ECONOMY

Gov’t must create tax incentives for private pension schemes

Greece’s conservative government has finally decided to take measures to breathe some life into the country’s ailing social security system but has yet to demonstrate that it understands the importance of private pension schemes in supplementing state pensions. All economists and even businessmen and market players recognize that the country’s pay-as-you-go state pension system is in dire straits and in urgent need of repair. Yet, no one, including the government, knows exactly the size of the system’s current deficit and future uncovered liabilities. So, even the absolute minimum has not been achieved, that is, to equip the country’s major pension funds with modern IT systems so that their management and the state, which guarantees their pensions, have a picture of their financial situation at any point in time. Unionists optimistic This creates uncertainty as to the true dimensions of the problem and gives credence to those, especially unionists, who argue that the current system can last for many more years, perhaps decades, with minor changes assuming the state fulfills its obligations by paying its dues. The unionists argue that the state ought to pay more than -2 billion annually in additional funding to the pension funds. They also estimate that more than 1 million people do not have the social insurance to which they are entitled, which translates into lost revenues of more than -4 billion annually. And while the vast majority of people realize that something is wrong with the state pension system, which is certainly in need of reform, the vagueness about exact figures does not help at all. This is not what one would expect from a country where talk about the shortcomings of the state pension system started in the 1990s and was rekindled occasionally in subsequent years as it became clear that fewer and fewer workers corresponded to each pensioner and many employers chose to evade rather than pay their social security contributions. Failed attempts It is known that Greece tried to put its fragmented pay-as-you-go pension system in order in the early 1990s under the conservative administration of then Premier Constantine Mitsotakis and earlier this decade under the Socialist government of former Prime Minister Costas Simitis. However, the reform of the system turned out to be a hot political potato and some, such as the previous Socialist government under Simitis, shied away from painful reforms due to the high political cost entailed. The current conservative government appears to be willing to make an effort to rationalize the system by merging the dozens of pension funds, instituting common rules relating to retirement age and the calculation of pensions and closing various loopholes. Its initiative is in the right direction although in some cases it is misguided because it gives the impression it is primarily interested in merging state pension funds with other, healthy independent pension funds in order to gain access to the assets of the latter funds for fiscal reasons. Although the overhaul of the fragmented and vastly inefficient pay-as-you-go system is a must for a country where the ratio of workers to pensioners keeps falling and the birthrate has dropped, the government should pay attention and take measures to address the same problem in a different way. Contrast This is to encourage Greeks to put money aside for their retirement by investing in private pension schemes. The goal will be to help people supplement their state pensions. According to all data, Greeks rely very heavily on the social security system for retirement with 98 percent of their pension income coming from the social security system. This contrasts with other European countries where about 50 to 60 percent of pension income is paid by the social security system. Experience shows that the most effective way to boost private pensions is for the state to provide tax incentives for people to save part of their income and invest it in order to enhance their pension at retirement. There are different ways to do this. However, the Greek way, which is to allow an individual to deduct insurance premiums worth about -1,200 per person from their annual taxable income, has not and will not do any good. This perhaps explains why life insurance premiums accounted for about 2.6 percent of Greek GDP at the end of 2006 compared to an average of about 8.0 percent in the eurozone. Follow Ireland? Greece perhaps could follow the example of Ireland. According to an Irish executive of Dutch insurance group Eureko, the Irish government offered the opportunity to households a few years ago to put money into a multi-year savings scheme to which the state contributed 1 euro for every 4 euros contributed by an individual. A high annual contribution cap per person, which amounted to roughly -250,000, was put in place. As a result, Ireland’s insurance premiums as a percentage of GDP rocketed. Aging population Of course, Greece’s population is not as young as Ireland’s and the public finances are not the same. Yet the Greek government ought to encourage its citizens to assume more personal responsibility for part of their retirement income and help them partly offset the adverse effects of the much needed reforms of the country’s pay-as-you-go system. Of course, it would have been much better if the government managed to put a new law in place to help even state pension funds derive more revenues from their assets to help meet their future obligations by maximizing returns in a more modern fund management system. Unfortunately this opportunity was lost last summer.