The logic of funding European pension restructuring and the dangers of financialisationÀ

During the 1990s, pension funds seemed to dominate the world's capital markets, reaping unprecedented rates of return. This stands in glaring contrast to the budgetary difficulties of most nonfunded European pension arrangements, which are a result of the changing demographic composition of the population. As a result, a growing number of European states is trying to transform the existing pay-as-you-go systems into funded pension arrangements. After a critical examination of these demographic projections, the claim that funded pension systems are not subject to `demographic stress' is critically assessed. Finally, given the logic to which funded pension arrangements are subject, it is argued that the introduction of such institutions could result in a growing financialisation of the economy. It is claimed here that this is not without dangers for the long-term wealth-generating capacity of firms. So, not only are the reasons for pension restructuring less compelling than is generally thought, restructuring could also result in unwanted side-effects. DOI:10.1068/a35307 (1) Dollar amounts are in US dollars throughout. À An earlier version of this paper was presented at the 14th Annual Meeting on Socio-Economics, University of Minnesota, Minneapolis, MN, 27 ^ 30 June 2002. pension systems, in particular those of France, Germany, and Italy, into a hybrid one by shifting pension responsibilities in part to funded arrangements, to absorb the imminent demographic shift. Of course, the interests involved are massive, and the pressure that is being built up is hugeöas are the consequences if the current pension regimes of Germany, France, and Italy are indeed transformed along AngloAmerican lines. As the rise of pension funds, the growth of capital markets, the increasing sophistication and economic importance of the financial industry, the growing political clout of financial players, and the dominance of shareholder value as a new ideology of wealth creation appear to be reinforcing one another, the decision to shift the burden of pension provision from public to private pension plans and from a PAYGo to a funded regime is sure to set in motion far-reaching changes. In this paper I offer a critical examination of the arguments for pension restructuring. I start in section 2 with a brief description of the parameters of European pension restructuring. In section 3 I critically assess the underlying arguments, arguing that the demographic projections hide important policy alternatives behind ceteris paribus conditions (section 3.1) and that the assumed `superiority' of funded regimes is premised on the assumption that funded arrangements are beyond `demographic stress' (section 3.2). In section 4 I describe the logic of funded pension arrangements and elucidate the ties with financialisation, defined as a discrete regime of accumulation (section 4.1). Finally, as a kind of afterthought, I briefly sketch some of the dangers such a process presents for the wealth-generating capabilities of firms in the long run (section 4.2). Although dealing with topics that cry out for a `grand theory', my aims are rather more modest. By providing a closer analysis of the arguments in favour of pension restructuring I aim to highlight the `ideological moment' within these discourses in an attempt to widen the room for political manoeuvring. Debunking `false necessities' is, of course, only the first step in the creation of `real utopias' but is indispensable nevertheless. My undertaking is humble in a second sense too. When addressing the subfields of demography and financial economy I do not claim to be the ultimate umpire. I am not equipped for that. Once again, I merely aim to show the contested nature of the projections and assessments to highlight that we all now live under conditions of contingency. 2 The greying of capitalism During the past decade the topic of pensions has risen on the political agenda. This is largely as a result of demographic arguments, projecting a worsening dependency ratio in the long run, ultimately kicking the legs from under existing welfare arrangements. Because in most European countries the number of childbirths has declined rather dramatically over the past fifty years and longevity has gradually increased, a declining number of workers have to provide for a growing number of pensioners and other dependents. As this drives up nonwage labour costs, the competitiveness of firms in export markets comes under pressure, setting in motion a downward spiral of economic decline if policies remain unchanged. According to this argument, the `greying' of the population puts a `time bomb' underneath the c̀ontract between the generations', ultimately leading to `a fiscal crisis of the state' (Bolkestein, 2001; Disney, 2000; OECD, 1995; 1996; 1998; World Bank, 1994). The OECD, for instance, has stated that in all member states even the present value of contributions is insufficient to cover expenditure. The deficits, expressed in percentages of gross domestic product (GDP), range from ÿ234.5% in the case of Denmark, via ÿ102.1% in the case of France, to ÿ23% in the case of the USA. Countries such as Italy, Germany, and France, in which public pension payments in 1358 E Engelen