Hot potato of pension reform attracts lukewarm attention

Greece may be making progress in tackling its budget deficit and huge public debt but, unlike other eurozone countries, it has done little to nothing to arrest the dynamics of its most acute problem – the ailing social security system (IKA) and more specifically its pension component. In so doing, it risks undermining the living standards of its citizens in the long run but few Greek politicians appear to be willing to touch the political hot potato and this is quite worrisome. The European Commission brought the issue of the effects of adverse demographics on the pay-as-you-go pension system and public finances to the forefront last week by publishing forecasts which single out Greece as one of the most vulnerable countries in the eurozone and the European Union in general. According to the EU, Greece’s public debt is projected to rise to 255.5 percent of GDP in 2050 if no sound reforms are undertaken. This will be the outcome of much higher pension and health-related spending needed to support an aging population and a declining ratio of workers per pensioner. Rising life expectancy The average life expectancy is forecast to rise to 80.3 years for Greek men and 85.1 years for women compared to 76.4 and 81.4 years respectively in 2004, while the number of births per woman is expected to remain low at 1.5, and the number of employees per retiree to fall below 2. It is noted however that statistics put out earlier this year by the Labor Institute of the General Confederation of Greek Labor (GSEE) portrayed a dark picture of some of the major parameters of the country’s public pension system. For example, the number of working people who corresponded to each pensioner continued to decline, easing to 1:79 in 2005 from 1:80 in 2004 and 2:27 in 1996, the last year before each pension was financed by the contributions of more than 2.0 employees. Still, more than 10 years since the first official committee, called the Spraos Committee after the name of the economics professor who headed it, was set up to study Greece’s pension system and propose solutions, no major reforms have been undertaken. Attempts to reform the pension system, such as earlier this decade, were aborted early on because of widespread social opposition, which produced a political backlash. So it is easy to understand why the second attempt by the former Socialist government under Finance Minister Nikos Christodoulakis aimed primarily at securing financing for the country’s largest IKA pension fund and secondarily at changing some of the parameters of the system, leading to the large actuarial deficits. The state committed money amounting to 1.0 percent of GDP each year to fund IKA’s deficit from 2003 through 2032 and 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. The gradual decrease of pension benefits to 70 percent of base salary from 80 percent, starting from 2008 onward, was also sought but the favorable effect was watered down by other measures, benefiting those who joined the work force from 1993 onward. Ticking bomb Although everybody with common sense across the political spectrum agrees that Greece’s pension time bomb is ticking, the government has decided to prepare the ground for reforms with yet another dialogue between social partners, having in mind to legislate some or all of the reform proposals during its second four-year term, assuming there is one. In doing so, the government is trying to find a middle-of-the-road way to go ahead with this important reform without assuming the full political cost. It also wants to do so early in its second term so it has enough time to recover later on. It is also understood that the main opposition PASOK party wants to use the unpopular reforms of the social security system as a means of inflicting political damage upon the conservatives, much like the latter did to the former when it was in power. Of course, some, like the trade unions, offer another solution which seeks additional funding for the current pay-as-you-go pension system through additional taxation and contributions, going after social security contribution evaders, and other measures which aim at preserving the current system. However, history teaches that this amounts more to wishful thinking than anything else. Social security contributions amount to 34.4 percent of the average wage cost in Greece compared to 24 percent in the OECD and 27.8 percent in the EU-15. In other words, social security contributions are already too high in Greece. Moreover, they tend to create disincentives for employment when increasing the number of employees is paramount to funding the current system. The way things are going, either one of the two major political parties will have to commit political suicide by pushing for an unpopular comprehensive package of pension reforms or both the conservatives and the Socialists will have to agree on a common set of reform measures. Greek history teaches two things about major social security reforms. First, it is rare to see a major political party be brave enough to assume the political cost of such reforms. Second, it is rare to see the two major parties agree on a platform for reforms which will pay little more than lip service to the needed unpopular changes in retirement age, etc. Under these circumstances, the best thing Greece can hope for is to maintain its strong economic growth rates and stick to fiscal consolidation to be in a position to offer generous tax breaks for contributions to individual retirement accounts in the future and proceed with some limited reforms of the pay-as-you-go pension system at the same time.