“Another Look at Causes and Consequences of Pension Privatization Reform Reversals in Eastern Europe"

In order for ‘carve-out’ pension privatization to improve long-term sustainability the transition should not be predominantly debt-financed, and private pension funds should deliver (net) rates of return tangibly higher than GDP growth. We show that none of the reforming countries in Eastern Europe was successful in fulfilling these two preconditions, even before the emergence of the global financial crisis. While existing literature mostly describes a recent wave of reform reversals as politically driven short-sighted policies that deteriorate long-term sustainability, we argue the contrary: that pension privatization structural deficiencies and disappointing performance allow reversals to improve the short-term stance without necessarily undermining long-term pension sustainability. We conclude that unless political consensus exists to support the multi-decade fiscal austerity required to finance pension privatization, reform adjustments and reversals can be a rational alternative to maintaining economically suboptimal or politically unstable pension systems in some Eastern European countries.