A viable pension system needs higher average retirement age

Greece may have taken tax measures to reduce its budget deficit this year but has done little so far to remove the most important threat to its public finances in the long run – dealing with the huge and growing unfunded pension liabilities. Pressed by the EU and facing the grim reality of an exponentially expanding deficit of the country’s main IKA pension fund after 2017, the Greek government, employers and employees have no option but to work together to set out a plan restricting access to pension entitlements and increasing the effective retirement age. The pension problem came to the forefront last week when Christos Polyzogopoulos, president of the General Confederation of Greek Labor (GSEE), presented an actuarial study which projected a dramatic increase in the deficit of the country’s main pension fund (IKA) after 2017 if no measures are taken. The study was done by GSEE’s Labor Institute. In seeking a politically easy way out, GSEE suggested an additional budget funding of 1.4 percent of GDP annually for IKA along with measures to combat the evasion of social security contributions, estimated at 1.8 billion euro per annum. Weak proposal However, this solution does little to tackle the pension deficit and focuses instead on financing it. In so doing, it assumes the economy will keep growing at satisfactory rates to bring in the extra revenues to fund the gap without taking into account the detrimental effect this will have on GDP growth, as budget resources are diverted away from productive uses into paying pensions. In this regard, it resembles the plan drafted by the previous Socialist government to finance IKA’s deficit a couple of years ago, but it took just two years to find out that this was not enough. Former Socialist finance minister Nikos Christodoulakis passed a law committing the state to providing funds equal to 1.0 percent of GDP each year to fund IKA’s deficit from 2003 through 2032. The state also assumed the responsibility of paying 9.6 billion euros to IKA to settle pending state obligations and honor IKA’s obligations to other state entities. Under the same plan, the state was to start issuing non-marketable, zero-coupon bonds, offering a real yield to maturity of 3.0 percent from 2008 onward to finance a reserve fund, enabling IKA to meet its future obligations. These bonds were to be redeemed in 2023. To be fair, that plan was accompanied by some reform proposals, namely a gradual decrease in pension benefits to 70 percent of base salary from 80 percent at present, starting from 2008 onward. However, these proposals were watered down by others, leading to an increase in benefits for those entering the work force from 1993 onward. But Greece, a country with an aging population, the largest budget deficit in the eurozone last year and a public-debt-to-GDP in excess of 110 percent, cannot continue to be blind about what is coming a few years down the road. A rapid deterioration in public finances is in the offing if the unfavorable dynamics in unfunded pension liabilities are not arrested. Of course, Greece is not alone in hearing the pension time bomb ticking. Other eurozone countries are facing the same problem, though on a smaller scale. However, a number of them have moved to partially reform their pension systems the last couple of years. Naturally, the reforms differ from country to country, though they all remain within the broad guidelines of tightening pension entitlements, providing incentives to delay retirement and fostering supplementary fully funded private pension schemes. Contrary to the trends prevailing elsewhere in the eurozone, more and more local companies, both in the public and the private sector, are looking to cut their work force by offering generous benefits in the context of early retirement schemes. They cite, especially in the broader public sector, the rigid Greek labor laws on layoffs to justify their moves, but in doing so, they just boost the system’s unfunded pension liabilities. Undoubtedly, the average monthly IKA pension of some 580 euros per month, including a supplementary sum (EKAS), is low. This means that to reduce it would simply add insult to injury. However, this sum perhaps masks another reality, economists point out. It takes into account people who took advantage of early retirement schemes and chose to retire early, that is, in their 40s and early 50s. Given the fact that they receive a smaller monthly pension, this drives down the average pension, the argument goes. Of course, others argue that a few of the early retirees receive even higher pensions than others who have worked a lot longer. Nevertheless, there is little doubt that these early retirement programs – some mothers with young children are even allowed to retire after 15 or 20 years – have added to the system’s woes, reducing the effective retirement age in the process. This opens a window of opportunity for Greece’s policy-makers, employees and employers to cure one of the system’s biggest problems without resorting to an outright increase in the official retirement age. By providing incentives for late retirement and penalties for early retirement, it can raise the effective retirement age and adopt less politically sensitive measures, such as hunting down people who dodge pension contributions and rationalizing the structure of Greece’s numerous pension funds to produce extra savings. It is encouraging that the government and social partners are willing to take another look at the country’s pension problem, although it is disappointing to recall that this dialogue was supposed to have begun in the mid-1990s and we are still here after some 10 years. It is also encouraging that all the parties involved seem to agree that raising contribution rates would do more harm than good by undermining competitiveness and hurting employment. It remains to be seen whether all parties can rise to the task and make the increase of the effective retirement age, along with stricter access to pension entitlements, the centerpiece of their common approach. If they do not, adverse demographics will ensure unfunded pension liabilities will continue to grow, posing the greatest threat to finances in the long run.

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