Bank of Greece Governor Yannis Stournaras on Tuesday sounded the alarm over the cost of social security, warning that the margins are “extremely narrow” for pensions to continue being paid out of the state budget.
Speaking at a conference on private health insurance, the former finance minister warned of the challenges of an aging population and said that “poor implementation or backtracking on reforms have increased demands on public pension funds and resulted in higher pension costs.”
He also expressed concern about a series of rulings from the Council of State finding that certain categories of pension cuts imposed in previous years as part of creditor-mandated austerity measures, were in violation of the Greek Constitution, saying that they could “further increase pension spending, possibly with retroactive effect.”
“The Bank of Greece estimates that these factors, in combination, pose the most serious medium-term fiscal risk and have an adverse effect on the debt sustainability analysis,” Stournaras warned.
“Furthermore, empirical research carried out by the Bank of Greece shows that the rapid rise of the population above the age of 65, as well as increased uncertainty over policy decisions related to the sustainability of the social security system also also having an adverse effect on the growth rate of per capita GDP,” the central banker added.
However, Stournaras argued, pensions could become a lever of growth rather than a drag on the state budget with the contribution of private insurance, “in combination with other policies, such as extending working life, increasing employment among older age groups and encouraging personal savings, could bolster pensioners' incomes and create a suitable safety net, while at the same time moderating the sociopolitical impact or even the risk of reversal of reforms.”
He added that introducing the option of private health insurance and private pension schemes would also help mitigate imbalances in the existing social security system, such as the high rate of some contributions, which inhibit employment growth, both from the supply and demand side.