ECONOMY

‘No need to reinvent gunpowder’

The viability of the Greek social insurance system is not under threat just due to the aging population, but also due to its inequality, fragmentation and opaqueness, says Miranda Xafa, a member of the board of the International Monetary Fund (IMF). «Taxpayers’ contributions to the social insurance funds do not follow principles of social solidarity but the law of the jungle,» she told Kathimerini in an interview last week while in Athens on a visit with a team of IMF experts. For the IMF and other international organizations, including the Organization for Economic Cooperation and Development (OECD) and the European Commission, the reform of Greece’s pension system represents the biggest challenge to its economy in the medium term. Xafa says Greece need not «reinvent gunpowder,» as it were, but simply draw on the experience of other countries. She also proposes that the management of the reserves of social insurance funds be assigned to private operators. Toward what direction were the reforms that other countries carried out in their social insurance systems? What parameters of the system did they change? The solutions are dictated by the nature of the problem: The rise in the average life expectancy, in combination with low birthrates, creates an aging population and an increase in the ratio of pensioners to people still working. Under such conditions, a pay-as-you-go system, in which people currently at work pay for the pensions of the older generations, needs reform in order to remain viable. There are three parameters: the level of contributions, the level of pensions and retirement ages. The reforms carried out in other countries touched upon all three… At the same time, however, a second axis of the system has been instituted as obligatory almost everywhere, with bilateral funding (by employers and workers) on the basis of the capitalization system, which does not depend on demographic developments. The contributions of employers and workers are provided by specialized private companies, under the strict supervision of the state. This axis is missing from the Greek social insurance system but could be created through the conversion of auxiliary funds into a capitalization scheme. Sweden’s reform of 1997 is particularly of interest, as it secured the viability of the pay-as-you-go system by introducing capitalization elements. Each insured person has his own private, individual account in the single, state insurance organization, which records contributions and computes virtual interest accruing from them. This is a virtual capitalization, as these sums are not invested but are used directly for the payment of pensions. The state agency continuously studies the development of the death rate of the insured, and computes coefficients for converting the sum recorded in each individual account into a pension equivalent. So, each insured knows at any given moment the pension he/she is entitled to and decides when to retire. The longer a person works, the higher the pension, while the state guarantees a minimum pension for all. Indisputably, the reform of social insurance system changes the terms of retirement for the worse and sparks reaction. How did these countries deal with the reactions and how did they convince their societies of the necessity of the reforms? The indispensible prerequisite for the social acceptance of the reform is that the public should be adequately informed, so as to achieve consensus. Three factors impede social insurance reform in Greece: the lack of transparency in the funds themselves, the lack of dialogue and consensus among political parties and the reactions of the «privileged» funds to any change. Does Greece have to imitate the social insurance reforms of other countries, or should it search for its own reform model? We do not need to reinvent gunpowder. The solutions are known. The prevailing conditions in the system define the options. For instance, Greek social insurance contributions are among the highest in the eurozone, denting the economy’s competitiveness. Therefore, the option of higher contributions is no longer feasible. By contrast, there is room for increasing the average retirement age, which is relatively low. Also, the system encourages early retirement because the pension does not rise proportionately to contributions after a point. What are the particular characteristics which make reform a crucial issue for this country? A team of British actuaries early this decade projected that the social insurance deficits will rise from 5 percent then to 17 percent by 2050, much more than any other EU nation, and far exceeding the economy’s capability of fully meeting pension requirements in future. However, Greece’s problem is not just the population’s aging. It is the inequality, fragmentation and lack of transparency in the system. Because benefits have been disconnected from contributions, the main issue becomes who will grab more from state revenues, that is, the taxpayer. That’s how, for instance, the taxes «in favor of third parties» have been instituted, which are paid by society at large to subsidize the pension funds of lawyers, journalists and other favored groups. The so-called «established social rights» are privileges maintained at the expense of society as a whole. The fragmentation of the system is such that no one has a clear picture. There are more than 100 funds, each with boards picked by political criteria, different retirement terms, lack of computerization and non-existent supervision. Chaos, in other words. The funds do not publish balance sheets and their returns on capital are unknown. Citizens do not have the right to know how their money is being utilized. Supporters of this system have argued that «it has not been proved that public management produces deficits and private management produces surpluses.» Indeed, management of the public insurance funds may be excellent, but the result is simply a state secret. Those who oppose the private management of social insurance funds’ money should ask themselves if management by the state to date fills them with optimism for the future.

Subscribe to our Newsletters

Enter your information below to receive our weekly newsletters with the latest insights, opinion pieces and current events straight to your inbox.

By signing up you are agreeing to our Terms of Service and Privacy Policy.