ECONOMY

Call for Cypriot pension reform

NICOSIA – The International Monetary Fund yesterday urged Cyprus to swiftly reform a creaking social security system to buffer the strain of a growing constituency of pensioners on its benefits system. Failure to act in a timely manner could see Cyprus showing an incrementally higher public debt in 10 years and a pensions system which may need to be supplemented by higher taxes in 15 years, Alexander W. Hoffmaister, head of an IMF mission visiting Cyprus, told a news conference. «The challenge for Cyprus is to move from diagnosis to action,» Hoffmaister said. Cyprus’s pensions system was last modified in 1980, but a lower retirement age and an aging population has increased the average duration of a person receiving benefits to 17 years from a previous 10. Declining fertility rates have also contributed to a demographic shock. With less people contributing to the system in future, this was expected to result in sharply higher dependency ratios, Hoffmaister said. Cypriots traditionally rely on the state for their pensions and the use of private pension funds is not widespread. In a preliminary assessment report, the IMF recommends increasing the retirement age to a broad-based 65, switching the present earnings-linked system to one linked to the consumer price index and introducing a mechanism to periodically review retirement ages. Authorities have yet to start a dialogue with labor unions on modifying the pension age, now at 60 or 63 depending on the type of work. The Finance Ministry has previously issued an assessment that the system will totter into a deficit by 2025 without reform. The impact of not introducing reforms would start to become evident with public debt and then fan out to the broader economy, Hoffmaister said. «Without reforms, public debt will start to increase within 10 years… the second way of looking at it is to imagine the evolution of taxes to support the benefits in the system now. This way, taxes will have to increase within 15 years. This will have a very adverse economic effect,» he said. Lid on expenditure In the short term, fiscal consolidation would require keeping public expenditure under tight control, the IMF report said. Higher-than-expected revenue should be saved and used to reduce the public debt. It also highlighted that an «ambitious public investment plan» – construction of highways and other infrastructure – could «jeopardize hard-won fiscal consolidation» without effective cost benefit analysis. Cyprus expects its fiscal deficit to settle at 2.0 percent of GDP this year and to fall to 1.6 percent in 2007. It hopes to adopt the euro as its national currency by January 1, 2008. To be eligible for eurozone admission it must keep its budgetary shortfall within 3.0 percent of GDP, converge on interest rates, keep a lid on inflation and show a progressively declining public debt. «Regarding macroeconomic policies, there is no room for complacency. Although inflation has declined recently, policies must be geared toward containing inflationary pressures,» Hoffmaister said.