ECONOMY

Politics over pensions

While other European Union countries (EU) take measures to reform their public pension systems, Greece appears to be heading in the other direction. Trailing behind the conservatives in opinion polls, the Socialist government appears to have succumbed to the old temptation of pleasing various special interest groups to be elected even if this means higher public pension spending and higher inflation next year. These measures, however, lead nowhere because they undermine the economy’s international competitiveness and hurt its long-term growth prospects. It is high time that the reformers in the government rise up to the occasion and block these unsound economic policies motivated by pure political motives. It appears that the government’s generosity to various special interest groups, carrying many votes, has prompted others to go on strike to push for sometimes excessive demands, some in the form of 20 percent-plus wage hikes. Although most have settled for less that they demanded, tax breaks and wage increases well in excess of anticipated inflation almost certainly ensure that 2004 is going to be another high inflation year for Greece and the budget deficit will turn out to be much larger than currently envisaged. Even more worrisome, though, is the government’s propensity for taking measures leading to higher future public pension liabilities. A case in point is the latest law on social insurance announced by the Labor and Social Insurance Ministry, which bucks the current EU trend on public pension reform by raising pensions for certain people, reducing penalties and offering more favorable terms to employers, and gradually including ATA (automatic inflation adjustment) for bank and public sector employees and others. In addition, the State is expected to give a rise of 3.8 percent to 4.1 percent rise to public sector pensioners retroactive from the beginning of this year and make it possible for certain categories of public sector employees to retire at an earlier age. Deteriorating indicators This is happening despite the fact that pension spending by social insurance funds and the ordinary budget is estimated at 12.54 percent of GDP in 2003 compared to 11.85 percent in 1999 according to the so-called 2003 social budget. In addition to this, the ratio of employees paying social insurance contributions to pensioners continues to head south, projected to fall to 1.51 percent in 2003 from 1.57 percent in 2002 and 2.27 percent in 1996, despite the fact that tens of thousands of immigrants started paying contributions over the same period. There is no doubt that Greece is not alone in the EU in facing the potential of a long-term pension crisis of unprecedented proportions if it fails to act. Other countries face the same problem. Unlike Greece though, some of them appear willing to bring pension reform forward and address the problem of huge future pension liabilities before there is no return. The German government has already made it clear it wants to gradually reduce pensions through 2020 by linking the annual pension increases to the evolution of the dependency ratio, that is, the ratio of population aged over 65 and under 15 over the working age population. The government has also indicated it wants to lift the average retirement age by almost three years by 2008. In France, public sector employees will have to contribute the same minimum number of years like the employees in the private sector, that is, 40 instead of 37.5 previously by 2008. An additional increase awaits employees of both sectors past 2008. This will raise the average number of years of contribution to 42.5 percent by 2020. Delaying retirement Moreover, the relevant legislation passed in France’s Parliament earlier this year calls for late retirement incentives and introduces penalties for early retirement. Tax incentives for late retirement are also envisaged in Italy along with tighter eligibility criteria for early retirement from 2008 in a bid to lift the retirement age to 62 years from 59 at present. In all the above cases, the common theme has been to lift the effective retirement age and even lower pension benefits to help contain pension outlays to manageable levels and avert the projected sharp rise in public debt-to-GDP ratios. Note that the debt-to-GDP ratio for Germany and France (but not for Italy) is well below the 100 percent level and pension outlays average about 11.5 percent of GDP. These figures compare unfavorably with Greece’s 100 percent plus debt-to-GDP ratio and projected pension spending in excess of 12.5 percent of GDP this year. Although things can get much worse for Greece, the government appears not to have taken notice or simply leave it to the next government to bite the bullet. According to a study produced by the Center for Strategic International Studies in cooperation with Citigroup Asset Management, Greece’s public pension expenditures as a percentage of GDP will reach 19 percent by 2050 while the sum of pension and health expenditures will amount to 44 percent by then. The respective figures for Spain are 16 and 37 percent of GDP. A few months ago, Greek central bank governor Nicholas Garganas dared to disagree and caused a stir by advocating the reform of the country’s pension system via an increase in the retirement age. He was saying what everybody with any common sense has been admitting in private for awhile. Although the gravity of the situation facing the Greek public pension system is widely perceived, nobody believed the government would act to take unpopular measures in an election year. Few would have thought, though, that it would have pushed for legislation leading to an increase in future pension liabilities, undermining long-term fiscal consolidation and making the sound of the public debt bomb tick more audibly. The government should not have done so in the first place. It is now up to the reform-minded government officials to stand up and be counted.