State and market in the formation of social security regimes : a political economy approach

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EUROPEAN UNIVERSITY INSTITUTE, FLORENCE

DEPARTMENT O F POLITICAL AND SOCIAL SCIENCES

ER No. 87/281

FORMATION REGIMES MY APPROACH

Gosta ESPDMG-ANDERSEN

BADIA FIESOLANA, SAN DOMENICO (F I)

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Printed in Italy in April 1987

European University Institute

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S T A T E A N D M A R K E T IN T H E F O R M A T I O N O F S O C I A L S E C U R I T Y R E G I M E S A P o l i t i c a l E c o n o m y A p p r o a c h b y G o s t a E s p i n g - A n d e r s e n © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

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INTRODUCTION.

The Political Economy of the Welfare State does not refer to a

theory as much as to an analytical focus on the interaction of

polity and economy. Much, if not most, of welfare state research

has concentrated solely on public sector social policy. As a

consequence, it has helped uphold the artificial duality of state

and economy that has patterned 20th Century thought. Our aim is

to decompose this partition; markets cannot be understood without states, and vice-versa.

Political economy has come to mean two opposing approaches. One

is the attempt to understand political phenomena through the

analytical foundations of modern economics, micro-economics in

particular. Its counterpart is the investigation of economic

phenomena with the employment of sociological or politological

conceptual apparata. This study is of the latter kind. My aim is

not to add yet another political theory of the economy to the

many that exist, but to explore how, in the first place, the

kinds of division of responsibilities between state and market we find today came to be.

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Neither state nor market as such were predestined to become the dominant loci of welfare provision- In fact, my argument is that

states created marketsjmarkets created states. The study that

will serve to explore the argument centers on the evolution of

pensions in the presently advanced industrial democracies. If

pensions may seem too narrow or obscure a phenomenon of

application, one should keep in mind two circumstances: one,

pensions account for more than 10 percent of GDP in many

contemporary nations; two, pensions constitute a central link

between work and leisure, between earned income and

redistribution, between individualism and solidarity, between the

cash-nexus and social rights. Pensions, therefore, help

illucidate a set of perennially conflictual principles of

capitali sm.

Most comparative research on welfare states rests on linear

conceptions of the world: some spend more, some less, but they

are otherwise basically the same welfare states. A greater

sensitivity to institutional variability will, in contrast, yield

a picture of distinct regime clusters. It is to this issue that

we first turn. Following an overview of the principal

institutional variations in the provision of pensions today, the

study will analyse the historical origins and developmental

patterns of private sector provision across the western world.The

study will then turn to an analytic effort to explain observed

international diversity and convergence.

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1. THE ROLE OF THE PRIVATE SECTOR IN WELFARE STATE REGIMES.

The concept of welfare state regimes serves to denote the

institutional parameters that guide and shape concurrent social

policy decisions, expenditure developments, problem definitions,

and even the response and demand structure of citizens and

welfare consumers. The existence of policy regimes reflects the

circumstance that short-term policies, reforms, debates and

decision making takes place within a framework of historical

institutionalization. The boundaries of rights and claims that are attached to social citizenship constitute an example of such , relatively historically stable institutional parameters. Thus,

the scope of human needs that are given the status of a social

right is a central definitional issue with regard to the

identi ficat ion of welfare state regimes. An " i nst it ut i onal "

welfare state i n Titmuss” scheme is, in contrast to the

"marginalist"y one that recognizes no pre-ordained boundaries for

social rights CTitmuss, 1974; Korpi, 1980). A particularly

important element in the identification of welfare state regimes

will, accordingly, be related to the blend of publicly provided social rights and private initiative. In other words, regimes can

be compared with respect to which essential human needs are

relegated to public versus private responsibility. To be

concrete, are housing needs, employment rights, health or human

capital development considered a matter of citizenship or an area of self-reliance? © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

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A second crucial dimension of welfare state regimes pertains to social stratification and distributional logic. As elaborated in

greater detail elsewhere <Esping-Andersen, 1982;1986),

comparative research typically ignores the fact that welfare

states are inherently systems of stratification, that not only

define citizens in terms of distinct strata, but also develop and

cultivate lasting loyalties, identities and status demarcations.

Three distinct clusters of regimes demarcate the cross-national

variation in this respect. First, the universalistic model

strives towards comprehensive inclusion and equal status of all

citizens. This is a welfare state that aims to undo the

stratification that results from markets and hierarchies, by

establishing classlessness in the world of social citizenship.

The Beveridge plan of universal flat-rate pensions, the

Scandinavian "peoples’ pensions", or the principle of universal

national health care belong to this category. Without doubt, the

Nordic countries constitute model examples of universalistic

citizenship in terms of status and rights.

A second distinct cluster is composed of nations which developed

social security along traditional corporativist lines; that is,

regimes that are founded on, and which seek to perpetuate,

status- or group- differentials. Identities, loyalties and

community is thus defined in exclusive terms with reference to

socially recognized class/group/status demarcations. The French

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distinction between "cadres", civil servants, manual workers; the

German separation between "Arbeiter", "Angestelte", and Beamten;

or the proliferation of more than a hundred separate occupational

pension funds in Italy, all reflect the dedication to status-

defined citizenship. The corporativist tradition is powerfully

present in the structuration of Continental European welfare

states. A special case may be seen in the Dutch model, where

status is not defined on the basis of occupation or economic position, but with reference to religion.

The third cluster, finally, can be identified as regimes where

the stratificational principle pursued is that of the market;

that is, welfare states are designed to consolidate and

perpetuate market pre-emminence. This is the "residual ist11 model

defined by Titmuss;one in which the state extends citizenship

rights is only under conditions conditions where the market

mechanism Cor the family) fails. Social security will seek to

conform to the standards of market exchange, by stressing

voluntarism, actuarial ism, a flavor of "less eligibility", and

target-efficiency in social provision. A hallmark of this regime

is the pursuit of maximum private sector provision, the

accentuation of means-tested social assistance, a pronounced

actuarial-type relation between individual contribution and

claims. The resulting regime will cultivate a system of

stratification that is quite at variance with the alternative

regimes mentioned; on one hand, it is likely to forge a dualism

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between state dependents and market actors; on the other hand, it

is prone to replicate the stratificational results of market

competition (and segmentation). The Anglo—saxon "New Nations" and

countries with a particularly flourishing liberalist tradition

are, comparatively, clear examples.

There are two obvious conclusions that emerge in this portrait of

welfare state regimes. One, that present-day welfare state

charactersitics are powerfully pre-defined by the history of

nationbuilding, mode of industrialization, class structural and

political development. This conforms closely to the arguments

presented in leading historical works on comparative welfare

state evolution (Briggs, 1361; Rimlinger, 1971; Flora et. al. ,

1981). A distinct welfare state regime may certainly owe its emergence to political conflicts and reforms within the fairly

recent past, as is clearly the case with the American (the New

Deal) or the Scandinavian (the breakthrough of social democracy

in the 193Q's). But, we would probably have to explain the

features of the New Deal, or the social democratic realignment, with reference to the patterns of nationbuilding that preceded

them. Nonetheless, what occupies us here are not theories of

ultimate historical causation, as much as the identification of regimes.

The second conclusion is that the place of private provision

within the total welfare mix is a crucial factor in

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distinguishing the stratificational and distributional nexus of

welfare state regimes. Private welfare must , ironically, be

analyzed in order to identify the welfare state; and as we shall

discover, the opposite is equally true. But, besides its

relevance for c 1 assi fi eatery endevours, the role of private

provision is an analytical precondition for any serious testing

of causal theories of welfare state growth, precisely because state provision is so powerfully intermingled with private

provision (Rein and Rainwater, 1986). As a conceptual and

theoretical problem, it is also an issue of methodology.

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2. METHODOLOGICAL PROBLEMS IN WELFARE STATE REGIME RESEARCH

The lion’s share of comparative welfare state research is notably

one-dimensional. First, it examines by and large only

governmental activity and thus ignores the private sector.

Secondly, it is overwhelmingly linear in its conception of

historical development and cross—national differences; on both

axes, analyses tend to focus on linear relations such as

expenditure levels and levels of economic development, working

class power mobilization, population ageing, or even

democratization. Thirdly, it is heavily wedded to mono-causal

arguments:"politics" versus "economic development", for example.

Reorienting research in the direction of a policy regime approach

invites new methodological considerations. The policy-and

sectoral mix that a regime approach demands, means that the

object to be studied must be defined relationally and

institutionally. This does certainly not mean that, a priori, any

linear-analytic approach must be discarded, but it seriously

raises the possibility that cross-national differences must be

identified via variables and criteria that are categorical and thus non-linear. If nations cluster, normal regression techniques must be applied with caution.

The great theoretical debates in welfare state research have

focused on a limited array of causal forces, the principal ones

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being economic development, demographic change, democracy, and

political mobilization. The two first, in particular, strongly

argue cross-national convergence; the case for the latter rests

pretty much on divergent welfare state development. In any case, a falsification of either argument can hardly rest on a study of state activity alone. To give one concrete example, actual public

pension expenditure may be increasingly divergent across

similarly developed nations, but this does not necessarily

invalidate a demographic or economic explanation, since

(government) mandated private employer pensions , if included in

an expenditure measure, might very well equalize the variation

otherwise observed.

But, even more important is the need to specify more precisely

what causal forces operate at what explanatory level. An example

from t he power mob i1i z at i on approach will illustrate the point.

Political parties operate at the level of parliamentary

decisions; trade unions at the level of industrial relations.

Both are manifestations of wage earner mobilization. Yet, nations

differ dramatically with respect to the mix of these two power

resources. Some score very high on both (Scandinavia, Austria), some are characterized by weak or non—existant labor parties, but

trade unionism of some significance (the United States or

Canada), others by the reverse (France). It would be a more

sophisticated theory indeed, could it specify the conditions of

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power mobilization that would produce any given combination of strong state or labor market based social provision.

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THE PRIVATE-PUBLIC MIX OF SOCIAL PROVISION IN ADVANCED CAPITALIST DEMOCRACIES.

Any study of the public-private mix faces formidable obstacles.

One is the paucity of reliable data, especially going back in

time; another is the difficulty of defining what exactly should

be considered private or public.

The definition issue must be first resolved. With regard to

pensions, the residual that emerges after having isolated

legislated social security programs, proper, is complex. Each

nation has experienced its own peculiar evolution in the arrival

of any given "package" of pension plans so that, what is termed

private in one may not necessarily enjoy a private status in

another. How, for example, does one treat private employer plans

that have been mandated by government?

The definitional question must be r esolved i n light of our

t h eor e t i c sa 1 c on cerns. Wit h this in rn i n d ,. we must begin with the

basic criteria of legislation, based on the argument that any

test of political power mobi1i zat ion theori es must i dent if y

outcomes that flow from parliamentary-level conflict and power.

This implies that we must include all pensions under the rubric of public if they are: a) directly legislated and/or administered

by the state, or b) if there exists a clear and explicit

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government mandate that the private sector provide a given type

of pension. This criteria implies that the Finnish, British and

Dutch second-tier industrial pensions must be considered public,

but given the absence of an explicit statutory government dictum in France Cor Switzerland, until 1982), the labor market pensions there are to be classified as private.The same argument pertains

to the Dutch "Company pensions". The year in which government

mandating occurred defines the shift from private to public.

A second category that must be isolated are government civil

service pensions. These mirror the government's role as employer

and are thus occupational in nature ; despite being financed by, and paid out of, government budgets, they have very little to do with legislated social rights but much to do with a particular status privilege. They reflect, in a sense, corporative privilege in the classical sense.

In the field of pensions there remain two classes of "purely"

private provisions occupational pension plans, and individual

annuities. The two types are important to keep seperate due to

the differential logic that they espouse. In a strict sense, it

is difficult to consider occupational plans as simply market-

conforming. They often mirror employer paternalism (in the form

of the traditional gratuity pension) , collective insurance (in

the form of group-plans), or labor market collective bargaining.

Today, the first type is relatively marginal (excepting Japan),

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and we can therefore view private occupational pensions primarily

as an indicator of trade union mobilization. Theoretically, we

would anticipate that private occupational pensions are

positively related to trade union power, in particular under

conditions of weak labor movement legislative capacity. Finally,

the category of individual insurance, such as life insurance

plans, reflect the traditional model of self-reliant

individualism within the framework of competitive contracting.

As noted, the empirical problem is formidable because of the

generally meagre and uneven statistical coverage of private

plans. There is normally reliable information on life insurance

plans, mandated occupational plans, and funded, or trusteed,

labor market pensions. The major shortcoming is lack of data on

unfunded "gratuity-type" pensions. For some countries, Japan

especially, we will thus underestimate the scope of private

provision. Historical data is, moreover, almost impossible to

assemble. This limits our inquiry to very recent data; for two

nations, Austria and Italy, there exist no up-to-date information

whatsoever on private occupational pensions. It is universally

agreed that their scope is tiny; we therefore decide to score

them equal to the lowest within the sample Can approximation for

Italy is facilitated by known private pension expenditures for

1 9 7 0) . © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

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The following empirical overview examines the public-private mix

within the two dominant social welfare program areas: pensions

and health care. For pensions, we present two different indicies;

one, total expenditure by program category; two, the sources of

income among aged households. With respect to the former,

expenditure data was prefered over coverage or finance data,

since it reflects the actual status at present; finance data,

given long-term funding, might only reflect a possible future

scenario. And the problem with coverage data is that broad

coverage does not necessarily imply that private pensions play

any significant role; in Sweden, for example, there is virtually

universal coverage of occupational private plans, but the

benefits paid out are exceedingly marginal.With respect to the

1atter, it is for a number of countries , p oss i b 1e to utilise

survey data to est i mate the r e 1 at i ve i mpor t an ce of public and

pri vate pensi ons, as well as of work income and individual

savi ngs i n the total income package of aged households. This

affords us the possibility of examining the continued importance

of work as well, and it permits us to compare expenditure-based

data with income-source data as a

means to ascertain data reliability. Issues of definitions and

data sources for pension expenditures are treated in detail in a

seperate appendix, attached to the tables.

For health care, we are able to present over-time data (1960 and

1980) on the public-private expenditure mix, thanks to the work

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of Poullier on behalf of the OECD. A third, and final, indicator

of the public-private mix will be presented in the form of

employer contributions to legislated, as opposed to voluntary,

fringe benefits. This offers yet another means of gauging the

reliability of the expenditure data, and of estimating the

relative importance of private provision within the labor force.

3.1. STATE AND MARKET PROVISION OF PENSIONS

For a few countries, it is possible to trace expenditure

developments of occupational plans since the 1950's. Table 1

presents estimates of occupational pension expenditure as a

percent of GDP between 1950 and 1980 for 12 nations.

Table 1 illustrates a number of important phenomena that we shall return to subsequently. First, that private (funded) occupational

pensions played a relatively marginal role until very recently.

In 1950, private pensions (as well as public) absorbed a small

proportion of national resources. Secondly, the table reflects

the differential trends among nations. In some countries,

especially Australia,France, Switzerland, and the United States,

private plans have grown very large, indeed. A substantial

growth also occurred in Denmark, Canada and Holland. The opposite

is true for Finland, Sweden, and the U.K. where,of course,

government legislation or mandating marginalized the private

sector. The bi—modal distrubution of private pensions across

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nations remains when we examine more closely the breakdown of pension expenditures around 1980. See Table 2.

Table 2 shows the relative importance of social security,

government employee, private occupational , and individual

pensions as a percent of GDP for 18 nations. For all four

categories,the cross-national variance is substantial. Social

security pensions vary from a low of just above 2 percent in

Japan to a high of almost 10 percent in Sweden. Government

employee pensions range from less than 1 percent in Australia and

Canada to a high of almost 4 percent in Austria. Private

occupational plans are insignificant in Austria and Italy, but

very large in France, Switzerland and the U.S.. Individual

annuities (which may include some group plans, too) play a

dominant role in Canada, Denmark and Germany, but are peripheral in Finland, Italy and the U.K.

A clearer picture of the relative pension mix can be established if we present the ratio of each of the four categories to total pension expenditure, as seen in Table 3. Note that we have here set Austria's and Italy's occupational pension expenditure equal to 0.1 percent of GDP.

Table 3 shows a distinct cross-national clustering. Low levels of

social security in the overall m i x seems clearly accomp an i ed by

large shares of private sector provision. This is almost

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tautological- Countries are surprisingly bi—modal with regard to

their emphasis on public employee pensions. In one group, their

iinfluence is overwhelmingly strong: Austria, Belgium, Finland,

France, Ireland, Italy and Japan. This is important to note,

since this is the same group of c ountries in which soci a1

security generally evolved along strongly demarcated status-

corporative lines (see Esping-Andersen, 1986). In contrast, the

liberalistic and social democratic traditions display low levels

of civil service pension expenditure (Australia, Canada, Denmark,

New Zealand, Norway, Sweden, and Switzerland). What primarily

distinguishes the latter is the relative position of social

security versus private sector provision. Australia, Canada and

the U.S. are examples of modest social security and strong

private commitments, whereas Norway and Sweden (and possibly also Denmark) exemplify the opposite. A preliminary classification of "pension regimes" is thus possible:

1- Corporative systems, in which status is a key element in the

pension program structure. In this regime, the private market is

generally marginal, and social security tends to be highly

occupationally segregated with particularly pronounced civil

servants' privileges: Austria, Belgium, Germany, Italy, Japan,

with the possible inclusion of Finland and France.

2- Residualist systems, in which the market tends to prevail at the expense of either social security or civil service privilege,

or both: Australia, Canada, Switzerland, the United States, and

possibly also France.

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3. Universalistic systems, in which population-wide social

rights marginalize both privilege and markets: New Zealand,

Norway, Sweden, with the possible inclusion of Denmark and

Hoi1and.

This classification leaves us with only one really mixed case,

the U.K.. The same basic patterns would be expected to emerge

when we turn our attention to the structure of income among aged households- We would anticipate that the relative importance of

work,investment, and private pension incomes would be highest in

those cases with residualist regimes.

As can be seen in Table 4, there is some truth in this, albeit

with important exceptions. But, first of all, Table 4 by and

large confirms our previous picture, even if it is unable to

distinguish civil service pensions from general social security.

Work incomes are important in the countries where we would expect

it: Canada, and the U.S., but also in Denmark , Ireland, and the

U.K. For Denmark and the U.K., the reason is probably the

straightforward one that the social security system offers only modest flat—rate pensions, and that a second-tier either does not

exist, or is too recent to provide for substantial pension

income. For Ireland, the reason would primarily have to do with

the continued importance of rural self-employment. However, given

that the table refers to households, the work income will, in

large measure, refer to spouses.

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The distinction between investment income and private pensions in

Table 4 corresponds to the relation between individual sel f-

reliance and collective bargaining. In this sense, individualism

appears especially pronounced in Canada, New Zealand, and the

U.S., and least so in Norway, Sweden, and Finland. For a few of

these countries we have household income survey data for the

early 1960's, as well. This permits us to trace major structural

changes for Denmark, Canada, the U.K. and the U.S. The primary

trend is a fall in the significance of work, especially in

Denmark and Canada; the rise of social security; and also a rise

of investment income, especially in Denmark and Canada (OECD,

1977; Goodman, 1986') .

The statistical correspondence between our two types of public- private pension mix indicators is fairly strong. Based on the 10 nation sub-sample for which household income data are available,

the zero-order correlation between a) the private pensions share

of household income , and b ) occupational pension expenditure as

a percent of total, is +.602. Similarly, the correlation between

the two indicators of the social security share is +.683. Both

work incomes' share, and private pensions' share of household

incomes is strongly negatively correlated with the social

security variable (-.694, and -.636, respectively).

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Table 5 presents the private-public mix in health care

expenditures for 1960 and 1980. At first glance, the table

illuminates two important factors. One, a pervasive shift from

private to public over the two decades. The 18-country mean of

private as a percent of total declines from 37.3 to 21.5. This

trend is accompanied by a certain international convergence:the

standard deviation declines from 17.9 to 13.5. Two, there appears

to be a somewhat similar public-private pattern to that which

existed for pensions; that is, the private-public mix is

consistent across different policy domains. Nations that are

biased in favor of private pensions seem also to be so in health

care. Thus, the "residualist" pension group includes by and large

the same nations with regard to health care: Australia, Canada,

Switzerland, the United States, with the possible inclusion of

France. The only real exception is Austria, where private

pensions are virtually non-existant, but where private health is

substantial. The zero-order correlation between the share of

private pension expenditures (including individual annuities),

and private health expenditure shares for 1980, is .630.

Finally, Table 6 presents data on the private-public mix in

employer payments towards fringe benefits. Expressed as a percent

of total labor costs, the table differentiates between legally

required employer payments (social security contributions, for

example) and voluntary contributions (which may be either

gratuituous or collectively negotiated). Although the table

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covers only 16 of the total IS nations, the pattern that emerges

would in general seem to confirm our previous findings regarding

the public-private distribution- Based on the 16 nation sub

sample, the zero-order correlation between the share of voluntary fringe benefits and private occupational pension expenditure as a percent of total is .823.

In sum, the evidence suggests a generally good empirical

correspondence among our various indicators of the public-

private mix in social protection. This implies also that the

relevance of a "regime approach" to the cross-national comparison of welfare states may be fruitful. The clustering along our basic dimensions is both sufficiently clear on single indicators, and

seems also to be upheld when we cummulate different

indicators. We now turn from the quantitative overview to the

question of how differential private-public structures evolved

historically. The discussion will be limited to the field of

pensi ons. _©The

Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

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4. THE HISTORICAL ORIGINS OF PENSION STRUCTURES.

It would be a serious analytic fallacy to impose upon the 19th

Century the conceptual meaning of pensions and retirement that we

have today. The practice of retirement was a marginal phenomenon

until World War II (Graebner, 1980; Myles,1984). Neither public

policy,.nor private choice, assumed that a person would normally

withdraw from active working life at a certain specified age, and henceforth enjoy old age in leisure. There were of course persons

drawing a pension, but until recently only very few aged would

have been in command of sufficient income to circumvent

dependency, poverty, or the compulsion to work.

Social security pensions emerged at the close of the 19th

Century, spread more rapidly in the interwar decades, but hardly

provided an institutionalized means of retirement until after

World War II (Perrin, 1969). This does not imply, however, that

the world of pensions was once a predominantly private domain to

be successively crowded out by the state. Indeed, from their

origins to the present, pensions have continuously progressed

through an intricate mix of private and public; the state has

consistently been highly present.

Income security for the aged in the 19th century was a question

of protection against impaired working capacity or loss of

breadwinner. Besides working (the norm), the principal sources of

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old age income protection lay in family care, thrift or charity,

within the private sector, and poor relief within the public

sector. As actual pension plans arose, the state was on center

stage. In its role as employer, the state was often a pioneer of

occupational pensions . The British government introduced civil

service pensions as early as 1834, the same year in which the new poor laws established the principle of less eligibility; New York City provided pensions for its employees by 1857. Taxation policy came to play a critical role in boosting private sector pension plans; government regulation of early friendly societies as well

as of rules pertaining to tax-exempt pension payments has

directly shaped the structure of private pension developments.

And, finally, the state's indirect stimulus has naturally been

formidable; the absence of legislated pensions, insufficient

coverage, meagre benefits, or restrictive eligibility conditions would almost automatically inspire private alternatives.

Any discussion of the history of pensions must take into account

the radically different structural conditions that prevailed in

early industrial capitalism. Due to class structure and

demographic conditions, objective need would be defined

di f fer ent1 y .

A large bulk of the 19th Century population was rural; self-

employment remained significant. Thus, in 1870 agriculture's

share of total employment usually surpassed 50 percent (65

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percent in Austria, 52 percent in Denmark, 50 percent in Germany

and the United States, but only 23 percent in Britain). The

relatively marginal commodification of labor that this implies

means that dependence on wages or insurance incomes in old age

would be somewhat peripheral.

Employment structure notwithstanding, prevailing demographic

conditions would have subdued massive demands for old age

pensions. Around 1820,life exepectancy at birth was normally well below 40 years; by 1900, still below 50 years (in comparison to contemporary societies with a life expectancy of more than 70 years). To adjust for high rates of infant mortality, we may note

that life expectancy at age 20 around the turn of the Century

hardly surpassed 40 years: 40 years in Austria, 41 years in

France, 42 years in the U.S., and 46 years in Sweden (United

Nations, Demographic Yearbook, 1949). In other words, very few

survived beyond the age of 65. Hence, the population ratio of

those 65 years and older was, around 1870, between 3 and 5

percent (as compared to 11-15 percent in the mid-1970's)

(Maddison, 1982).

The need for old age pensions in 19th Century industrial

societies was perhaps modest, but certainly not absent. With the

consolidation of the commodity status of labor emerged the risk

that work incapacity would jeopardize survival. Widows, the

disabled, and the old were easily the victims of extreme poverty.

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Von Balluseck (1983:219) reports that the vast majority of those

receiving alms in Berlin in 1867 were over 60, or widows. But

abject or prospective need for protection was hardly matched by

any sustained capacity to ensure that it be met.

In the 19th Century, old age income protection was managed in a

variety of ways. One, most continued to work; a norm that was

pervasive well into the 20th Century. Ball (1978:80) reports that almost 70 percent of American males over age 65 worked in the

1890’s;Gui11emard (1980) reports similar figures for Trance. In

fact, the early social security schemes or employer plans were

not meant to replace work income, but rather to supplement or

compensate for diminished working capacity (Myles, 1984).

Employers would often provide sheltered jobs for their aged and

less productive personel.

The second major means of securing a livelihood in old age was

family. The importance of family was two-fold. One, the

traditional practice of transferring the means of production to

the younger generation and, subsequently, living off the

"dividend"; two, the necessity of relying on the family’s general

welfare function. A 1929 New York survey showed that more than

half of the aged persons were dependent on support from family

and friends (Weaver, 1982:42).

The third avenue was charity, in many nations predominantly

organized by the church. The same New York survey cited above,

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showed that percent of the aged were solely dependent on charity, but this misrepresents its real significance. As late as

1927 in the United States, total private charity payments were 6

times greater than total public welfare expenditure (Weaver,

o p.c i t . p .20).

The fourth avenue was publicly provided poor relief which, as

discussed above, remained practically the only state income

maintenance program for its citizens, at least until the turn of

the century. As the German example showed, the relief rolls were often swelled with old workers with neither work nor property.

Even as late as 1954, there were one million aged Britons

dependent on social assistance (Brown and Small, 1985:136).

However, where political adherance to hard-core liberalism held

sway, poor relief was not a particularly dependable source. In

the United States, there were many states which refused to grant

cash assistance to the needy (Weaver, op.cit); in Britain, the

reign of the poorhouse would ensure that all but the most

desperate would turn elsewhere.

The fifth and sixth avenues, namely either state or private

pension insurance, are today the all—dominant but were in the

19th Century extremely marginal. Bismarck's pioneering pension

insurance first came in 1889, and most nations failed to

introduce public pensions for workers until well into the 20th

Century. This does not mean that the state was wholly inactive;

indeed, states pioneered the principle of occupational pensions

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(for their own civil service), and frequently mandated them in selected, high-risk or high-priority occupations, such as seamen

or miners. But, clearly, these kinds of plans failed to cover

those citizens with the greatest potential need, namely the

property-less wage worker. One type of government provision was occasionally of some importance, and that was veterans' pensions,

especially in the United States. Skocpol and Ikenberry (1983)

argue that the surprising lack of popular pressure for pension

legislation in the U.S. was due to the rather frivolous

disbursement of Civil War pensions.

Private sector insurance was not capable of substituting for the

huge gaps left by family, charity and state. For our 19th Century

forebears, there were normally two private sector pension

options. First, and most important, were friendly societies and

their kindred. These were generally thrift organizations for

distinct social groups, be they occupationally or trade union

defined; they often evolved out of the ancient guilds. In some

nations their scope was considerable. Gilbert (1966) has

estimated that about 50 percent of working class males in Britain in 1880 were members of friendly societies;in the United States around 1890, there were 3.7 million members — equivalent to about

5 percent of the labor force (Weaver, 1982:46). Ashford

(1986:151) notes that the French mutual societies counted two

million members in 1902. Friendly societies were, on the other

hand, only marginally involved in old age pension disbursements.

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Their activities centered on sickness protection, unemployment,

burial costs, and survivors. Moreover, their membership largely

consisted of the better-off, skilled sections of the working

class: those capable of furnishing the required weekly

contributions. As a result, their capability of securing pension incomes among the aged was somewhat less than impressive. This is

clear in the United States during the 1920fs ; while membership

had grown to more than 5 million, the total number of pension

recipients in 1928 was only 11 thousand (Weaver, 1982).

The alternative source of private sector pension protection was

employer plans. There were a small number of industries that

established private pension plans at an early date, notably in

the railroads, mining, and among seamen. These early forerunners

of the industrial pension were, moreover, often sponsored by

governments. In addition, a handful1 private firms began in the

19th Century to establish company pensions. These were almost

universally corporate vanguard firms, such as American Express

(then a shipping company), ATT, Carnegie Steel, and Kodak in the

United States; Krupp, Siemens, and Hoechst in Germany; and

Cadbury, Lever, and Rowntree in Britain. Such plans, however,

were primarily addressed to salaried staff and they were, above

all, paternalistic and gratuituous. Benefits were discretionary,

usually contingent on life-long and loyal service, and were

financially precarious. Thus, rather than being premised on

contractual entitlement principles, they were paid out of current

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ompany revenues- As such, a person's pension prospects were company fortunes.

ntimately connected to the vagaries of

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5. THE HISTORICAL EVOLUTION OF THE PRIVATE-PUBLIC MIX

The foregoing portrait of 19th Century pensions indicates that

the market system was a fairly residual element in pension

provision.Therefore, when state pension insurance eventually

emerged, there was hardly any "crowding-out" effect possible. The 19th Century private market had, in fact, not discovered much of a niche for pensions.

Paradoxically, public and private pensions emerged and grew in

tandem. What was gradually crowded out were the pre-capitalist

legacies of social protection, such as the family, and charity,

together with the poor laws and friendly societies.

The causal structure of pension evo1ution rests on a combination

of sociological variables (demography and employment) and

political transformation. The demographic structure began to

change dramatically around the turn of the Century, particularly

with respect to family structure and life expectancy. In the

three decades after the turn of the century, male life expectancy at age one jumped by almost 10 years in most nations; the ratio of citizens 65- and older thus grew (United Nations, op.cit). It was also in this era that the shift from self-employment to wage

labor, and from agriculture to industry was particularly

powerful. The share of agricultural employment declined from 50

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percent in 1370 in Germany and the U.S. to about 33 percent in

1910 . Hence, neither the family nor the farm would afford much

old age protection for the average worker of the new social

order. And, meanwhile, need grew objectively.

It was also an era in which the meaning of work and employment

was recast; from artisan-type shops and small manufactures to

modern mass production, from a stress on labor intensity to a

growing concern with maximizing productivity. The Progressive

Era, be it in the United States or Europe, was one that

inaugurated ideas of scientific management and optimal efficient use of labor power. Thus arrived also the desire of management to shed itself of ageing workers (Myles, 1984; Qraebner, 1980).

While need for pensions obviously grew, so did citizens'

collective capacity to demand them. Over the course of the 19th

and even 18th centuries, there had been countless proposals and

plans for both public and private pension plans. Daniel Defoe had

proposed a "pension office" as early as 1697;Thomas Paine wrote

it into his basic rights of man, and presented an actual plan to the Lower House; both revolutionary and Napoleonic France debated

old age protection CAlber, 1982:32-33;Ashford, 1986). They all

came to naught because there was no political will. The period

around the turn of the Century, however, changed the conditions

under which political will could find expression. In the labor

market emerged trade unions and, gradual1y , industry— and

nation-© The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

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wide labor associations. Their legal recognition was generally

established during the closing years of the 19th Century, and

their growth was almost everywhere explosive. Universal

suffrage spread around World War I, allowing the rising labor

parties representation and some leverage. In other words, the

"social question" could become political.

In this historical nexus emerged the modern blend of private and

public old age protection. In the private sector, the movement

was towards two basic systems; one, individual (life) insurance;

the other, collective types of occupational and industrial

pensions that, incidentally, should include government employee

occupational pensions. In the public sector emerged two models of

social security pensions; one, a basic, usually flat-rate,

minimum with its roots in the social assistance tradition

(Denmark, Australia, for example); the other, an insurance scheme

pr emi sed on actuarial 1ogi c and an emp1oyment r ecor d .

In a nutshell, the thrift element shifted from the friendly

society to the modern insurance company; the employer gratuity

pension was gradually transformed into a contractual fringe

benefit in collective bargaining; government poor relief became

social security.

The early initiatives within both public and private pensions

were frequently motivated by desires to weaken the labor

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movement s . Private sector employers instituted pensions as a

means of weakening union loyalties, divide the employees, and

glorify management (Myles, 1984; Graebner, 1980; King, 1978;

Jackson, 1977). Unions were therefore antagonistic. Similarly, early state legislation of pensions was typically undertaken as a

means to arrest the growth of labor movements, and to redirect

workers' loyalties toward the state and the existing order

CRimlinger, 1971). This was the clear rationale behind the German , Danish and Austrian reforms; this was also what guided the 1891

Papal Encyclical, Rerum Novarum, which came to exercize

tremenduous influence on social policy within the Catholic

nations. The rise of modern pension schemes was therefore not catapulted by labor; its influence was little more than that of the passive kind.

Given their relative powerlessness to influence either state or market,it is not surprising that the labor movements concentrated

on cultivating their own plans. It was during the turn of the

Century that these came to enjoy a fast pace of growth. As noted,

the Arnerican trade union societies grew from 3.7 mi 11 ion to 5.3

million members between 1390 and 1900; they continued to grow

until the Great Depression, when they suffered severe financial

difficulties and gradually lost out to private insurance

companies, employer plans and public pensions (Weaver,

1982:46ff). It should be kept in mind, that probably only l/4th

among the large numbers covered in trade union plans were covered

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for pensions (Weaver, op.cit. p.48), and very few actually became recipients.

The situation was fairly similar in Britain where trade union

fund membership grew to 5.5 million by 1338 (Brown and Small,

1385). That is equal to 24 percent of the British labor force of

that period.

From the point of view of the labor movements, the friendly

society strategy was discovered to be less than optimal. It did,

of course, offer an added attraction for workers to join the

unions, but its marginal dividend for mobilization was easily

offset by its segmentary consequences. It spoke to the better-off

workers, able to contribute and easier to organize, but largely

excluded the weakest, lowest paid, and most marginal workers—

precisely those that would be most important to organize and most

in need of protection. The workers' insurance model embodied in

the trade unions was, accordingly, potentially dualistic.

Besides, it was prone to financial difficulties due to recurrent

unemployment and business cycles. Thus, Weaver (1382) argues that the decay of trade union funds in the United States was primarily caused by their inability to weather the Depression.

The institutionalization of both private and public pensions

coincided during the early decades of the 20th Century. In

several respects, public policy actually nourished market

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expansion. First, governments began in earnest to build up

occupational plans for their employees at both central and local

level. In Britain, for example, all local governments instituted

teachers pensions by 1898; by 1937, this was mandated for all

employees of local governments (Brown and

Small, 1985). In the United States, there was a rapid growth of

both federal employee pensions and state/local government

coverage. By 1928, total coverage of public employees reached

about 1 million; about 25 percent of state/local employees

(King, 1978:200; Weaver, 1982:48). In the same year, veterans

pensions were still the greatest source of pension income,

benefitting almost 500.000 individuals, or somewhat close to 85

percent of all pension recipients in the U.S. (Weaver, op.cit.

p.48). This was also the era in which many public utilities, such

as transportation, gas and electric, were nationalized; as a

consequence the membership of government employee plans grew

additionally. Even in the United States, the Federal government

came to the rescue of the railroads, leading to the

nationalization of their industrial pension plans in 1935.

The direct impact of government occupational plans on private

sector growth was two-fold: one, they were important as agenda

setters, stimulating demands for equal protection among private

sector employees; two, being often administered by insurance

companies, they helped bolster their role as key institutions in

the further growth of private sector pension protection in terms

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of both individual, group, and industrial schemes- In brief, government employee plans helped construct the private market.

A second important influence of government were its fiscal and

regulatory interventions. Between the two world wars especially,

governments introduced the idea of tax expenditures to give the

market incentives for social protection (for example, the 1921

Finance Act in the U.K.; the 1922 and 1924 revenue act in

Denmark, and the 1926 revenue act in the U.S.), by allowing

deductions for contributions. In turn, such tax privileges

spurred governments to regulate private sector initiatives,

stipulating financial solidity, funding, contractual rights and

accountability. Thus, governments came to further bolster the

importance of insurance companies; concommitantly, they helped

reshape the nature of employer pensions, discouraging the

traditional discretionary gratuity principle and encouraging the

rise of regular,negotiated, and contractual fringe benefit plans

for employees.

Ironically, the legislation of social insurance schemes also

provided considerable room for private pensions. Where

legislation was slow to happen, as in the United States, the

incentive was obvious. Where it did happen, the private sector was typically antagonistic, fearing a crowding out effect. When

Germany, for example, legislated pensions for salaried employees

in 1911, the insurance industry was vehemently opposed CJantz,

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1961:149!). But there seems to be no unequi vi cal 1 y negative effect

of legislated pensions on private pension growth. The social

security reforms that were introduced before World War II offered

very meager benefits, incomplete coverage, and where the

insurance model was adopted, the contribution requirements meant

that they really only applied to future generations.Thus, in

Britain the 1908 law provided only means-tested benefits to aged

citizens beyond the age of 70; the subsequent contributory

pension of 1925 assumed 40 years contribution and was, anyhow,

designed so as to provide only a minimum to be supplemented with

private occupational pensions or individual savings. The German

ArV workers' pension insurance was launched as a disability

pension for those unable to work, targeted for workers over 70,

premised on 35 years contribution. As Myles (1984!) shows, those

Germans that did receive a pension would probably have been

unab1e to 1i ve on i t .

Generally speaking, government pension legislation before World

War 11 was in the spirit o f o f f er ing mini malist pr ot ect ion, so as

not to discourage labor supply; it was assumed that necessary

pension supplements should be purchased in the private market. In

the United States, the spirit of minimalism was, perhaps,

unusually extreme. But the same basic principle applied also to

European practice. Welfare Capitalism was a slogan that depicted

well the definition of government responsibility for the era as a whole. © The Author(s). European University Institute. version produced by the EUI Library in 2020. Available Open Access on Cadmus, European University Institute Research

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The evolving pension mix of the first decades of the 20th Century

mirrors a welfare capitalist model. It embodies a matrix of

developments that bridge the largely pre-capitalist terrain of

the 19th Century, and the welfare statism of the post World War

II period. Objective need for pensions had clearly asserted

itself; wage earners' power to demand action was increasingly an

inescapable reality; industry's new productivism diminished the

value of aged workers; states had taken decisive steps to

encourage and even create a market for pensions; social security

had been set in motion, but was still no serious contender to

private pensions. In brief, this was the era of Titmuss'

residualist state.

Private pension schemes grew markedly during the first decades of the 20th Century. But more important than their growth was their transformation. The movement was from discretionary gratuities to

contractual arrangements; from unfunded plans to insured,

trusteed schemes; and from catering to narrow strata of upper-

echelon staff, they were gradually extended to manual workers.

Within this process occurred also a transformation of the age-old

tradition of thrift. The friendly societies Cor the piggy-bank)

gave way to the modern insurance company's life insurance plan.

More slowly, the savings embodied in the family farm gave way to

ur ban homeowner ship.

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The promotion of Welfare Capitalism, it was believed, would allow

the modern capitalist enterprise to substitute for the

unpleasantly communistic flavor of social insurance. It spoke to

the new world of the Progressive Era, the emerging modern

corporation, scientific management, and the heightened concern

with good labor relations. It was premised on hopes that social

protection was indeed a cause to be happily embraced by private enterpr i se.

Both companies and whole industries began, in the United States,

to establish funded and trusteed pension plans, increasingly to

be placed with insurance companies. By 1930, the insurance

industry held a total of 83 million policies (including

individual, group, and company plans), and was paying out

benefits amounting to $ 2 Billion (more than charity, public

employee plans and the scattered state pension plans paid out

together)(Weaver, op.cit.p42). This staggering amount, of course,

included mainly other risks than pensions, but it was in the

pension field that the life insurance industry's fastest growth

occurred. Group plans (almost exclusively contracted by

individual manufacturing firms) accounted for 1 percent of its

business in 1915; 15 percent by 1935 (Weaver, op.cit. p.47).

Industrial pensions that addressed manual workers grew at a fast pace. With quite modest contributions (that were tax-deductible)

, such pension plans spread quite impressively in the 1320's. Ely