ANALYSIS

Social security needs to be rationalized

social-security-needs-to-be-rationalized

Greece’s social security system has been well overdue for a major overhaul for years. Adverse demographics, generous pensions and a protracted economic decline have made it imperative. Undoubtedly, any solution entails a good deal of political and social cost. However, it will be a mistake for a heavily indebted country in desperate need of growth to try to tackle the problem by shifting the burden to current employees and future pensioners.

The government has forwarded its proposal for addressing the shortcomings of the pay-as-you go pension system to the international lenders and is awaiting their response. For its part, it has tried to come up with 1.8 billion euros in savings this year without cutting main pensions, but leaving open the possibility of doing so for auxiliary pensions over 170 euros. It is noted though that it reduced main pensions 2 percent and auxiliary pensions 6 percent across-the-board last fall by raising healthcare contributions.

Although it is hard for anybody like us to put numbers on the proposal, it is clear that it is trying to restructure the system by means that minimize the political cost. It is trying to avoid cutting the current pensions until 2018 and is relying instead on other measures such as increasing social security contributions and putting a tax on banking services to come up with the revenues.

In doing so, it has scored a victory by having the heads of some employers’ organizations consent to a “reasonable” hike in social security contributions for companies and employees. It is a clear reversal of the 2.9 percent reduction in social security contributions two years ago that is credited by many for boosting employment and salaries.

We have long argued that hikes in social security contributions have a damaging effect on international competitiveness, labor productivity, employment and growth potential. This is more so for export-oriented and small and medium-sized companies. Contributions are indeed low and could be raised in the public sector and for farmers.

The lack of employment opportunities and the high social security contributions, combined with income and property taxes and the unsatisfactory level of public services, contribute to the intergenerational divide and create disincentives for young educated people to stay in Greece. This brain drain has a detrimental effect on the country’s growth potential in the medium term.

The numbers of the social security system tell us what has to be done. One should start with budget subsidies to social security funds which play a significant role in achieving fiscal consolidation, arresting debt dynamics and eventually lightening up the debt burden. A simple glance at the figures gives the whole picture.

The state budget subsidized the social security funds with about 5.4 billion euros, or 4 percent of GDP early this century. Today, the budget finances them with about 10.5 billion euros, or 6.1 percent of GDP. Taxpayers paid around 19 billion euros, or 8.2 percent of GDP in 2009, the year before the country was bailed out.

Had the budget subsidized the social security funds with the same amount spent in the early years of the 21st century, the country’s public debt would have been lower by 110 billion euros or more according to our calculations. It is noted that the general government consolidated debt was estimated at around 337 billion euros by the European Commission at the end of 2015. In other words, about a third of the public debt would have been wiped out if state funding for social security funds had stabilized around the level of 2001.

Unfortunately that did not happen. Successive governments provided unjustified pension increases and other benefits to many in a bid to win votes, with the opposition parties at the time demanding even greater hikes. Moreover, they encouraged early retirement schemes to deal with overstaffed state-controlled organizations and companies because they could not lay them off.

It is not surprising that the total pension bill would have been some 8 billion euros lower per annum if all retirees received their pensions after the age of 65 according to our calculations. Expenditure on pensions would have been 3.8-4 billion euros lower if everybody retired after the age of 62. Greece spends about 28.5 billion euros on pensions, or 16.5 percent of GDP annually, down from 32 billion in 2009.

It is fair and makes economic sense to start rationalizing the budget subsidies to various social security funds. It is not right for taxpayers to pay a per capital subsidy of about 16,000 euros annually to Public Power Corporation’s 37,000 pensioners and 11,000-12,000 euros to the 46,000 pensioners of OTE telecom, now controlled by Deutsche Telekom, some of whom are in their 50s or women who have been getting a pension after working for only 15 years in the past. This contrasts with an annual subsidy of some 2,000-3,000 euros to the pensioners of IKA, the country’s largest fund.

We have said before the country could save 500-600 million euros by halving the subsidy to the PPC and OTE funds. It could also produce more savings by putting an appropriate cap on the total amount received from all pensions. More than 330,000 people receive three main pensions or more. This would be justified because Greece is an indebted country and pensions are in general higher than they would have been if calculated based on lifelong social security contributions, paid mostly in drachmas.

It is true that fixing the social security system is a big task. However, it will be unfortunate if the solution does not focus on rationalizing spending and producing savings by penalizing future pensioners.

[Kathimerini English Edition]