One group of Greeks that will look upon the return of creditors to Athens for talks aimed at completing the second review with some trepidation is the country’s 2.7 million pensioners.
Since 2010, when Greece signed its first bailout with the eurozone and the International Monetary Fund, the retirement age and social security contributions have increased, while pensions have come down. There is rarely a review that leaves pensions untouched and this one promises to be no different as lenders are targeting a reduction of annual pension spending by about 1.8 billion euros, or 1 percent of GDP.
The IMF has been the most vociferous among Greece’s lenders regarding the need for a further overhaul of the country’s pension system to make it sustainable in the long run.
Between 2000 and 2010, pension spending in Greece climbed from 11 to 15 percent of GDP, mostly due to large increases in nominal pensions, generous benefits and options for early retirement. During this period, Greece’s figure was the second highest in the eurozone after that of Italy, according to the IMF.
Despite two sets of reforms legislated in 2010 and 2012, pension expenditure continued rising and hit 17.7 percent in 2015, largely due to a GDP contracting by 25 percent while the average pension decreased by 8 percent between 2010 and 2015.
The IMF believes the combination of low contribution revenues and high pension spending led to the pension deficit climbing from 7.3 percent of GDP in 2010 to 11 percent in 2015, making it by far the highest in the euro area.
Despite cuts to pensions in previous years, the Fund estimated the average pension in Greece at 978 euros in 2015, which is similar to the eurozone average adjusted for the purchasing power parity. However, the Fund argues that pensions in Greece are granted at younger ages and are based on shorter contribution periods.
Despite a rise in the early and standard retirement age to 62 and 67 years respectively, the average retirement age fell to 59 years during the crisis since vested rights were protected under all previous reforms. The distribution of retirement applications in Greece at the end of 2015 revealed that it remained skewed toward few years of work, the IMF claims. About half of applications related to less than 26 years of contributions, while only a quarter involved applications made after 35 years of contributions, the Fund said.
In addition, the gross replacement rate (defined as the ratio of average pension to the average wage) in Greece was the highest in the euro area, at around 81 percent at the end of 2013, almost 30 percentage points above the eurozone average.
The interpretation that the Greek pension system is too generous was openly challenged by Labor Minister Effie Achtsioglou earlier this month. She wrote to the Financial Times to claim that the data is not being used to fairly reflect reality.
“The narrative about Greek pensions is driven by demands of its creditors,” she wrote. “It is based on the crude statistic that pensions require annual transfers from the state budget of around 11 percent of GDP in Greece compared with the eurozone average of 2.25 percent. This comparison is misleading.
“Following the implementation of the new pension law last year, total state financing of pensions is projected at less than 9 percent of GDP. Furthermore, the eurozone average relates solely to the cost of financing pension system deficits and not total spending. The comparable figure for Greece is around 5 percent of GDP,” Achtsioglou argued.
Pension reform is a perennial issue in Greece. It was high on the agenda during the first review, which concluded in the summer of 2016. At the time, the government legislated a number of measures yielding 1.5 percent of GDP by 2018, while the long-term savings were seen at 2.7 percent by 2025. Athens hoped that this would be enough to put the pension issue to bed. However, the IMF argued at the time that this would not be sufficient and it now says that the intervention still leaves a pension deficit of 9 percent of GDP over the medium term.
The reform introduced a new, unified pension system with a fresh set of rules that applies to all current and future pensions. In addition, the main pension was split into two parts: the national pension, which is a fixed amount set at 384 euros for anyone with a minimum of 20 years of contributions, and the contributory pension, which is based on a worker’s contributions over their entire working life.
The reform means that pensions already being paid out have to be recalibrated in line with the new rules by September 17. The scheme foresaw that any pensioner set to lose part of their retirement pay as a result of the recalculation would instead have this so-called “personal difference” frozen until the gap was eliminated by an increase in the country’s GDP and inflation rate.
However, the IMF has apparently convinced the other lenders that the personal difference has to be scrapped. The lenders are believed to be targeting savings of 1 percent of GDP (1.8 billion euros) but the Greek side would like to limit them to 0.75 percent (1.4 billion). This would correspond to an average reduction of 15 to 20 percent in the existing main pensions for 1.4 million pensioners who will be affected by the change.
The discussions about further reform of the pension system, given that there have been several rounds of cuts since 2010 and almost half of Greek households say they rely on pensions as their main source of income, will be particularly difficult for the coalition.
The government showed what importance it attaches to keeping pensioners (a sizeable pool of voters, even if they do not cast their ballots as a united bloc) when it risked the wrath of its creditors in December by handing out a Christmas bonus of 617 million euros to 1.6 million pensioners from the excess 2016 primary surplus.
It looks like the retirees who treated the handout with skepticism are about to be proved right.