26
4.2 Welfare State Institutions and Policy Legacies
Rather than political institutions, the school of historical institutionalism sees policy lega-
cies as the main source of resilience in the face of adjustment pressures on mature welfare
states. In other words, welfare state institutions themselves are seen as forming a powerful
obstacle to either retrenchment or restructuring because they are often subject to path-
dependent processes, making a change to alternative institutional arrangements costly. The
reference to PAYGO-type pension systems serves frequently as a prime example (see for
instance Pierson 2001: 411-416). In the following discussion of sources of resilience in
social policy programmes, I will first of all turn to schemes of old-age provision.
4.2.1 Old-Age Pensions
The German system of pension provision has relied for most of its history (until 2001) on a
single statutory pension pillar (with some separate schemes for special occupations like
public sector workers, professionals and farmers). Those who are employed, pay wage-
related contributions up to a ceiling, with the burden shared equally between employers and
employees. Since 1957, the guiding idea of the system has been that pension benefits should
reflect relative living standards achieved in working life (tight coupling of entitlements and
wage-based contributions), while solidaristic elements include tax-credits for non-
contributory periods (e.g. unemployment; education). Pension levels are generally indexed,
traditionally in line with gross earnings changes, but since 1992 based on net earnings. In
the 1980s, pensioners could still count on a pension level of 70 per cent of average net earn-
ings (assuming 45 contributory years) but, not at least because of labour market changes,
actual payments vary widely. A general minimum pension was only introduced recently
(2001), as were publicly subsidized private pensions (Clasen 2005a: 95ff.)27
Originally, pensions rested on a number of interlinked principles, including a guarantee of
the former living standard, the social insurance principle, automatic adjustment of pensions
to the development of gross wages, self-governance of pension funds as bodies of public
law, a federal subsidy and financing by contributions, based on a pay-as-you-go (PAYGO)
arrangement (Nullmeier/Rüb 1993: 94f.).28 The last of these is very relevant for the argu-
ment about the sources of resilience because it implies that contributions paid on the basis
of wages provide the financial base of the system. Despite an additional infusion from pub-
lic budgets, i.e. the federal budget, pension benefits are essentially financed from these con-
tributions. This means that pension benefits paid at any one moment are essentially financed
by the current working population. If a government planned to switch to another pension
system, for instance, capital-funded pensions, this would create a major difficulty: while
27 For reasons of brevity, this section only sketches the contours of German pension arrangements. See
for more details in English e.g. Clasen 2005 (Chapter 5) and Schludi (2002).
28 Nullmeier and Rüb (1993) discuss how these and other principles of German pension arrangements
came under pressure between the mid-1970s and the 1989 pension reform.