The ‘New Politics’ of the Bismarckian Welfare State: Pension Reforms in Continental Europe David Natali and Martin Rhodes European University Institute, Florence Abstract How do veto-heavy European welfare systems engage in reform? In this paper we analyse the pensions policy reform process in four Bismarckian welfare states against the background of recent theorizing about the scope and nature of welfare reform. We develop the notion of a ‘double trade off’ – involving both politics and policy - to illustrate how governments manage to push reforms forward despite the opposition of strong vested interests. In the process we also reach a number of conclusions about recent theoretical understandings of reform in continental Europe, including both the process of reform and the nature of reform outcomes. 1. Pensions Reform – the Nature of the Problem From the 1970s, a series of pressures have shaken the social protection structures created and developed in Europe in the 19 th and 20 th centuries. These include an increase in the demand for services (beyond the expansion of available resources), the transformation of the family, the ageing population, general budgetary strains (compounded in some countries by the EMU convergence criteria) and an ideological shift towards neo-liberal principles and values. Europe’s ‘conservative-corporatist’ regime of countries faces the most difficult combination of problems due to strong challenges to its foundational assumptions (strong and constant economic growth, full employment, family stability, a low level of female work force participation), and an institutional structure that is resistant to reform (popular but fragmented social schemes financed by social contributions and managed by social partners and the state). Pensions are a paradigmatic case. The Bismarckian pensions model is based on the overarching goal of income maintenance. Financing is provided mainly by employers’ and employees’ contributions, entitlement is conditional upon a contribution record and most benefits are earnings-related. Public pension schemes are organised on a pay-as-you-go (PAYG) basis and funded by compulsory contributions that are not capitalised, but are immediately employed to cover payments to current pensioners. As for management, there is a mix of responsibilities between the state and organised interests: the state has a supervisory role (especially regarding the system’s financial viability) while many decisions are negotiated with trade unions and employers’ organisations. The intense political debate on recasting pensions in Continental Europe has centred on the following: 1. Financial Viability. The financial imbalances of social security programmes are one of the main challenges and have obliged decision-makers to reduce social outlays and increase contributions. The political debate has centred on the distinction between contributory and non-contributory benefits and the need, emphasised especially by the unions, to clearly distinguish expenses directly attributable to the state (and to be covered by general taxation), from those