Risks of ignoring past experiences, best practices in pension reforms

Risks of ignoring past experiences, best practices in pension reforms

Based on international evidence, pension systems face headwinds due to demographic and other shifts. In France the government has indicated that reforms are necessary to save the pay-as-you-go system, which is no longer sustainable as the ratio of workers to pensioners is going down. Polls show that 70% of the French are opposed to the plans to raise the minimum retirement age from 62 to 64. This holds true even for those ranked as the best in the world in terms of competitiveness, fairness, and democratic values. A case in point being the Dutch pension system where the population is aging and returns are falling while life expectancy continues to rise. The Netherlands is overhauling its pension legislation to create a more sustainable system in an aging society where fewer people are remaining with the same employer throughout their working lives. The new approach aims for pension funds to create more personalized and transparent accounts for participants, in the spirit of the highly regarded Australian model, which has been rising in the international rankings since its adoption 30 years ago.

We have argued before in our writings that the newly introduced entity, to be called henceforth by its initials in Greek as TEKA, falls well short of the best practice benchmarks, despite its noble intentions to overhaul the social security system by moving from a currently unfunded defined benefits (DB) scheme to a partially funded defined contribution (DC) model. It is still profoundly unfair, it will prove patently ineffective, and it will exacerbate the demographic problem in an environment where the Greek population is constantly declining because of emigration and low birth rates. A successfully adapting society learns from past mistakes, as well as the successes of others, and they apply these in a way that best fits their current situation.

The new TEKA fund has ultimate responsibility for the management and investment of worker contributions. Against this background, we present here some economic and governance issues that underpin the fault lines of Greece’s new state-run auxiliary pension fund.

Giving TEKA an exclusive mandate for the management of the mandatory contributions that the law requires is an anti-competitive tenet. Doing so implies that it is doubtful whether individuals in Greece will have the means to participate in a private pension fund on top of contributing to TEKA. As we have noted in our earlier writings, developed pension fund markets with (or without) state-run auxiliary funds give pension fund participants the freedom to decide whether to enroll in the state or private pension funds. Furthermore, by giving TEKA the advantage of providing a zero real return guarantee to pension fund participants (the guarantee backed by the Greek state), and indeed in a country with Greece’s level of public debt, poses significant fiscal risks, not dissimilar to the ones that brought about the 2009 financial crisis, albeit in the not-too-distant future. These distortions will further contribute to the death of the Greek private pension fund sector, which is a critical component of pension funds in most other developed pension markets (e.g. Australia, the Netherlands etc).

TEKA will exacerbate the demographic problem in an environment where the Greek population is constantly declining because of emigration and low birth rates

On the governance and supervision side, the TEKA management and organizational culture also resembles that of a monopoly. For instance, the legislation mandates that its board of directors (BOD) consist of six external expert members that are appointed by the minister and/or deputy minister from a list of 12 members recommended by an “independent” selection board. In turn, on a day-to-day basis all the functions of the fund are supervised and guided by the chief executive officer. The CEO is also appointed by the minister or deputy minister from a list of three that are recommended by a different “independent” selection board. In comparison with other national pension funds, these arrangements do not allow direct representation on the BOD of employees and the employers that are the key stakeholders who provide the contributions. This approach is considered as one of an undemocratic culture of management as the BOD should include the key stakeholders, with the six external members acting in an advisory capacity. This apparent absence of “class consensus,” which is the cornerstone of management of the superannuation funds (in say Australia), may lead to a confrontational environment with low trust, if the BOD and the CEO are perceived as not acting in the public interest. It is a clear violation of the principal-agent relationship, where the principal in this case (the Greek workers) is not represented in the system, only the agent is represented by elected and unelected officials.

Finally, it should be stressed that the adopted institutional setup violates basic macroeconomic and fiscal policy principles. From the fundamental macroeconomic accounting identity, we know that (in an equilibrium environment) the sum of savings and taxes equals that of private investment and government spending. To a large extent, private investment is supported by private savings, whereas taxation finances public expenditure. As a result, the private and the public sectors operate collaboratively. But when the public sector intervenes in this relationship at the expense of the private sector, as is the case here, and then it undermines its own sustainability and contributes to crowding out private investment. Drawing on the literature which shows that the level of pensions is a strong positive determinant of emigration, we are afraid that the chosen institutional arrangements will not only fail to compensate for Greece’s demographic problem, but may precipitate further the wave of emigration to nations with more robust and sustainable pension systems. Indeed, this is also supported by recent evidence that “those who left Greece for economic reasons in the 2010s don’t see any incentives for repatriation while the country is identified with a structure and culture sufficiently repugnant to them.”

George C. Bitros is emeritus professor of political economy at the Athens University of Economics and Business ([email protected]) and Steve Bakalis is a retired academic of economics, Victoria University, Australia.

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