Greece: Deep structural problems
Reeta Paakkinen examines Greece's economic woes and the impact of pension reforms. There are signs that the private sector will have to play a greater role in future provision
In Greece, the overhaul of the country's social security system, among with other fiscal reforms included in the EU and IMF €110bn bailout package, have been met with violent protests, leading to the death of three people.
The long-overdue reforms bring cuts to pension benefits, introduce severe penalties for early retirement, increase retirement age, and change the formula for the calculation of pensions. The country's pension gap currently stands at €4bn for 2010, while its budget deficit is 13.7% of GDP - more than four times higher than euro-zone rules allow.
The severity of the problem was revealed in October when the newly-elected Papandreou socialist government declared Greece's budget deficit was more than double the previously announced figure. The new government promised to save Greece from bankruptcy by bringing the deficit down to 9% of GDP in 2010, and in May passed budget cuts totalling €30bn for the next three years. The Papandreou government aims to bring the budget deficit below 3% by the end of 2014.
Commenting on the ongoing riots in Greece Platon Tinios, economics professor at Piraeus University says: "The situation now is like when a new strict teacher enters a classroom. First there is a shock and rebellion but then pupils just get on with it."
Tinios notes until recently Greek politicians thought pension sustainability in 2030 was "too far away" to worry about. "In previous bouts of pension reform - in 1992, 2002, and even in 2008- - such a viewpoint was allowed to pass largely because what was happening in Greece was thought of peripheral interest. In 2009, though, Greece was perceived as the Achilles' heel of the euro, the Greek national debt became a test case of the stability of the euro-zone as a whole," he says.
The broad picture of the reform package was presented to the Greek cabinet prior to consultations with the IMF and the EU Commission in late April. However, Greek MPs had initially no opportunity to properly familiarise themselves with the draft law before it was presented to the IMF and the EU, as the document was only read aloud to them.
Representatives of the local pension industry were also unaware of the details of the upcoming reform one week before the law was supposed to come into effect on 15 May 2010. "The draft should become a law on 15 May, but we still do not actually know yet what the exact changes will be," says Nikos Tessaromatis, chief investment officer of Athens-based EDEKT Asset Management.
The draft was scheduled to be discussed on the cabinet meeting of 10 May as IPE went to press.
It appears the reform package includes an increase of effective retirement age from the current 61.5 years up to approximately 63.5 years. The statutory retirement age in Greece is currently 65 years and 60 for women working in the public sector. However, some public and private sector employees, like the police, harbour workers, security services and journalists for the state TV and radio can retire in their 50s because they are entitled to a pension after 35 years of social security contributions. In the future, the minimum number of years someone will have had to have worked to qualify for a full pension will rise to 37 years and there will be strong incentives to stay in working life for 40 years. The retirement age will also be linked to average life expectancy.
Panos Tsakloglou, a professor at the department of international and European economic studies of the Athens University of Economics and Business says the package also envisages a regime of a basic pension for everybody - means-tested for persons over 64 with no, or limited, contributions - and another element linked to how much an employee contributed to his pension during his working life. "The changes will be phased in until 2018," Tsakloglou says. "Further, pension cuts to all retirees of up to 15% in both public and private sector were announced, as instead of 14 pension payments a year, retirees will get 12. Easter, Christmas and summer bonuses will be replaced by low flat rate payments," he adds.
In addition, the law is likely to include elements discouraging early retirement. "There will be a new way of calculating pensions," contunues Tsakloglou. "Today, after 35 years of contributions, each year in working life counts for 2% of the replacement of the reference salary. The reference salary is the average salary of the best five years of the last ten years in employment. But in the future, this percentage will go down to approximately 1.5% in order to provide a further incentive for staying in working life, and the reference salary will be the average salary throughout his employment. So like many EU countries, pensions will be reduced to reflect a worker's average salary rather than their final salary, and the longer the people stay in working life the more pension they will eventually get," he explains.
"The government will aim to tackle the informal economy by requiring employers to register seasonal workers for social security, and pay their employees' salaries as well as social security contributions in cheques or in bank transfers. At the moment, there are a lot of seasonal workers and an informal work force in agriculture, domestic services, construction and tourism, for example, and most payments are made in cash," Tsakloglou says.
The austerity measures also include a freeze on public employee pensions for the next three years, as continuous increases in pay have taken place since 2006, with salaries rising considerably faster than inflation.
The reforms were initially expected to be phased in stages between 2013 and 2018. Discussions with the IMF, the European Commission and European Central Bank, however, pushed Greece to adopt most immediately, Tsakloglou says. "This is better for the public finances. What is being tried here is something no other country has attempted so far; that is to simultaneously set our public finances in order and improve our competitiveness without any exchange related depreciation." The new law package will most likely come into force by the latter part of June.
Dr Jens Bastian, researcher at Hellenic Foundation for European & Foreign Policy (ELIAMEP), says it is more important in Greece to make the existing legal framework function than to draft new laws. "The new law is subject to change and as such is not as important as how much of the existing law you can execute without legal reform. Structural reforms in Greece often fail in delivery."
The main problem in Greece, Bastian says, is that there are too many early retirees. "This is the case especially in the public sector where some professions can retire only after 35 years of service, and this has devastating social and fiscal effects," Bastian says.
"Many of these retirees continue to work after their retirement, and often their employment is unrecorded. So they get a very generous pension and block entry to young people to the work market at the same time," Bastian said.
According to him, the current unrest in Greece reflects also a strong conflict between generations. "These people who have been able to guarantee themselves generous pensions are seen as the ‘golden boys and girls', who like gatekeepers, prevent the entry of younger people to the job market," Bastian says.
The huge social security deficit is one of the fiscal consequences of the favourable treatment some professions enjoy. "Small groups of people are taking out generous pensions at the cost of many others. Trade unions have been fiercely defending these rights, which is also questionable. The laws can be changed but increasing retirement age and accumulating more years at work will be major challenges for the government," Bastian says.
On the other hand, he notes, the Papandreou government has adopted ‘a crystal clear' policy that does not support early retirement and that existing agreements will have to be renegotiated.
An additional challenge for Greece is also that it has no electronic system for the administration of its retirement payments. Partly because of the poor administrative infrastructure of pension payments, it is estimated that some 30,000-60,000 people who have deceased are still receiving regular payments, which their families collect. "On the islands and small villages there are numerous families receiving the pensions of their dead family members. This is possible because there is no electronic system to manage the payments and it is not necessary to show any identification to receive the pension payment. This is yet another burden for the system," Bastian says and notes: "In Greek pensions, there is a lot of food hanging relatively low - reflecting the urgent need for structural reform."
Over the past months, as the necessity for urgent actions to save the country from bankruptcy have been debated, calls to develop Greece's private pension sector have become more vocal. At the moment, private pension saving in Greece is minimal as many perceive the sole responsibility for pensions to belong to the state. "Greek private pension sector is very underdeveloped. The prevailing mentality is that the state is the one who should provide pensions. Furthermore, there is no incentive structure with tax benefits whatsoever. This is also what the new law says - one should not rely solely on state pension," Bastian concluded.