Cyprus pensions

NICOSIA – Cyprus’s pension system needs a major overhaul to prevent it from tilting into a deficit and then requiring a raft of new sources of revenue to fund it, say analysts. The Mediterranean island, which joins the eurozone on January 1, is in a bind on how to increase revenues to its pension system and ensure that a growing contingent of pensioners are on acceptable income levels. Some 24,000 Cypriots are on minimum monthly pensions, which start at 168 Cyprus pounds ($420). According to some assessments, just over half of Cypriot pensioners are living below the poverty line, defined as 60 percent of the national median wage. «Studies show that Cyprus is a high-risk country because of its growth perspectives and the (pension) model it applies,» said Iraklis Vladimirou at the University of Cyprus. According to EU figures, Cyprus’s public pension expenditures will have to rise by 12.9 percentage points of gross domestic product by 2050, the highest rise among country members, from 6.9 percent in 2004. By 2050, the island will have the second-highest proportion of pension expenditure in the EU with 19.9 percent, just behind Portugal. For now, authorities have managed to increase the retirement age in the public sector to 63 from 60, but talk of further increases and reform have been put on the back burner ahead of presidential elections next year. Central bank Governor Athanassios Orphanidis highlighted the cost of non-reform. «Consumption taxes will finally have to be raised by 10 percentage points to cover the increased expenditures of the social securities fund, literally crushing the economy,» he recently told parliament. Economists say solutions lie in better management of the existing pension funds, increasing contributions and making people work longer. «Probable solutions must include an increase of levels of contribution (from 16 percent) to 20 percent, a decrease in benefits, an extension to the retirement age of contributors and prudent fund management,» said economist Symeon Matsis. Due to a restrictive investment regime which allows investment primarily in government bonds and bank deposits, returns are insufficient to meet future needs. «When grand-scale investments are restricted to a single market, returns can not be high,» said economist Costas Apostolidis. According to the latest 2006 figures, the government debt to the pensions fund amounted to 40 percent of GDP and was in form of low-yield, short-term treasury bills. «Investing the social insurance fund contributions in government bonds was a mistake. This debt will never be paid back,» Apostolidis said.