IMF warns on Cyprus pensions

NICOSIA – Cyprus’s plan to adopt the euro in 2008 lays the groundwork for continued economic growth, but an aging population threatens the long-term sustainability of public finances, the IMF has warned. In its biannual assessment on Cyprus, released yesterday, the International Monetary Fund said a growing constituency of pensioners and a declining birthrate will put pressure on finances in years to come. The Mediterranean island, a member of the European Union since 2004, applied on February 13 for admission into the eurozone from January 1, 2008. Maintenance of low inflation and sustained growth will require fiscal and wage restraint, and vigilance on monetary policy, the IMF report noted. «Aging severely challenges Cyprus’s economy and fiscal accounts. The outlook of an unreformed social security system is bleak,» the IMF said in an assessment of the island’s pension system. Cypriots, who rely heavily on the public pension system, now retire either at 60 or 63, depending on the sector. Authorities want to increase the retirement age to 65, while the IMF suggested that only be an initial step, with further adjustments to keep up with demographic trends. In a separate document, the IMF warned that without reforms, consumption tax rates would need to increase by 10 percentage points to finance old-age pension and health expenditures. It also cautioned against an over-reliance on labor taxes, or social insurance contributions, to foot reforms. Cyprus has not reformed its pension system, a mechanism of compulsory contributions, since the baby-booming 1980s. In recent years, birthrates have plummeted, falling below the crucial threshold of 2.1 births per female required to keep the population stable, to 1.4. Statisticians say the figure is below population replenishment levels, and more than 25 percent of Cypriots will be over the age of 65 by 2050. Authorities are considering a raft of incentives to raise flagging birthrates, including fat cash payments of 20,000 Cyprus pounds (-34,600) to coax families into having a third child.