Invasion from within:
Ideas, Power and the Transmission of Institutional Logics between Policy Domains
Martin B. Carstensen
Department of Organization
Copenhagen Business School
Department of Politics and International Relations
University of Oxford
Forthcoming in Comparative Political Studies
Abstract: How do institutional logics travel within an economy? Employing insights from historical- and
ideational institutionalist theory, this paper offers a novel understanding of change dynamics as driven by
actors’ creation of institutional interlinkages within a political economy. It develops the causal mechanism of
’invasion from within’, consisting of a three-stage process: The progressive weakening of a policy paradigm
within one institutional site coinciding with a strengthening of the policy paradigm in another; the building of a
coalition within the exporting field; and the use of framing strategies to ‘localize’ adjacent logics of action and
delegitimize adversarial coalitions. The analytical purchase of the argument is corroborated through process
tracing of the German pension paradigm shift during the 1990s, showing that ideas about private capital
formation developed in finance were redirected toward old-age provision and strategically transferred to the
pension arena by a coalition of actors from the German finance domain.
Key words: Institutions – ideas – interlinkage – Germany – pension
Seminal contributions to institutionalist theory have advanced our understanding of change
and continuity as much as they have sparked novel concerns. While the Varieties of
Capitalism (VoC) framework has drawn attention to the interconnectedness of institutional
domains (Hall and Soskice 2001), its postulate of complementarity is criticized for being
functionally deterministic and neglectful of endogenous sources of change (Crouch 2005,
Hay 2005, Streeck 2010). Historical institutionalists have identified mechanisms of
potentially transformative marginal change in the absence of exogenous shocks (Streeck and
Thelen 2005, Mahoney and Thelen 2010), but continue to grapple with the agency-problem,
notably how actors arrive at new institutional interpretations (Blyth et al. 2016). Ideational
scholars have made headway demonstrating the importance of ideas and discourse when
conceptualizing agency (Hall 1993, Blyth 2002, Schmidt 2002), but have yet to engage with
the question of how institutional domains are linked across the economy. This paper seeks to
contribute to bridging these strands of scholarship and their asterisks by developing the
causal mechanism of ‘invasion from within’. It suggests that a key driver of institutional
change is actors’ strategic creation of interlinkage through export and import of institutional
logics from one domain of the economy to another.
Recent scholarship has forcefully argued that institutional rules are inherently open
and their definition often ambiguous (Streeck and Thelen 2005), and that an important source
of endogenous change may be institutional logics of action imported from outside or
reactivated after having laid idle for decades (Schneiberg 2007, Campbell 2004). Considering
the connectedness of policy elites within the polity, it seems plausible that another source of
change may originate in strategic agency pushing institutional logics prevailing in one policy
area to gain dominance in another with the effect of over time undermining and displacing
the logic of the existing institutional setup. Despite the intuitive appeal of such an argument,
institutionalist scholarship offers little in way of a theoretical framework to analyse such
processes, in turn leaving largely unexplored the question of how institutional logics move
throughout an economy. To help fill this lacuna, we point to causal pathways in which ideas
may work as a ‘transmission belt’ for the movement of institutional logics between
institutional sites, employing the analogy of a transmission belt to tease out how
interpretations dominant in one institutional domain may be transposed and adapted in
another. We argue that the authority and legitimacy of the ideas underpinning a logic of
action in one institutional domain may be harnessed and powered by actors seeking to push
for a similar logic of action in an adjacent policy area.
The argument is supported by an analysis of the German pension paradigm shift
during the 1990s. After two decades of parametric reforms that largely stuck to basic
Bismarckian principles, the 2001 Pension Reform Act (PRA2001) introduced tax-subsidized
funded schemes for occupational and private pensions in what most observers agree to
signify a paradigm shift (e.g. Lamping and Rüb 2004). The reform meant that the state no
longer was the sole guarantor of the achieved living standard in old age, with capital markets
filling the void. Albeit heavily studied, we know little about how German policymakers came
to favor pension privatization, that is, how a reform option that was barely entertained up
until the mid-1990s managed to muster an almost hegemonic coalition by 1998 (Leifeld
2013). We contend that existing accounts may benefit crucially from placing centrally the
role played by marginally transformative change in an adjacent domain: the financial system.
The pension-finance nexus barely factors into existing studies of the German shift toward the
multi pillar pension paradigm (notable exceptions are Wehlau 2009; Oelschläger 2009;
Hockerts 2011, ch. 13), although the importance of the general zeitgeist of financialization
and the economic interests of the financial services industry in pension privatization are often
hinted at. Financial liberalization's explanatory power is thus relegated to an auxiliary factor.
In contrast, the paper argues that the morphing shift toward an outsider- and market oriented
financial system unencumbered longstanding ideational and institutional obstacles that
previously stood in the way of a cross-class compromise vis-à-vis outsider schemes like
Anglo-American pension funds. This marginal financial paradigm shift coincided with the
incremental erosion of the old pension paradigm, which opened the way for a process of
"localization" (Acharya 2004), during which policymakers from the finance area employed
policy prescriptions developed in finance, translated them to the pension domain through
strategic framing and in the process undermined what had been a powerful coalition of
Seeking to elucidate how developments within the policy field of finance impacted on
reform dynamics in German pension politics, and contributing more generally to our
understanding of how institutional logics may spread within economies, the paper employs
what Beach and Pedersen (2013) term ‘theory-building process tracing’. This approach
involves building a theory about a causal mechanism1 between the independent and
dependent variable starting from a situation where we are uncertain regarding potential
mechanisms connecting the two (Beach and Pedersen 2013, 11). Employing a mix of
inductive and deductive segments, the paper thus starts from the puzzling outcome of a multi-
pillarization of the German pension system, and indications in the existing literature that
finance played an as of yet underexplored role in this. Taking then a more deductive tack,
insights from ideational- and historical institutionalism are leveraged to propose the causal
mechanism of ‘invasion from within’ to account for the outcome.2 The paper traces the
connection between the establishing of pension privatization as the dominant reform option
(dependent variable) and German financial liberalization (independent variable). It is argued
that the effect of German financial liberalization on pension politics was made possible by
the causal mechanism of ‘invasion from within’, i.e. the simultaneous weakening of the
incumbent pension paradigm and strengthening of finance; the creation of a powerful
coalition in the area of finance; and the strategic invasion of finance ideas into pension
politics. This in turn means that although the increased structural power of finance mattered
for the outcome, its effect was borne through by the causal mechanism of ‘invasion from
How does this explanation set us apart from existing accounts of stability and change
in comparative political economy? To be sure, the notion that pension and financial systems
are linked is hardly news to VoC scholars. Their core insight is that institutional domains
functionally cohere into complementary clusters (Crouch 2010). In 'coordinated' political
economies, stakeholder- and bank-dominated financial systems tend to cluster with
predominantly public and often PAYG pension regimes, whilst we find shareholder- and
market-dominated financial systems grouped with (privately) prefunded old age provision
systems in 'liberal' ones (Jackson and Vitols 2001). While VoC readily illuminate the static
functional link between pension and financial systems, it has little to say about the dynamics
of change that have brought the pension path departure. Analytically speaking, only
exogenous shocks may induce change, which then takes the form of exclusively positive
feedback mechanisms toward a complementary equilibrium (Hay 2005, Streeck 2010). It is
hardly surprising, then, that the only study of the PRA2001 through a VoC lens almost
exclusively emphasizes the path dependent qualities of the reform (Vitols 2003). Moreover,
although material factors undeniably played important roles in bringing the system's logic to
its functional limits, leading to an erosion of the old pension paradigm, the shift at hand
1 Following Bennett (2008: 207), we understand causal mechanisms as “processes through which agents with
causal capacities operate in specific contexts to transfer energy, information or matter to other entities”
2 Although in principle ’theory-building’ process-tracing is inductive in nature – moving from evidence to an
account of the causal mechanisms that explain developments in the case – there is also an important deductive
dimension to this research design. As noted by Beach and Pedersen (2013) "In reality, theory-building process-
tracing is usually an iterative and creative process” where “Hunches about what to look for that are inspired by
existing theoretical and empirical work are investigated systematically, with the results of this search forming
the background for further searches" (p. 18).
cannot be purely explained as a derivative of structural conditions. Importantly, alternative
reform options were politically and functionally viable during the period of heightened
uncertainty that was the German 'pension crisis' beginning in the mid-1990s (Leifeld 2013;
Marschallek 2004). This raises the question of why pension multi-pillarization not only
reached political prominence, but also succeeded in becoming the reform option without any
At the opposite end of the spectrum from VoC's institutional morphology are
approaches postulating evolutionary serendipity (Streeck 2001; Crouch 2005). Discarding the
functional rationality-postulates underlying the VoC-inspired literature, Streeck (2001)
contends that non-efficiency enhancing interests matter and need to be accommodated.
However, it remains unclear how postulates of serendipity and seemingly random
experimentation "at the margins" (Crouch 2005), can be accommodated with concerted
political action that result in more than sectoral piecemeal reforms. Moreover, despite the
central theoretical role played by institutional interlinkages in much comparative political
economy, the strategic creation of interlinkage between institutional sites has so far played a
marginal role in scholarship within the gradualist historical and ideational research strand of
This lacuna may owe to the fact that much scholarship on comparative capitalism
predominantly deals with the political and economic determinants of national institutional
diversity rather than homogeneity (Beckert 2010). The study of the homogenizing effects of
the spread of ideas, norms and practices within organizational fields has in turn been the
bread and butter of much sociological institutionalist scholarship. DiMaggio and Powell
(1983) notably argued that actors’ efforts to deal rationally with uncertainty often lead to
“homogeneity in structure, culture and output”. Such homogenizing processes of
‘isomophism’ highlight how “organizations compete not just for resources and customers, but
for political power and institutional legitimacy” (p. 150). Responding to calls for greater
attention to agency and power (e.g. DiMaggio and Powell 1991, Fligstein 2001), more recent
contributions allow for a clearer view of the ways in which strategic agency may forge
connections between otherwise unconnected institutional fields (e.g. Fligstein and McAdam
2012, Fourcade and Khurana 2013).
These insights will prove useful below, when from the perspective of comparative
political economy, we couch our framework within a historical institutionalist framework
well suited for understanding the persistence of national diversity (Beckert 2010), while
employing insights from sociological institutionalism and ideational scholarship instructive
for understanding how power relations, legitimacy and ideas play a key role in actors'
strategic efforts to penetrate and transform institutional domains. However, the immediate
focus of this paper differs from sociological institutionalists' typical preoccupation with the
establishing of institutional fields through organizational homogenization, or the
homogenizing transformation that may follow from the import of foreign organizational
models. Our more specific aim is to theorize the creation of interlinkage between two well-
established policy fields that have otherwise remained institutionally disconnected. We show
how theorizing the movement of institutional logics between institutional fields, rather than
focusing on the import of ideas from abroad, is key for accounting why multi-pillarization
became the preferred option for German policymakers. This process was fraught with
ideational power, where agents of continuity in the pension system were pushed to accept a
new set of ideas originating in the finance sphere – rather than seeking out new ideas to build
legitimacy, as posited by theoretical frameworks advancing isomorphism as an explanatory
The paper is structured as follows. First, it develops the causal mechanism of
‘invasion from within’ and discusses the methodological underpinnings of its constituent
parts. It also sets up the research design for the case study. The second part of the paper
contains a study of the German pension paradigm shift. The first section traces German
pension politics up until 1995, while the second section covers financial liberalization in the
same period. The third section is concerned with the transfer of institutional logic from
finance to pension politics between 1995 and 1998, followed by a brief outlook beyond 1998.
The paper concludes with a discussion of the broader implications of the paper for
comparative political economy.
2. Ideas as a transmission belt for institutional interlinkages
There is little doubt that logics of action with a historical legacy within a policy area, or
logics of action brought in from abroad, are key potential sources of institutional innovation
(Campbell 2004, Djelic and Quack 2007). But at this point, the role of political, ideational,
and institutional transmission pathways between institutional spheres within the political
economy remains underappreciated (see however Crouch and Farrell 2004, Swenson 2002,
Thelen 2004). We suggest that one important way in which ideas play into processes of
(gradual) institutional change is as a ‘transmission belt’ between institutional domains. A
transmission belt is a loop of flexible material used to link two or more rotating shafts
mechanically to transmit power. We employ the analogy to highlight two connected sources
of interlinkage between institutional sites, namely ‘synchronization’ through ‘power
transmission’. The paper thus posits that through the causal mechanism of ‘invasion from
within’, a logic of action dominant in one area of the economy (e.g. finance) may through
agency be transposed and adapted to another (e.g. pension), over time leading to significant
In this context, synchronization does not mean that whatever happens in one area
happens exactly the same way and at the same time in another. We instead use the concept of
synchronization to convey the meaning that over time a similar logic of action may come to
structure interaction in two otherwise disparate policy areas thus making them run according
to similar logics. It raises the question of how such general interpretations may travel
between institutional setups, i.e. what is the mechanism that actualizes the causal capacity of
an institutional logic in one institutional domain to have an impact on another? Although we
recognize that synchronization could occur through other processes – e.g. following
3 As laid out by Deeg (2005: 172), a logic of action encompasses the general orientation of actors, i.e. the
typical strategies, routine approaches to problems and shared decision rules that structures interaction within an
institutional setup, which taken together governs the interpretation of a given structure of institutional
constraints and opportunities (Streeck and Thelen 2005: 18). Building on Deeg’s (2005) conceptualization, we
focus on the movement of logics of action between institutional domains rather than the reactivation of dormant
logics or their import from abroad.
functional pressures – we follow recent ideational and historical institutional theorizing in
emphasizing the role of strategic agency in bringing about such connections and the central
role of forging coalitions to practice and enforce particular interpretations of an institutional
setup (Campbell 2004; Mahoney and Thelen 2010). To make the argument more tangible, we
may ask what circumstances need to be met for the mechanism of invasion from within to
unfold. In the following we put forward a causal mechanism hypothesizing the necessary
circumstances for actors to move a logic of action from one institutional domain to another:
The progressive weakening of a policy paradigm within one institutional site with a
simultaneous strengthening of a policy paradigm in another; the building of coalitions
between actors within or across institutional sites; and the use of discursive framing strategies
to ‘localize’ a new logic of action and either persuade or sideline incumbent actors in the
field under invasion.
Paradigm desperation and aspiration
Logics of action are most likely to invade another policy field when the authority of a policy
paradigm in one area is waning and the authority of a different paradigm in another policy
area is strong. On a conceptual level we consider this the conjunction of two marginal
processes. The point of departure for change dynamics across domains then is that "gradual
yet increasing disillusionment and the slow delegitimization of existing beliefs [...] open[s]
up a political space into which new ideas can be inserted" (Berman 2001, 234). The
weakening of a policy paradigm is produced through a process fraught with contests for
legitimacy. Since the anomalies that eat away at the authority of a policy paradigm (Hall
1993) do not automatically present themselves as such, but rather need to be collectively
interpreted and acknowledged as anomalies (Blyth 2013), actors seeking to export a logic of
action to a neighboring policy area need to construct a "crisis narrative" (Matthijs 2011,
Kuipers 2006) and, second, forcefully make a case for the superior problem solving capacity
of the logic of action that they are seeking to export (Carstensen and Matthijs 2018).
Although some ideas and discourses are based primarily on technical and scientific
(cognitive) arguments, to make these powerful in persuading the broader public and the
organizations representing it, they still need to fulfill a normative function by providing a
more generally accessible narrative about the causes of current problems and what needs to
be done to remedy them that resonate with the public (Schmidt 2006, 251–3). The success of
such an operation depends crucially on the legitimacy that these ideas as well as their
supporters already enjoy within their own policy area and in society at large; a legitimacy
that can be leveraged by arguing for their relevance within a new policy area.
It is thus key for the success of ‘invasion from within’ that the dominant paradigm in
the exporting domain provides connecting points to help overcome obstacles that may
previously have stood in the way of forming a coalition in favor of a certain policy
prescription. Consider the case of the German pension paradigm shift. At the surface, the
conjunction of financial aspiration and pension desperation is seen. However, as argued
below, the underlying reason why the financial discourse of pension privatization managed to
successfully penetrate the pension arena is that in the course of the financial liberalization
process a consensus regarding the benefits of the outsider-finance paradigm emerged. This
dominant discourse, on a most fundamental level, made away with much of the German
skepticism vis-à-vis capital markets; but more germane to our argument, it established the
basic sensibility of fostering prefunded pensions as a suitable way to provide for old age. In
other words, ideas that muster a firm coalition in one domain enjoy a fundamental legitimacy
and political momentum that may propel them to the top of the political agenda as plausible
policy options in domains that are in need of new solutions. Also, in the case of German
pension privatization, the respective policy prescription was already largely developed
"waiting in the wings" (Schmidt 2002, 223), which contributed to its appeal over other
Networks across institutional domains
To bring in a new interpretation of existing institutions requires that a powerful coalition of
actors support the reinterpretation. As noted by Parsons (2016), ideas that generate new
coalitions by definition stretch across diverse and previously separate actors and agendas.
Working as ‘coalition magnets’ (Béland and Cox 2016), such ideas may influence policy
precisely because they mean different things to different people making it easier to agree
(Jabko 2006); a process that crucially hinges on actors’ discursive construction of likeness
between ideas prevailing and widely considered legitimate in one issue area, and the ideas
they are seeking to push through in another.
The successful transmission of a logic of action from one institutional domain to
another thus requires coalition building structured around a common, nut nonetheless often
ambiguous, understanding of policy problems and viable solutions (Culpepper 2008, Palier
2005). We may imagine multiple shapes that such coalitions can take. One could for example
see a winning coalition made up only of actors from the adjacent policy area exporting an
institutional logic. In this case, the widespread support that the logic of action enjoy among
powerful actors in one area of the economy may enable agents to transmit it to another
institutional site, over time leading to gradual institutional change. Alternatively, the import
of ideas from one policy area to another may help forge coalitions across institutional
divides, i.e. between actors placed in disparate institutional sites that coalesce around a joint
interpretation of how the two policy areas should work and jointly support the introduction of
their shared logic of action in both institutional domains. In this case, incumbent actors
seeking to change the dominant institutional interpretation in their policy area may harness
the legitimacy their preferred logic of action enjoys in a neighboring policy area, along with
the authority of the coalescing actors, based for example on prestige related to professional
and educational background or their membership of international regulatory networks
Importantly, the harnessing of legitimacy is not just a matter of providing persuasive
arguments that may bring on board the most important political groups and the electorate, but
likewise a process that works to shut down competing crisis narratives and alternative policy
solutions. From this perspective, the use of ideas to exert power is instrumental, in the sense
that the actors who come to accept the new set of ideas and the changed logic of action their
institutionalization entails do not necessarily believe in the ideas. Instead, the intersubjective
efficacy of the idea – and the communicative discourse employed by the ideational agent – is
so strong that the actors concerned are compelled to adhere to the idea (Carstensen and
It is important to recognize that the effectiveness with which networks crossing
institutional sites are able to export a logic of action from one institutional domain to another
is not only based on persuasiveness of the ideas in the sense that any set of actors with the
‘right ideas’ can potentially establish such interlinkage. The efficacy of such an operation in
large part hinges on other non-ideational factors, notably access to significant economic
resources – that enable actors to campaign for their ideas, and in a broader perspective lends
weight to their claims – as well as institutional position that places the actors in the network
centrally in the political system and broader societal networks of power. Material resources,
however, alone cannot account for the successful movement of a logic of action. As argued
above, for incumbent actors to identify and make their interests actionable within the
parameters of a different logic of action requires that the supporting network provide a
coherent and appealing narrative that may speak to interests that cut across ideological
divides and persuades about the problem-solving capacity of a new set of ideas. On a
conceptual level, then, this means that the power of ideas oftentimes interacts with other
kinds of power, like structural, institutional and coercive power (Barnett and Duvall 2004,
Parsons 2016). In terms of the German pension case, rather than highlighting ideational
power at the expense of the structural power of finance, it is thus key to appreciate the
interaction between different kinds of power within the case.
Strategic translation of a new logic of action
If a reinterpretation is to be successfully imported to another institutional site to establish
synchronization, it requires that it be fitted to its host environment. In order to make a policy
appear persuasive or "coherent", actors need to engage in a strategic transfer of legitimacy
and frames across spheres to show how the logic of action offers normatively acceptable
ideas that also appear to be an effective cognitive alternative in the perceived material interest
of actors (Schmidt 2008, 307). It is auspicious to conceive of the discursive strategies
underlying invasion from within as what Acharya (2004) refers to as ‘localization’. He
proposes to think of localization as a "congruence-building process" during which actors
engage in grafting and framing.4 In Acharya’s (2004) framework, ‘grafting’ is a tactic policy
entrepreneurs employ to institutionalize a new norm by associating it with a preexisting norm
in the same issue area, which makes a similar prohibition or injunction. Such grafting in turn
requires framing, because “the linkages between existing norms and emergent norms are not
often obvious and must be actively constructed by proponents of new norms” (p. 243).
One such strategy is not to advocate to displace the existing paradigm altogether, but
rather to modify it. Acharya (2004, 246) finds localization attempts more likely to be
successful when "the idea recipient's chief goal was to strengthen, not replace, existing
4 Note that Acharya (2004) exclusively focuses on the actions of local actors importing foreign ideas in the
context of transnational norm diffusion, whereas we assume invasion from within to encompass both exporting
and importing actors, not least, because importers and exporters often are difficult to distinguish; the same
member of parliament may sit on social and economic committees, switch positions during their career, or hold
generalist positions in government.
institutions [...] with the infusion of new pathways of legitimation". In the case at hand,
privatization advocates merely sought to displace the logic that the government pillar suffices
to secure the living standard of former wage earners into old age. In order to do so, they made
the case that only by integrating funded elements into the old system, will this system be able
to survive. This is intertwined with another way in which actors adjust their discourse when
aiming at a new domain. Not only did they adapt to the prevalent frames, but also the
communicated goals underlying the policy. When pension privatization was discussed in the
financial domain, pro privatization arguments revolved around the policy's positive effects in
terms of deepening capital markets and their superior yields, and by extension, increasing
economic growth and employment, whereas normative categories of generational justice
dominated the debate in the pension arena.
Whilst this adjustment in terms of vocabulary is hardly surprising, the way in which
privatization advocates fused arguments of economic efficiency and social justice is less
obvious. Privatization advocates presented the economic superiority of prefunded pension
schemes vis-à-vis PAYG varieties as something that can be taken for granted. This is where a
policy prescription—or rather its fundamental ideational dimension—that evolved in an
adjacent policy area really unfolds its legitimizing power: Advocates do not need to actually
put forward the argument anymore; instead mere self-evident side notes à la "as we all know,
funded alternatives provide superior yields" suffice. Hence, the axiomatic quality that a
policy prescription gained in a neighboring policy has the effect of immunization through the
creation of unquestionability (Brettschneider 2009, 192). It is this transfer of legitimacy that
enabled actors to bring about an interpretative closing of the 'knowledge market' that made
pension privatization appear to be a "simple necessity" (Marschallek 2004, 299) as part of
what one may refer to as the "social construction of an imperative" (Cox 2001). This speaks
to the taken for granted-effect that paradigms exert (Hall 1993, Blyth 2002): What previously
stood in the way of pension privatization—capital markets skepticism etc.—is now part of
the pro-privatization argument, but relegated to a marginal note.
Before proceeding to the case study, it is necessary to set out the specifics of the research
design underlying the empirical analysis. Faced with the twin tasks of explaining the role of
finance in the pension paradigm shift and crafting a theoretical framework useful for such an
endeavor, a theory-building process tracing approach is particularly useful. According to
Beach and Pedersen (2013, 16), there are two key steps in developing a causal mechanism
based on theory-building process tracing. First, its starting point is inductive with the
collection of evidence that may be used as “clues about the possible empirical manifestations
of an underlying causal mechanism between X and Y”. The second step involves “inferring
from the observable empirical evidence that these manifestations reflect an underlying causal
mechanism that was present in the case.” (p. 16) In the context of this paper, the inductive
collection of evidence was ordered using the existing and quite extensive literature on the
PRA2001 reform, which was combined with a deductive element of moving back and forth
between ideational- and historical institutionalist theorizing and the available data in an effort
to tease out causal connections underlying the developments in the empirical material.
To demonstrate the analytical usefulness of the causal mechanism of ‘invasion from
within’ for understanding the multi-pillarization of the German pension system requires
showing that the three constitutive parts of the causal mechanism are necessary to include to
account for the outcome of interest. We do so by analysing, first, how the two policy fields –
finance and pension – develop in the decades preceding the reform. The analysis traces
changes in the socio-political and institutional environment pertaining to both domains and
links them to the preferences, strategic considerations, and policy positions of key actors.
Here we show that initially the two fields remained disconnected in the sense that
policymaking in each was structured by two largely incommensurate paradigms, and that no
coherent coalition had formed in finance that argued in favor of pension privatization. We
then track the waning authority of the Bismarckian pension paradigm and the simultaneous
strengthening of the finance paradigm. Second, we show how previous obstacles toward
compromise were unencumbered through the marginal process of financial liberalization.
Finally, we trace how privatization advocates leveraged the legitimacy of liberalization in
finance to push for the introduction of private schemes in the pension domain, and that actors
"localized" their policy prescription in the pension sphere by engaging in discursive strategies
Throughout the empirical analysis, these arguments are weighed against relevant
alternative explanations. First, one could reasonably conjecture that the structural power of
finance alone can account for the shift towards pension privatization. This would entail that
once the German financial sector gained enough economic and political clout, financial
interests set their eyes on a liberalization of the German pension system and were able to
push through the reform. In that case, we do not need the causal mechanism of ‘invasion
from within’ to explain the shift towards multi-pillarization, since we can simply point
towards material and structural factors. Second, one may imagine that the ideas that inspired
the policy shift in German pension politics originated within the pension area itself. In these
circumstances we would be able to claim that both the second and the third part of the
proposed causal mechanism, namely the forging of coalitions within an adjacent policy area
and the process of strategic localization, is unnecessary for accounting for the outcome. Put
differently, it would be superfluous to study connections between institutional sites, since the
reform was created within the pension area. Third, and finally, we seek to determine the
extent to which ideas concerning pension privatization were introduced from abroad rather
than developed within the German polity. If that was the case, again, we do not need the
causal mechanism of ‘invasion from within’ to account for the outcome but can instead limit
our focus to studying the effect of ideas imported from abroad.
The empirical analysis draws on a wide range of primary and secondary sources,
including parliamentary debates, various newspaper archives, and expert interviews. Expert
interviews have been employed to validate the findings from documentary research, enhance
the reconstruction of political processes, and discern actors' motives and beliefs (Tansey
2007). Interview subjects have been selected based on case knowledge (purposive sampling)
and recommendations (snowball sampling).5
5 The 19 interview subjects include representatives of organized business, academics, bureaucrats and social and
financial policymakers (CDU and SPD) including both former MPs and ministers.
3. Revisiting the German Finance-Pension Nexus
Obstacles of pension privatization: powerful ‘pension men’ and German ‘insider finance’
The 1957 pension reform enshrined the basic principles of the Bismarckian, one-pillar
pension paradigm. Contrary to the consensual character often attributed to the process
leading up to this seminal reform, key aspects pertaining to the pension-finance nexus were
subject to extensive political battles along fault lines that would reemerge in pension debates
throughout the remainder of the century. The economically liberal parties Free Democratic
Party (FDP) and German Party (DP), the liberal wing of the governing Christian Democratic
Union (CDU), and the entire camp of organized business opposed the dynamized PAYG
approach,6 yet for reasons of political expedience, as well as the perceived failure of funded
alternatives in recent history of wars and inflation, a near ideal-type conception of a
'Bismarckian' pension system reigned supreme (Nullmeier and Rüb 1993, 93-115). In turn,
voices fundamentally questioning the pension configuration were increasingly marginalized
in what Babel (2001, 51) refers to as a "silent revolution."
By the mid-1980s, a formidable liberal coalition had begun to question the one pillar
paradigm encompassing inter alia the FDP, the economic and financial wings of the CDU,
the Bundesbank, and many academics. In the context of what was widely perceived to a be a
'pension crisis', the period between 1985 and 1989 saw a battle between the agents of whose
policy preferences largely fall within the multi-pillarization paradigm and agents of
continuity defending the principles of the one-pillar pension paradigm. The 1989 pension
reform act (PRA1989) explicitly adhered to the traditional order, since multi-pillarization
advocates neither managed to undermine the authority of the one-pillar paradigm, nor
seriously challenged the discursive-political power wielded by the so-called Rentemänner
(pension men) that undergirded the old pension order, in particular organized labor,
conservative and social democratic 'social politicians', and administrators of the public
pension scheme (Nullmeier and Rüb 1993, 301). This coalition put concerted efforts in
finding policy solutions that explicitly remained within the parameters of the 1957 reform.
The importance of this "coalition of path dependents" (Conrad 1998, 112) for continuity in
the German pension system can hardly be overstated (Hinrichs 2005, 53).
While the one pillar paradigm proved resilient despite mounting material pressures,
pension men's efforts in fending off attacks were also facilitated by a lack of cohesiveness
among agents of change. Even though the policy solutions advocated by this coalition all fell
within the category of pension multi-pillarization, they differed widely.7 Note that the main
6 In particular the financial sector—including insurers, commercial banks, savings banks, and other financial
intermediaries—mobilized against the dynamized PAYG approach and even founded the Association for the
Protection of German Savers (Gemeinschaft zum Schutz der deutschen Sparer) in opposition to the reform
(Hockerts 1980, 378).
7 It is key to appreciate that even among economically liberal advocates of pension system change the preferred
policy option is by no means unambiguous and 'financialized' partial privatization but one potential path toward
multi-pillarization (see Béland 2006, 567). The fault lines within political camps often go underappreciated,
which may stem from an often overly simplistic dualism between neoliberals and welfare state advocates
(Leisering 2004, 51).
line of division did not run between political parties, but across the conservative and social
democratic people's parties, between 'social politicians' on the one hand and 'financial' and
'economic politicians' on the other (Berner 2009). Consider how the heterogeneity among
liberal agents of change played out within the CDU, which is widely held to be the decisive
battleground of pension politics at this point (Nullmeier Rüb 1993, 353): One camp led by
Kurt Biedenkopf advocated a systemic shift toward a Beveridgean type of system while
Christian Schwarz-Schilling's proposal envisaged introducing a capital stock within the
public pillar (Miegel 1981; Biedenkopf 1985; Schwarz-Schilling 1987; 1988). When the
CDU voted on their pension program at the party convention in 1988, these two visions of
multi-pillarization competed with one another, somewhat canceling each other out and
facilitating labor minister Blüm's victory.8 This internal heterogeneity stands in stark contrast
with agents of continuity, who displayed remarkable cohesion in their positions and lines of
defense (Hegelich 2006, 234). For example, when Schwarz-Schilling presented his proposal,
a variety of 'pension men' dispelled it in remarkably similar ways (Nullmeier and Rüb 1993,
388). Agents of continuity rejected multi-pillarization policy ideas out of principle without an
"internal audit," as two of the most central 'pension men' confirmed during interviews.9 One
'pension man' recalls that "we truly have built a concrete wall" to fend off multi-pillarization
Just when policymakers within social policy thought to have had sustainably repaired
the pension system, reunification added to the long-term marginal pressures the system had
been facing. At this point the longstanding globalization-competitiveness discourse
(Standortdebatte) lamenting strenuous 'social costs' grew stronger (Seeleib-Kaiser 2002) and
even social democrats began to adopt positions that higher pension contributions ought to be
precluded. Multi-pillarization advocacy was focused on fiscal retrenchment and
reducing non-wage costs in the name of competitiveness (Banchoff 1999; Hegelich 2006,
217–232). As Cox (2001, 498) writes, "[b]ecause enhancing competitiveness is a concept
alien to the construction of the German welfare state, it does not offer a legitimate basis for
welfare reform." While effective in pushing for budget cuts, such a discourse failed to 'shape
paths', which at that point is reflected in comparatively steep retrenchment but limited
restructuring in the German pension system (Schludi 2005). By 1995, multi-pillarization
advocacy was one-dimensional and internally heterogeneous.
Reconnecting Private and Public Pensions
One may be tempted to draw a straight line from generous public pension systems to a
private pension regime that contributes little to capital formation (Vitols and Jackson 2001),
but such a link is difficult to empirically corroborate (e.g. World Bank 1994, 307).
Notwithstanding its dominance, it is not as if generous public pensions simply 'crowded out'
private (old age) saving in Germany. German private savings rates actually increased after
8 Interview with Christian Schwarz-Schilling, Berlin, 17.01.2018.
9 Email correspondence 11.01.2018 and phone interview 05.12.2017.
10 Phone interview 05.12.2017.
the 1957 pension reform and remained high (Hockerts 1980, 383).11 Economists have
referred to this as the 'German savings puzzle.'12 In light of the parallel quantitative
development of public pensions and overall private savings, we need to consider both spheres
as "qualitatively drifting apart" (Wilke 2016, 47) rather than functional derivatives of one
another. The 1957 pension reform instigated a remarkable dissociation of pension politics
into "separate worlds of old-age provision" (Berner 2009, 21). As the one-pillar approach
meant that the public pension pillar alone should suffice to maintain one's standard of living
throughout retirement, the purpose of occupational pension schemes altered from topping up
meager public pensions to a tool of employee retention and motivation during times of full-
employment (Hegelich 2006, 122). Wealth formation policies aiming at a higher share of
'productive capital in the hands of employees' were also decoupled from the old age provision
context (Dietrich 1996, 222-228). Company pensions and private wealth more generally
became "de-socialpoliticized" (Berner 2009, 125) and thus disjunctured from what was
considered 'pension politics' or the 'pension system.'
Whereas during private capital formation parliamentary debates of the 1960s the
implications of the recently established pension system were, if only occasionally, raised by
policymakers of various stripes, as early as in the 1970s the two issues were not conflated
anymore. Perusing the parliamentary debates and media reporting pertaining to the private
capital formation policy initiatives during that period13 suggests that the context of old age
provision did not factor into these debates. This separation held throughout the 1980s, when
the financial solidity of the government pension was increasingly put in question. None of the
parliamentary debates, motions, or law proposals by the government and opposition parties
on private capital formation from that decade contain a reference to old age provision.14
Perhaps more surprisingly, the goals of private capital formation policies were also
remarkably separated from private old age provision. Equity-based products were considered
overly speculative and thus inappropriate for old age saving, while on the other hand life
insurances were deemed unsuitable to foster capital formation.15 As the favorable tax
treatment of housing and life insurances was the "strongest pillar of German saving policy"
11 While life insurers received a boost due to the heightened awareness for the issue of saving for old age in the
immediate aftermath of the 1957 and 1972 pension reforms (Berner 2009, 107-108), the growth of company
pension schemes of the immediate postwar period ebbed away as a result of the 1957 pension reform (Manow
12 That is, the country "has one of the most generous public pension and health insurance systems of the world,
yet private savings are high until old age" (Börsch-Supan et al. 2000, 1).
13 The most important ones include the CDU's 1970 "Burgbacher-Plan", the FDP's 1972 "Freiburger Thesen",
and the SPD's 1973 Tariffonds proposal.
14 This disjuncture is perhaps best illustrated by the parliamentary debate from November 14, 1986 when a
pension law (Siebtes Rentenversicherungs-Änderungsgesetz) and a capital formation law (Zweites
Vermögensbeteiligungsgesetz) were discussed during the same session: even though numerous policymakers
raised the need of 'structural reforms' of the pension system, none of them even alluded to the potential role that
private capital formation may play in supplementing old age income (Plenarprotokoll 10/247, 14.11.1986).
15 A particularly instructive incident to underscore this dichotomy is a government reply to a minor
parliamentary question (kleine parlamentarische Anfrage) from the late 1970s as to why insurers' capital sharing
policies were ineligible for direct savings subsidies:15 since the up front coverage costs for death risk hampers
efforts of immediately forming capital, lawmakers argued that such schemes would contradict the main purpose
of such subsidies for capital formation (Plenarprotokoll 8/144 15.03.1979, 11538).
(Börsch-Supan and Eymann 2000, 17) and efforts at fostering private capital formation
through savings subsidies remained comparatively unsuccessful, saving patterns of German
private households come as little surprise: In 1991, 75 percent of household assets were held
in currency, deposits, insurance claims, and pension rights (Detzer et al. 2012, 64) and even
by 1998 a mere 6 percent of the adult population directly owned shares (Jürgens et al 2000,
This political pillarization of the three pension pillars has two main upshots. First, it
highlights the perceived incommensurability of policy goals pertaining to old age provision
and capital formation as a crucial obstacle toward capital market oriented pensions. Second,
it suggests that one needs to understand the evolution of politics pertaining to the second and
third pillar of the German pension system in the context of the German postwar financial
paradigm. Widely held to be the ideal-typical bank-based and insider-oriented variety up
until the 1990s, the German financial system constituted an institutional arrangement that
shielded firms from short-term market pressures and thus ensured 'patient capital' (Hall and
Soskice 2001, Vitols 2004, Deeg 1999). Most company pension commitments were held as
internal book reserves (Direktzusage) with such "organizationally embedded schemes"
constituting a key source of market-independent liquidity (Jackson and Vitols 2001) and thus
a core element of the patient capital paradigm (Röper 2018).
Especially the recession between 1979 and 1982, however, delegitimized what was
perceived as an overreliance on bank and internal finance in light of a wave of corporate
bankruptcies (Story 1996, 385). Corporate Germany's 'equity problem' became more severe
throughout the 1980s (Deutscher Bundestag 2006, 14).16 Upon the decision to form a Single
European Market, the financial system increasingly became part of the German globalization-
competitiveness debate (Standort) in the second half of the 1980s (Beyer and Höpner 2003,
191). Rather than a 'big bang,' however, marginal reorientations toward finance capitalism
ensued (Jürgens et al 2000, 67; Deeg 2005). A widely shared consensus in the political field
of finance began to emerge that saw the deregulation of the financial sector as a factor of
competitiveness, source of economic growth and employment, and essential in bringing
'equity culture' to German households. By 1995, finance capitalism had reached a tipping
point of dominance (Röper 2018). The shifting political winds encouraged banks and
investment companies to challenge incumbent insurers with 'financialized' pension policy
proposals (Röper, n.d.). Investment companies (BVI) proposed the first investment fund (AS-
funds)17 officially labeled as a pension product (Laux 1995) and Deutsche Bank's research
arm for the first time made concrete proposals to establish Anglo-American type of pension
funds in Germany (DB Research 1995).
The BVI connected two issue spheres that had long been separated: private capital
formation and fostering private old age saving. It is therefore not too aggrandizing that BVI-
chief Laux referred to this "combination of capital formation based on equities with the idea
of old age provision" as a "revolution" when first presenting AS-funds on German television
16 The average equity ratio of German firms dropped from about 30 percent in 1965 to 18.5 percent in 1983
(Schwebler 1985, 350).
17 In many ways constituting the 'ice breaker' for the pension debates to come, AS-funds "basically contained all
'core components' of the Riester-pension" (Oelschläger 2009, 14).
(TV interview "Telebörse" 15.09.1995). Deutsche Bank Research's Axel Siedenberg
similarly underscored a dual strategy: "Our initiative aims to strengthen occupational
pensions and at the same time broaden and deepen the Finanzplatz Deutschland" (Siedenberg
1995, 3). These policy initiatives are expressive of bricolage (Campbell 2004; Carstensen
2011), as organized finance and financial policymakers reformulated private capital
formation policies and company pensions as solutions to the problems facing the pension
system within the context of the wider finance capitalism program – and thus broke up the
longstanding incommensurabilities separating the three pension pillars. Investment
companies explicitly took aim at the "political taboo that wealth formation policies and old
age provision policies be conceptually kept strictly separated" (Laux 1995).
This recombination did not generate entirely new ideas, but rearranged longstanding
policy goals of fostering 'equity culture' and private capital formation, boosting capital
markets, and privatizing parts of the pension system in novel ways. BVI chief Laux
accordingly described his policy innovation as "killing three birds with one stone:" private
capital formation among employees, deepen capital markets, and improving old age
provision for employees (TV interview "Telebörse" 15.09.1995). This constitutes the
integration of the finance capitalism program and multi-pillarization advocacy: Notions of
efficiency (rates of return), longstanding but abstract arguments about increased capital
formation and thus economic growth through funded pensions, and the need to privately save
for retirement were recombined and translated into concrete policy solutions. The forging of
a connection worked on both a discursive level – which facilitated 'path shaping' in
"establishing new grounds for evaluating the legitimacy of policy proposals" (Cox 2001, 474)
– as well as on a political level, where these reformulations meant concrete policy solutions
that could be fought for. Two marginal processes coincided: pension desperation and
financial aspiration. The stage was set for invasion from within.
Notwithstanding the central role of international organizations in spreading ideas
about pension reform (Orenstein 2013), with the OECD and World Bank often pointed to as
key sources of ideas concerning multipillarization, in the case of the German pension
paradigm shift, the ideas and discourses behind the push for pension privatization were
'homegrown.' For one, interviews with elite decision makers at the time shows that few were
aware of the existence of the studies of international organizations like the OECD or the
World Bank, let alone had read it. In the case of the World Bank report, Lamping and Rüb
(2006, 465) corroborate this: "We found no single evidence that the World Bank’s concept
played any role in the development of the reform ideas." Second, even if policy ideas of
multi-pillarization were in some form imported from abroad, it is unlikely that their initial
recipients were located in the sphere of social policy (especially given the abovementioned
German compartmentalizing of economic and social policymaking). It seems more plausible
that actors in other policy areas or societal spheres were susceptible to such ideas at an earlier
stage and then advanced them domestically, turning this into a process 'from within'.
Localization: Leveraging Financial Consensus in the Pension Domain
The reformulations of policy goals and the conjunction of marginal change processes created
a new political space in which privatization advocates had to focus on a different audience.
Unlike the "quiet" financial domain (Culpepper 2011), pension politics are among the
loudest. This means that rather than a small technocratic circle the public at large needed
persuading. Once investment companies and banks had developed concrete policy solutions
to open up the field of pension politics, they allocated tremendous resources to campaigns
pushing for partial privatization (Wehlau 2009). One manifestation of these efforts by
financial firms was to found a research institute solely dedicated to the issue of old age
provision, the Deutsche Institut zur Zukunft der Altersvorsorge, in 1997. The financial sector,
liberal think tanks and academics produced and disseminated a myriad of academic and
pseudo-scientific studies, especially after 1995, in what one may refer to as 'wallpapering' of
A significant part of this effort was aimed towards the perhaps most obvious and
longstanding point of critique vis-à-vis the one-pillar pension system, namely its vulnerability
to societal ageing. Warnings about the 'exploding social costs' that had long been part of the
fiscal sustainability and competitiveness discourse, experienced a notable amplification post
1995 in what amounted to a 'pension panic'. We can pinpoint the increased participation by
organized finance through the proliferation of the terms "pension gap" (Rentenlücke) and
"provision gap" (Versorgungslücke), which clearly aim to point out insufficiencies in the
public pension system (see e.g. BVI 1996, 1997, 1998, GDV 1996, 1997, 1998, BdB 1997,
1998). What used to be specialist jargon in the financial sector was transferred to the wider
pension debate. A former CEO of an investment company and president of the BVI recalls:
"We mentioned provision gaps in every third sentence. [...] We mentioned it again and again,
we brought it to the fore again and again."18 Winfried Schmähl, the most prominent academic
among the 'pension men,' laments "an instrumentalizing of demographic change by conjuring
up crisis scenarios," (Roland 2001, 53) beginning in the mid-1990, in the context of which he
attributes a key role to banks and insurers in linking "demography and the insecurity of
pensions" (p. 54).
By engaging in what one may refer to as "demographic pessimism" (Skidmore 1999),
pension privatization advocates sought to dislodge the logic that the government pillar alone
would suffices to secure the living standard of former wage earners into old age
(Lebensstandardsicherung). They made the case that system-internal solutions could not deal
effectively with the 'ticking demographic time bomb' and that the first pillar alone will no
longer guarantee Lebensstandardsicherung, thus rendering multi-pillarization 'inevitable.'
(see e.g. GDV 1996; BdB 1997; BVI 1996) While a seemingly intuitive strategy, this
reformulation contrasts starkly with multi-pillarization advocacy in the 1980s. During the
1989 pension reform debate, agents of continuity defended the old order by arguing that
Lebensstandardsicherung may not be endangered. At that point, multi-pillarization advocates
like Schwarz-Schilling dared not to put in question this policy goal of the first pillar
(Schwarz-Schilling 1987; 1988). During the 1990s, by contrast, privatization advocates
absorbed Lebensstandardsicherung as the overarching policy goal, but reformulated it in
18 Interview, Berlin, 06.10.2017.
arguing that all three pillar combined shall ensure it. That is, they maintained the policy goal,
but altered the means to attain it as "Lebensstandardsicherung through three pillars" (Rische
As noted above, Acharya (2004, 246) finds recombination strategies more likely to be
successful when the idea recipient’s goal is to bolster existing institutions by providing new
raw material for legitimation. Partial privatization advocates did just that when making the
case that only by integrating funded elements into the old system will this system and its
promise to secure the living standard of wage earners into old age be sustained. This line of
reasoning became widely used thereafter. Katrin Göring-Eckardt (Green Party), for example,
argued during the parliamentary debate of the PRA2001 that only once generational equity is
re-established—crucially by means of pension privatization—"will the acceptance of PAYG
old-age provision rise again" (Plenarprotokoll 14/46). This ‘implementing the new merely to
save the old’-framing conceivably contradicts the notion of the private pillar successively
crowding out the state pension.
Feeding into the construction of likeness, privatization advocates understated the
paradigmatic extent of the changes they were proposing by insisting that the bigger role
played by private and occupational old age saving be a 'supplement' to rather than a
'replacement' of the public pension pillar (see e.g. BVI 1996; BdB 1997). This marks an
interesting contrast to the dramatic tone employed when characterizing the dire financial
situation of the public pillar. A former CEO of an investment company and president of the
BVI confirms that this was a deliberate strategy of understating.19 This has been widely
criticized by agents of continuity and one of their key representatives even refers to this as
"deception."20 Labor Minister Riester attests to this non-displacement framing regarding the
introduction of the private pillar during the first reading of the law when characterizing it as
"not a replacement, but a supplement to the state pension" (Plenarprotokoll 14/133).
Another discursive strategy of undermining the old pension paradigm and introducing
new cognitive and normative concepts as superior solutions by privatization advocates can be
found in the context of presenting the PAYG system as generationally unjust. "Generational
accounting" (Generationenbilanzierung) provides the economic tool underlying much of this
debate (Schmähl 2004). On a most fundamental level, generational accounting allows
comparing benefits that different types of pension systems provide for individual cohorts.
Financial sector actors primarily used generational accounting to compare rates of returns
between the public pension pillar and their respective policy alternatives, such as investment
funds (Hockerts 2011, 312). In addition to presenting the public pension as inefficient in
terms of rates of return, especially partial privatization advocates used generational
accounting to warn of a "sustainability gap" (Nachhaltigkeitslücke) in the public pension
system, which unduly burdens younger generations (Leisering 2004; see e.g. GDV 1996;
BdB 1997; BVI 1996).
Tracing the career of terms, arguments, and concepts of partial privatization from a
before-and-after-1995-perspective for the four main political parties and their respective key
19 Interview, Berlin, 06.10.2017.
20 Email correspondence 11.01.2018 and phone interview 05.12.2017.
agents, leads to the conclusion that by 1998 partial pension privatization had become a
perceived imperative among all main political parties; not because agents of continuity grew
convinced of its advantages or because they had to resign, but because the pressure created
by partial privatization advocates forced them to make concessions and thus redraw the
contours of the pension debate. The two key agents of continuity—the long-time social
minister Norbert Blüm (CDU) and the longtime social policy spokesperson Norbert Dreßler
(SPD)—felt coerced to adapt both their language and their positions as a strategic move to
prevent further reaching steps toward partial privatization.21 Examples of this include the fact
that both entertained ideas of introducing a capital stock in the public pension pillar to
appease multi-pillarization advocates; their concrete battles with privatization advocates
about interpreting Lebensstandardsicherung; or Blüm's attempt to shift the meaning of
'generational equity' toward his leitmotiv in an debate with the FDP (Torp 2015, 375). In
1994, Dreßler still flat-out rejected any necessity to partially privatize (Dreßler 1994), by
1998 he had reluctantly supported concrete policy proposals toward that end and begun to
defensively adapt the multi-pillarization nomenclature (Dreßler 1998).
One may interpret this convergence among change and continuity agents as a learning
process by the latter. One is hard pressed, however, to find evidence of such importing of
ideas or adjustment of preferences. During a public hearing for the Third Financial Market
Promotion Act, for example, financial policymaker Wolfgang Steiger tellingly asked the
Goldmann & Sachs representative: "What kind of arguments may help win over employees
and social politicians to introduce pension funds in Germany?" (Public Hearing Finance
Committee 12.11.1997, protocol no. 93, 111-112). A prominent social politician from the
1990s recalls how distinct the spheres of financial and social policymaking remained in
parliament: "those were separate playing fields, so to speak. It wasn't as if financial
politicians and social politicians would get together and ponder what to do. Realistically there
was no exchange [prior to the PRA2001]. [...] Politics was strongly pillared back then."22
Further substantiating this, he describes a pronounced polarization within the CDU/CSU: "90
percent of social politicians supported the Blüm model and 90 percent of financial and
economic politicians opposed it" (ibid.). In the run-up to the PRA2001 most of the core
agents of continuity such as Rudolf Dreßler or the chairman of the Social Council, Winfried
Schmähl, were ostracized (Wehlau 2009, 147-158). Within the SPD the PRA2001 also
caused a rift: During the internal vote of the parliamentary group, 19 MPs voted against the
reform, which was also the number of members of the committee for social affairs.23 When
the Bundestag passed the legislation, 48 SPD MPs expressed their "fundamental social
political concerns" about the reform in an attachment to the protocol and justified their voting
in favor as merely the lesser evil (Plenarprotokoll 14/147, 14458). Taken together, this
substantiates an invading export by financial actors rather than a learning import by social
21 Phone interview 05.12.2017.
22 Interview, Berlin, 02.08.2017.
23 Phone interview 05.12.2017.
Outlook beyond 1998
Taken together, by 1998 we can attest the "social construction of an imperative" (Cox 2001,
463) to partially privatize the German pension system. The smaller political parties, FPD and
Greens, converged on partial privatization (Torp 2015, 379) coming from different points of
departure. Social politicians within the people's parties found themselves forced to make
strategic concessions to defend the old order. 24 Organized business gladly used the ideational
power that AS-funds and pension funds wielded as government policies to justify their more
radical privatization advocacy. 25 Organized labor increasingly fragmentized over the issue of
fighting multi-pillarization versus adapting it to gain influence through collective
occupational pension schemes (Schludi 2005, 161). And in a context of favorable stock-
market performances, the media almost unanimously and often euphorically called for partial
privatization (Schmähl 2012).
By 1999, when the discussion of the PRA2001 began, the economic effects of
pension privatization were hardly ever mentioned anymore. If at all, they were alluded to in
passing, which is remarkable, given how complex and debatable the economic case in favor
of pension privatization is (Marschallek 2004). Hall (1993, 290) likens ideas to subatomic
particles, for they "do not leave much of a trail when they shift." In the case at hand, what is
left unsaid is arguably most instructive to assess the financial paradigm shift's impact on the
pension domain. The government's proposal for the PRA2001 does not contain a single
reference to the economic effects of pension privatization and the counter motion by
CDU/CSU merely states in the most general terms: "The expansion of the first and second
pillar would disburden the state pension and strengthen the business and financial location"
(BT-DS 14/1310). During both readings of the law in the Bundestag, not a single speaker of
any party specified this notion of economic effects other than vague allusions to the overall
integration of social and financial policies.
While we surely observe a combination of both deliberate and subconscious absences
during the parliamentary debates of the PRA2001, the latter appear to outweigh the former.
In the only parliamentary discussion of privatization's economic effects, Kurt Biedenkopf
addressed potential doubts about pension privatization's concomitant double-payment
problem (see e.g. Myles and Pierson 2001) when submitting in the Bundesrat (upper house):
"But due to the compound interest-effect, private capital formation is more economic than the
collective PAYG old-age provision. [...] Consensus about this basic idea prevails across party
lines" (Plenarprotokoll 758). Upon proposing the long-term goal of a 40 percent share of old-
age provision coming from private savings, Biedenkopf further argues: "Economic reasons,
which I cannot explain further here, support this as well. Private old-age savings create
capital formation, which increases productivity." These quotes teeming of self-evidence
combined with the observation that not a single MP even bothers to mention superior yields
to make the case for funded schemes—let alone address potential risks stemming from
24 Phone interview 05.12.2017; interview, Berlin, 02.08.2017.
25 Interview, Berlin, 23.10.2017.
fluctuating capital markets26—supports the hypothesized invasion from within-effect of the
financial paradigm in the pension domain.
Having followed the process through which pension privatization became the favored
reform option, we are now in a better position to determine whether in fact a more simple
structural explanation – focused on the increased economic and political clout of German
finance – may suffice as explanation for the paradigm shift. At first, such an argument seems
persuasive, considering that German organized labor has lost ground in terms of coverage,
level of centralization, and public legitimacy throughout the 1980s and 1990s (Hassel 1999;
Schroeder and Keudel 2008) and actors from the financial sector increasingly began to
penetrate social policy discussions during the 1990s (Wehlau 2009). While the benefits of the
PRA2001 for the financial sector are undoubtedly tremendous—Lamping and Rüb (2004,
182) refer to it as a "gigantic capital-market extension programme via the creation and
motivation of private demand"—two main factors shed doubt on a structuralist argument.
First, beyond reasonable doubts whether structural power is a plausible and testable causal
factor in the case of pension policymaking to begin with (Röper, n.d.), the structural
development of the German economy hardly displays substantive financialization. For
example, the percentage of GDP represented by the financial sector has increased by merely
0.5% between 1991 and 2013 (Statistisches Bundesamt 2014). Second, pension preferences
have been markedly heterogeneous within the financial services industry, which led to
extensive infighting (Röper, n.d.). If key fractions of finance only reluctantly got on board
with 'financialized' pension policy solutions, the purchase of a structural power argument
seems limited. In other words, and as shown above, to make their interests and material
resources actionable, political actors within the finance area needed a common interpretation
of pension reform, and a discourse that could legitimize the paradigm shift, and only once
this was established did their structural (and instrumental) power come to bear on pension
politics. Financial liberalization unloosened the underlying Gordian Knot in the form of the
insider financial paradigm and redirected the idea of private capital formation toward old-age
Rational-functionalist, marginalist historical, and ideational institutionalist strands of
scholarship have each significantly advanced our understanding of institutional change and
stability. The Varieties of Capitalism approach affords particular prominence to the stability-
inducing dynamics of institutional complementarity and the central role played by
institutional interlinkages in sustaining such continuity. While more recently strides have
been made in historical and ideational institutionalism to bring greater attention to dynamics
of change and agency, limited attention has been paid to the role of institutional linkages in
setting the boundaries for such dynamics of change. In an effort to contribute to existing
debates about what processes drive institutional change in advanced political economies, this
paper has sought to leverage insights from each of these traditions to help explain how and
26 With the exception of the leftist PDS: "There is reason to fear pensions depending on stock market
why institutional interlinkages not only change over time, but how actors and the ideas they
use to legitimize their reconstructions crucially drive these dynamics. Bringing greater focus
to interinstitutional linkages as sources of institutional change and not only stability, holds
promise for the development of analytical models that recognize potentially transformative
gradual change, while acknowledging the limits to actors’ efforts to change the institutions
within which they operate.
The paper shows the explanatory purchase of this perspective by adding an important
piece to the puzzle of German pension privatization. It demonstrates that the reform has deep
roots in private capital formation debates that were redirected toward old-age provision
during the marginal process of financial liberalization, thereby underscoring the need to take
a multi-domain vantage point. The conjunction of the marginal erosion of the old pension
paradigm and the morphing emergence of the outsider financial paradigm helps explain why
pension privatization came to be the favored reform option. By discerning strategies through
which advocates leveraged pension privatization's legitimacy and cross-class support from
the financial domain and 'localized' it in the pension domain, the paper elucidates the causal
effect paradigms can exert across domains. It specifies the often-vague notions of framing
and grafting for the context of trans-spherical change dynamics and develops empirical
strategies of discourse analysis—e.g. tracing absences to discern the subtle causal power by
paradigms—that may prove useful beyond this case study. Taken together, this application of
invasion from within sheds new light on the significant puzzle of how pension
privatization—in many ways the antithesis of a Bismarckian pension system—seemingly out
of nowhere came to be widely perceived as the only reform option to save the old system.
While the focus of this paper has been to theorize how the movement of logics of
action between institutional sites may perpetuate gradual but significant transformation, the
mechanism of ‘invasion from within’ also holds promise in term of bridging seemingly
contradictory theories of change through critical junctures versus gradual transformation.
Although bringing an interpretation to a position of dominance in an institutional domain
typically requires years of strategic labor on part of actors – and may likewise be connected
to developments in other parts of society, most notably in the academic sphere that often
lends legitimacy and credence to certain interpretations at the expense of others (Hirshmann
and Popp Berman 2014) – it is exactly the legitimacy accruing from the authority that an
interpretation enjoys in one area that may enable actors to relatively swiftly place it centrally
in another. Put differently, what at the face of it looks like a rather sudden paradigmatic shift
may in fact be the result of marginal developments within two otherwise disconnected
institutional sites pushed through by strategic agency. Critical junctures may appear as a
result of a host of external reasons, but the mechanism of ‘invasion from within’ suggests that
a critical juncture may also be the result of agency overcoming what appears as
insurmountable opposition, in part by leveraging the legitimacy certain ideas enjoy in
adjacent policy areas.
The paper also connects with approaches highlighting the role of functional pressures
in fostering and strengthening interinstitutional linkages, but it emphasises the role of agency
in creating and sustaining such connections. Indeed, one may be tempted to tell the story of
the German finance-pension nexus from a more functionally inspired vantage point. In the
case of pension privatization reforms, the functional link between both spheres—modern
capital markets and liberal corporate governance regimes are a prerequisite for pension funds
to operate—leaves little doubt as to why financial actors reach outward upon reaching the
limits of the possible apropos of implementing the new policy prescription within their
sphere. Deducing that political actors simply accepted and pursued this rationalist-
functionalist agenda, however, would belie the ideological, non-linear genesis of the
underlying political process. Following a neo-Weberian view, the argument developed in this
paper does not disregard interest-based arguments, but emphasizes the need for actors to
adapt their ideas and interests through discourse to successfully penetrate other domains. Our
approach thus advances the longstanding debate about how domains within a political
economy cohere and interact, ranging from functional determinism to evolutionary
serendipity (for an overview, see Crouch et al. 2005). Invasion from within provides a novel
way to conceive of linkages: Without neglecting functional links between domains, it aims to
uncover the political and ideational workings underlying these linkages.
Finally, the paper also speaks more broadly to concerns in gradualist historical
scholarship about where the reinterpretations that drive institutional transformations
originate. By bringing attention to an overlooked but central mechanism of gradual
institutional change, invasion from within contributes towards greater analytical clarity about
where changes in institutional interpretations originate, how such (re)interpretations gain a
firm footing within an institutional configuration and the central role played by actors in
crafting connections between institutional domains. It suggests that ideational scholarship
offers important tools to analyse the process through which interpretations are developed,
adapted and legitimized to speak to the policy developments in adjacent institutional
domains. Highlighting the mechanism of invasion from within, potentially opens up a wide
research agenda. Efforts in this vein will have to further flesh out the underlying dynamics of
strategies aimed at transferring legitimacy across the boundaries of policy areas; for example,
in the form of potential arbitrage dynamics with actors taking advantage of distinct
institutional logics such as different levels of public salience.
Acknowledgements: The authors wish to thank the editors and three reviewers for their
helpful and constructive comments and suggestions. Thanks are also due to Daniel Béland,
John L. Campbell, Pepper Culpepper, Jane Gingrich, Pascal König, Ronen Mandelkern,
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