BoG: Reform pension system now

The Greek social insurance system is in need of urgent overhaul if it is to be prevented from causing an unbearable strain on the state budget, Bank of Greece Governor Nikos Garganas said yesterday. «There is no room for further delay, solutions are needed here and now,» Garganas said. «We must proceed with substantive and not decorative solutions to relieve the budget (burden),» he told a news briefing on the presentation of the central bank’s semiannual interim report on monetary policy. Garganas said it will be impossible for the Greek taxpayer to shoulder the burden that the financing of the social insurance system will bring to bear on the state budget, particularly after 2015. For this reason, emphasis has to be laid on how social spending can be contained rather than how the budget can meet it. Garganas said an effective solution will require, as in most other countries, changes in the parameters of the social insurance system, such as the retirement age, the pension/salary ratio and social security contributions, as well as the introduction of a complementary capitalization system. «Capitalization schemes not only contribute directly to the viability of pension systems but also encourage savings, investment and growth,» the central bank report said. The Bank of Greece welcomed the recent guidelines set by the government for a dialogue on reforming the pension system but said they would not be enough to solve the problem. «Based on the experience of other countries, it is doubtful whether they are sufficient.» The report also expressed concern regarding the deterioration of the competitiveness of the Greek economy, as shown by the steep increase in the current account deficit which is projected to total 29.3 billion, or 14 percent of GDP this year. «It is a new record… We borrow from abroad and are eating tomorrow’s bread,» said Garganas, noting that the deficit was higher than in any other mature economy in the European Union. Coupled with an inflation rate persistently higher than the eurozone average, the current account deficit threatens to hurt jobs and economic growth, he said. Greece is increasingly becoming a debtor nation – net private and public sector debt owed abroad has grown to 92.2 percent of GDP last year from 51 percent in 2001, Garganas said. To reverse the trend Greece needs to change its economic growth model to one based more on exports and less on domestic consumption, the Bank of Greece said. To do this it must address macroeconomic imbalances. These include further improvement in public finances, lower inflation to improve price competitiveness, a higher savings rate and structural reforms in labor and product markets, the education system and in public administration. The central bank’s report said the economy would expand by slightly more than 4 percent this year with consumer inflation slowing to 2.8 percent. In its draft 2008 budget, the government targets bringing the fiscal deficit down to 1.7 percent of GDP from a projected 2.6 percent this year. Garganas said the government’s deficit target next year «is attainable provided that the needed measures are taken.» (Kathimerini, Reuters)