Building a fair pension system

Building a fair pension system

Should people who filed for retirement after mid-May 2016 receive a pension that is 25 to 40 percent lower than that collected by those who retired before that date after working the same number of years and paying the same social security contributions? The government and the other political parties think so and are trying to convince the European Union to rescind the relevant law, due to come into effect from the start of 2019 (an election year), which will apply the same rules to calculating the pensions of all retirees. However, intergenerational and intragenerational solidarity and distributive justice and equality dictate the opposite.

Faced with the 2015 decisions of the Council of State that called for main and auxiliary pension cuts enacted in 2012 to be rescinded, the government decided to recalculate all main pensions, citing the equal treatment of old (pre-mid-May 2016) and new retirees. The cost of the court decisions was estimated by lenders at around 2.0 percent of gross domestic product.

The recalculation resulted in the so-called “personal difference” – the difference between the actual pension and the amount calculated. The government passed a law (N.4422/2017) last year which foresees main pension increases from the beginning of 2023 and imposes cuts of up to 18 percent from 2019. This is the law the government wants to take back.

The government argues that it is not necessary to apply the law since the primary budget surplus is estimated well above 3.5 percent of GDP this year – the target Greece has committed to meet through 2020 – and at 3.5 percent or higher next year. However, critics point to the country’s pension expenditure-to-GDP ratio, which stands at 17 percent, the highest in the EU, and its aging population, while others point to projections the pension bill will come down to 12-14 percent of GDP over the next few decades as new retirees receive much lower pensions.

One may agree that Greece can attain the primary surplus target this year and next, rendering the 2017 law redundant from a fiscal point of view. Of course, this may not be the case from 2020 onward, but at this point it seems to be a valid argument against applying the law. On the other hand, the Greek case is weakened when it is put in the context of the already high pension spending and adverse demographics.

All this does not change the fact that some old retirees are discriminated against by receiving a smaller pension for similar qualifications compared to their cohorts due to the non-application of the same rules. An unspecified number of old retirees will receive a pension increase if the 2017 law comes into effect while some 900,000 will be subject to cuts. Among the 900,000 retirees are former public sector employees and others from utilities and banks who receive the highest pensions. Moreover, new retirees receive pensions which are 25 to 40 percent lower than those obtained by old retirees.

Critics of the law argue that some low-income pensioners may also see reductions. However, this can be dealt with by introducing a floor – i.e. 700-800 euros – under which no cuts are applied. After all, the law foresees a maximum cut of 18 percent for high-income pensioners although bigger cuts may be justified according to the recalculation and the resulting “personal difference.”

Analysts warn against not applying the same rules in calculating pensions. They argue that highly taxed employees who also pay high social security contributions may object to financing a system that promises them lower pensions at best in the future.

They also argue that it will be almost impossible from a political point of view for any other future government to apply the law that dictates a sizable cut in personal income tax deduction from 2020 if the 2017 pension law is rescinded. On the other hand, the application of the same pension rules will create some fiscal space that may partially avert the full cut in the tax deduction.

All in all, the pay-as-you-go pension system relies on intergenerational and intragenerational solidarity. To the extent the latter is weakened by discrimination, the foundation of the system is undermined. The interest of the country should be put above votes.

Dimitris Kontogiannis ([email protected]) holds a PhD in macroeconomics and international finance. He has written and reported for Reuters, the Financial Times and Kathimerini English Edition, among others.

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