarily in the organization of occupational pensions. In both countries, a politically weak left settled for collectively regulated but privately organized occupational pensions that, despite their location within the market rather than the state sphere, produce outcomes similar to Sweden's. These historical choices decisively shaped the subsequent development of pensions. The Three Pension Systems Until recently, Sweden was usually seen as the prototype of the social democratic pension regime because the public sector dominated pension provision (Esping-Andersen, 1990). The Swedish system also generated large publicly controlled pension funds (AP Funds); in 1992, the AP Funds equalled 35 % of GDP (Proposition 1993/94: 250, 16). Collectively bargained occupational pensions covering 90% of the labour force topped up public benefits. Denmark and the Netherlands are typically considered weak cases of social democratic pension policy, because Danish and Dutch social democrats failed to introduce generous public supplementary pensions. The Danish pension system is marked by universal basic provision, topped up by modest public supplementary pensions and increasingly important (private) labour market pensions. The Dutch system combines a public flat rate pension with mandated private occupational pensions based on the principle of solidarity. Pension Politics in Three Small States: Denmark, Sweden and the Netherlands 291 Despite these institutional differences, the three pension regimes deliver broadly similar social outcomes. Poverty rates among the retired in all three countries are among the lowest in the world, as are levels of income equality among pensioners and between pensioners and wage earners. Table 1 shows poverty rates among older persons in 11 rich countries according to the two most common methods of determining poverty rates. Sweden shows the lowest poverty rate, closely followed by Denmark and the Netherlands. In Disney and Whitehouse's (2002: 20) study of the economic well-being of older people in 16 rich countries, Denmark had the lowest level of income inequality among pensioners, followed closely by Sweden, Australia, Finland, and the Netherlands.1 The three pension regimes also deliver similar results in other ways. All three pension systems have a relatively high degree of funding (see table 2). All three pension systems also cover a variety of risk profiles because all citizens receive basic coverage via the basic pension. Finally, recent changes in all three pension systems significantly strengthen work incentives. The latest round of reforms in all three countries tightened the link between contributions and benefits and reduced incentives for early retirement. The Netherlands in particular has taken significant steps toward reducing early exit (Visser and Hemerijck, 1997). In the 1970s and 1980s, the supplementary pension system (along with disability and unemployment insurance) provided an attractive early exit route for redundant wage earners (Trommel, 1995). Dutch early exit rates remain stubbornly high despite this progress. The OECD (2003) reports that the effective retirement age for men in Sweden was 63.8 in the period 1995-2000, 64.3 for Denmark and 60.7 in the Netherlands. The effective female retirement age in the same period shows a similar pattern: in Sweden it is 62.5, 60.6 in Denmark and 59 in the Netherlands (OECD, 2003: 54). In short, these three pension systems are relatively resistant to both endogenous and exogenous pressures. Endogenous pressures, including changing family patterns, the growth of non-standard work, etc., do not lead to increased poverty among retirees because the basic pension provides a minimum level of coverage, despite career interruptions. Exogenous pressures such as the financial market integration and EMU are less likely to lead to pressure on public budgets because pensions are partially or fully funded. Thus although the Netherlands and Denmark rely mainly on the private sector for incomerelated benefits, outcomes (as defined above) are broadly similar to Sweden's. The Dutch and the Danes have followed a pension path that is less statist than the Swedish, but only in terms in supplementary pension provision. All OECD countries regulate private pensions in some way; the question is whether and 1. For similar results, see Hauser (1998). 292 Canadian Journal of Sociology Table 1. Poverty Rates for the Elderly in the 1990s Country Year 40% Poverty rate 50% Poverty rate