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RETRAITE ET SOCIÉTÉ / SELECTION 2007
Focus...
The Open Method of
Coordinational Applied to
Pensions, A Critical Analysis
Gérard CORNILLEAU, Henri STERDYNIAK, OFCE ;
Antoine MATH, IRES
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European Union recommendations on pensions have multiplied
in recent years. Chronologically, the issue of pension reform first
appeared in texts and recommendations from the bodies in
charge of economic policy issues, namely the Economic and
Financial Affairs Directorate General (DG ECFIN), Ecofin
Council, Economic Policy Committee (EPC) and the European
Central Bank. With public finances (deficit, debt, public
spending) under tight scrutiny within the framework of the
Stability and Growth Pact (SGP) and the Broad Economic Policy
Guidelines (BEPG), Member States are coming under increasing
pressure to reform their pension systems. In EU jargon, “reform”
means reining in future pay-as-you-go pension expenditure by
reducing the relative size of pensions, pushing back the
retirement age and developing funded mechanisms.
The BEPG, which sprang from a concern to coordinate
economic policies, provide a legal basis for European
intervention in an area of national competence such as
pensions. The overarching goal of the BEPG is the reduction of
deficits and public spending regardless of the point in the
economic cycle, i.e. even during periods of economic
slowdown. This is an intangible dogma. Public pensions, which
account for more than 10% of the EU GDP and almost half of
total spending on social protection, and represent the biggest
public expenditure item, are logically the priority target of the
proponents of fiscal orthodoxy (DG ECFIN, EPC, Ecofin
Council). They are fuelling an alarmist portrayal of the long-term
unsustainability of pay-as-you-go pensions for public finances
and calling for urgent reforms.
74
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The prospect of population ageing provides another justification
to push constantly for restrictive fiscal policies. Apparently, these
policies should be pursued even during periods of economic
slowdown in order to anticipate “commitments” attributable to
pay-as-you-go pensions. In 2000 the Ecofin Council decided that
some of the BEPG should deal with the financial impact of
ageing, then in July 2001 Member States must include
projections of the long-term effect of population trends in their
annual Stability and Convergence Programmes submitted within
the framework of the Stability Pact. The programmes are
evaluated and recommendations issued.
To impose their assessments and solutions, DG ECFIN and the
EPC cite expertise from various reports. These highly contentious
reports are in fact rarely debated and their conclusions tend to
be imposed on all actors.1 Correlative to their offensive against
pay-as-you-go pension systems,2 DG ECFIN and the EPC are
pushing for the development of funded mechanisms managed
by the private sector. In this they enjoy the support of the
Commissioner for the Internal Market and Services, UNICE3 and
other lobbies that defend employers’ interests, chief among them
the financial sector, which has a stake in the increased business
that funded pension schemes would generate for them.4
The OMC, a shift in the power balance towards more social concerns?
In reaction to what could be considered interference by
▼
economic policymakers in an area of their competence, in late
1999 the social affairs ministers began taking initiatives to
reclaim their place in the debate. Those initiatives led to the
creation of a Social Protection Committee and a European
monitoring procedure–the “Open Method of Coordination”
1 For a critical analysis of these reports, see Math A., 2001, “Quel avenir pour les
retraites par répartition en Europe?”, Revue de l’IRES, n° 36, 58 p.; see also
Chagny O. et al., 2001, “Les réformes des systèmes de retraite en Europe”,
Revue de l’OFCE, n° 78, p. 97-208.
2 An enlightening document on this point: Mc Morrow K., Roeger W., 2002, “EU
Pension Reform–An Overview of the Debate and Empirical Assessment of the
Main Policy Reform Options”, European Commission, DG for Economic and
Financial Affairs, Economic Papers, n° 162, 104 p. For a critique of this document,
see Math A., 2002, “Les retraites par répartition dans le collimateur européen”
(http://reparti.free.fr/politik3.pdf).
3 UNICE, 2001, Strategy Paper on Sustainability of Pensions, 36 p.,
(www.businesseurope.eu).
4 Math A., 2001, “Défense des intérêts patronaux au niveau européen: le cas des 75
retraites”, Chronique internationale de l’IRES, n° 72 (reprinted in 2002 in Problèmes
économiques, n° 2.749, La Documentation française).
RETRAITE ET SOCIÉTÉ / SELECTION 2007
or OMC–derived from the European Employment Strategy and
officialised at the Lisbon Council in March 2000. Like all other
soft law processes, i.e. community processes relating to policy
areas of national competence that do not entail a sanctionable
legal obligation, the OMC consists of exchanges of information
and best practices, an evaluation by the Commission and a peer
review, which puts political pressure on Member States by
publicising commitments and progress. Thus economic
policymakers are no longer alone in developing the discourse
and drafting guidelines on pensions. Through the OMC, social
affairs actors (Council of Ministers, Social Protection Committee,
Employment and Social Affairs Directorate General) have been
reintegrated. However, in the short term this development seems
unlikely to shift the power balance or alter the guidelines
defined by economic policymakers, for several reasons:
– Social policymakers do not have the same degree of cohesion
as their economic counterparts. Different national traditions,
systems, ideologies, political calendars and recent reforms
implemented or under discussion are not conducive to a
common doctrine and interests on the issue of pensions;
– On the whole, social policymakers subscribe to the
recommendations of their financial counterparts, as
demonstrated by the proceedings of the Social Protection
Committee and the Employment and Social Affairs Directorate
General. They generally accept the mantra that social
contributions must not be increased. Consequently their room
to manoeuvre is restricted to lowering pensions and pushing
back the retirement age. They also support the doctrine on
limiting public spending and therefore pay-as-you-go
pensions;
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– The social affairs ministers have not managed to prevail in an
area–pensions–where they nevertheless had legitimacy.
Within the framework of the OMC, they share responsibility
for it with economic policymakers. Social policymakers have
competence for aspects relating to the adequacy and
adaptability of pension systems, but, when it comes to
financial aspects, i.e. serious business, the economic
policymakers (DG ECFIN, EPC, Ecofin) hold sway and write
all the analyses and recommendations;
– Above all, the European Council has constantly stressed the
subordination of all other “structural” policies, including
social policies, to the BEPG (which is foreseen in the Treaty
76 and repeated in all documents). The OMC on pensions must
be “integrated” into and made compatible with the BEPG.
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This subordination is heightened by the fact that the OMC
is a fragile process with no legal basis–it was decided by the
Council’s conclusions–in contrast to the BEPG, which are
enshrined in the Treaty. In practice, the OMC is subject to the
right of scrutiny of economic policymakers, since upstream
the power balance is to the advantage of DG ECFIN on the
commission in charge of drafting the BEPG, and downstream
to the advantage of the Ecofin Council for their enforcement;
▼
– The actors that could break through the closed doors of the
Council and the Commission and voice other concerns are
shut out in practice. This is notably the case of the European
Parliament. Back in 2000 and 2001 the Council saw no need
to forward to the Parliament the reports on pensions drafted at
the request of the European Council and appended to the
conclusions of the subsequent Councils. The Parliament
expressed its dissatisfaction in a resolution adopted in
May 2001. In vain. In the end, the Parliament was not even
given the opportunity to issue a consultative opinion on the
OMC. It would only be “kept informed”. The process is being
run behind the closed doors of the Council under the
stewardship of the Commission. Lip service is paid to the
need to involve elected representatives and stakeholders
(citizens, trade unions, civil society), but they are
systematically excluded. This practice, neither transparent
nor democratic, can only exacerbate citizens’ feelings of
indifference and wariness towards European
integration–which we complacently regret–and encourage
the confiscation of decision-making by an unaccountable
technocracy.
The integration of pensions into the issues covered by the BEPG
and the OMC raises several questions.
To justify its intervention, the Commission claims that some
countries might be tempted to finance pensions by increasing
the public deficit. However, all Member States are keenly
aware that their pension systems must be structurally balanced.
As long as each Member State is committed to balancing its
system financially (by pushing back the retirement age, lowering
benefits or raising contributions), the trend of pensions does not
threaten the stability of public finances. It is therefore not an
issue that needs to be addressed by the Stability Pact. It is hard
to see why it must be mentioned in the pact every year.
The pact deals with fiscal and cyclical matters and is not an 77
appropriate framework for dealing with long-term social issues.
RETRAITE ET SOCIÉTÉ / SELECTION 2007
And yet the 2003 joint report by the Commission and the
Council on adequate and sustainable pensions, which stemmed
from the proceedings of the OMC, contains the same note twice
(note 14, page 40 and note 18, page 56), which reads: “Member
States’ strategies to ensure sound and sustainable public finances
are reported and assessed in the framework of the BEPG and the
Stability and Growth Pact and should be in accordance with
these”. That is unacceptable. The strategy of each country on
pensions is its own affair and does not have to comply with
community rules on budget deficits.
▼
Contributions to pension schemes, which have a direct payback
in terms of benefits, should not be included in compulsory levies
(even if the 2003 joint report asserts explicitly the opposite,
page 68). They are not automatically a disincentive to work.
They are an investment, the return on which (the rate of payroll
growth plus the rate of growth of the average length of
retirement) can be compared to the return on financial
investments. There is no economic justification for a total barrier
between the two types of investment, with one considered
harmful (contributions) and the other beneficial (retirement
savings). The obsession with reducing the rate of compulsory
levies should leave out social contributions, and the obsession
with cutting public spending should leave out pensions.
In most European countries, decisions about the pension system
are traditionally taken within the framework of dialogue between
the state, employers and trade unions. The OMC takes that
debate to the inter-state level between senior civil servants from
the financial and social affairs administrations. Can they
legitimately present the National Strategy Reports? Can they
legitimately give a French, German, Belgian or other national
opinion on their partner countries? This consultation between
financial administrations (which represent the dominant social
categories) is much narrower than the consultations at national
level, which involve all the stakeholders. The result is the
dominant class agreeing on a common response. In this regard,
the OMC represents a step backwards for social and democratic
debate.
The concerns of the community, technocratic, liberal ideology
are taken into account. Thus the recommendations are strongly
influenced by a concern to reduce public spending and
therefore social spending, not to challenge the profits/wages
78 ratio and to develop the financial markets.
FOCUS...
There is no coordination in areas where it is needed, namely the
need to raise contributions and ensure a minimum guaranteed
replacement rate (to avoid competition by the lowest social
bidder) to preserve welfare pensions in relation to insurance
schemes.
The OMC has given rise to a plethora of reports, which,
ironically, are rarely mentioned in national debates and thus
seem superfluous. There is a risk that the EU will attempt to
impose–or national technocracies will use the EU to impose–
a liberal view of how pensions should be organised, with the
procedure of mutual surveillance being used against reticent
Member States. This view entails pushing back the minimum
retirement age, ending early retirement schemes (even for senior
workers that employers refuse to employ), reducing public
pensions, rejecting any increase in contributions, and
developing funded pensions. Member States need to assert
forcefully that pensions remain an area of national competence,
that reform decisions are taken democratically by each
government, which is accountable to its citizens, after
negotiations with the social partners.
In 2005 the BEPG were reorganised as a package of
24 “Integrated Guidelines for Growth and Jobs”. Three
guidelines concern pensions. Guideline 2 asks countries to
address population ageing by undertaking faster government
debt reduction (but ageing boosts the saving rate, and therefore
demand for government bonds), reforming their pension and
health care systems (i.e. cutting benefits) and raising
employment rates. Guideline 17 reiterates the employment
rate targets, in particular 50% for workers aged 55 to 65.
Guideline 18 proposes increasing senior labour supply by
modernising social protection systems, i.e. by terminating
phased-in retirement schemes, by financially penalising early
retirement, and by rewarding late retirement. This carries a
threefold risk: consigning senior workers whom companies do
not want to hire and who have no safety net to poverty, reducing
the total amount of pensions, sharpening inequality between
blue-collar workers (who are forced to withdraw from the
▼
workforce early) and white-collar workers (who can prolong
their careers and save in funded pension schemes).
The Social Protection Committee at least managed to include in
the pension adequacy indicators valuable indicators like the
elderly poverty rate and the income replacement rate ensured by 79
the pension system.
RETRAITE ET SOCIÉTÉ / SELECTION 2007
What are the likely outcomes of this process?
It is too early to gauge the effects of the OMC, given the
dynamic, iterative dimension of the process. However, similar
older experiences, particularly the European Employment
Strategy initiated in 1997,5 suggest several possible scenarios:6
– The OMC will not affect national policies and will serve as a
smokescreen for the lack of community action on social
issues. Each Member State will follow its own path without
worrying about the European level. This criticism has often
been made of the Luxembourg process, which is said to have
led primarily to better coordination within States, between the
civil servants from the different ministries called on to draft
the National Action Plans for Employment. In other words,
the European Employment Strategy has mainly created
employment for senior civil servants and experts from
Member States and the Commission. The confidential nature
of the OMC with respect to pensions and the lack of any
reference to it in national debates, especially in France, tend
to support this assumption;
– The OMC will limit divergences between national strategies.
Since Member States have to follow common guidelines, their
choices can no longer diverge (too far) from those guidelines,
because of policy commitments made under the OMC. The
political pressure exercised within the OMC could alone
cause strategies to converge. The OMC thus seems to be a
way for Europe’s dominant class to agree on a strategy and
refuse to increase the percentage of GDP allocated to
retirement in favour of funded schemes;
▼
– The OMC will not have direct effects but long-term indirect
effects through cognitive processes. It will enable a common
ideological framework to develop among the national
administrations. This framework of unified thought, expressed
in meetings, a discourse and common tools and indicators, is
conducive to convergent policies. The European Employment
5 Anticipating the entry into force of the Amsterdam Treaty, the Employment Summit
in Luxembourg (November 1997) launched the European Employment Strategy.
The aim was to significantly reduce unemployment within five years. To that end, a
system of multilateral surveillance was set up. This included in particular an annual
joint assessment paper on employment, used by each Member State to draft
national action plans (author’s note).
80 6 Pochet P., 2001, “Subsidiarité, gouvernance et politique sociale”, Revue belge de
sécurité sociale, n° 1, p. 125-140.
FOCUS...
Strategy has undeniably contributed positively to the
implementation and circulation of tools and indicators for
comparing labour markets and employment policies.
However, it is uncertain whether the use of common concepts
and measuring tools has already had effects on policymaking.
The implementation of converging actions or of new
community policies may be facilitated in the event of an
external shock. However, the idea of a common cognitive
framework is still in the realm of fantasy, especially as the
obstacles may have been underestimated: the resistance to
▼
reform of national pension systems and divergences in issues,
electoral dates and reform calendars;
– The main impact of the OMC will be a redistribution of roles
and a shift in the power balance, enabled by the
communitarisation, even partial, of the issue of pensions.
By having the paradoxical effect of formally reconciling
subsidiarity and attempts at convergence at European level,
the OMC will redeal the cards in favour of actors with the
wherewithal to participate in the European game. The actors
with privileged access to the European level, particularly
policymakers, could take advantage of the guidelines, which
they helped draft, and from which other troublesome actors
(trade unions) have been sidelined. “We are right to wonder
whether a section of the government, of the technocracy, is
not trying to use Europe, if not as a vincolo esterno … at least
as an internal resource … to bring about the social changes it
seeks based on the model” of monetary union. “On this
assumption, infra-national entities, which usually have less
access to the European game than national governments,
would find themselves left out”. The OMC could thus
“produce asymmetry between institutional and social actors.
Those who can use (or have the capacity to use) explicitly or
implicitly the resources of the highly complex European game
are in a position to influence the European agenda and to
take advantage of it domestically”.7 In pensions as in other
areas, unpopular reforms could be pushed through more
easily if they were seen as an unavoidable European
obligation.
7 Pochet P., 2001, op. cit.
81
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