Between a rock and a hard place
In ancient Greece, people who wanted to have their future forecast travelled to Apollo’s temple in Delphi, where the dangerous journey was generally rewarded with an answer, albeit ambiguous.
Nobody questioned the answers, because they were supposed to come from Apollo himself. But pilgrims who tenaciously interpreted the god’s messages – passed on by a priestess in trance – and acted on them, often ended up in trouble.
If an ancient Greek Delphi priestess came back to life today to be consulted on the future of the country’s pension system, even she would probably struggle to use a language nebulous enough to match the topic.
The current Greek pension system is the result of a string of legislative initiatives implemented over the last 50 years. It is fragmented into hundreds of pension funds and is so generous that it is unbalanced from a financial point of view.
The average gross replacement rate amounts to 108%, according to the Observatoire Social Europeen (OSE), a body which monitors developments in the EU’s social policies.
The system is dominated by the PAYG, public (and mandatory) first-pillar providing pensions, lump sums and assistance benefits. The first pillar is divided in separate schemes, like the Social Insurance Foundation (IKA) for private sector employees and the Agricultural Insurance Organisation (OGA), catering for farmers.
It is also split into tiers. The first tier of the first pillar provides means-tested benefits and a flat rate minimum pension, both of which are financed by the tax payer.
The second pillar includes several auxiliary pension funds, mandatory for various professions and financed by employers’ contributions. Welfare funds make up the third tier. They are common among public employees and consist of lump sum benefits.
All these pension handouts are regarded as first pillar. Apollo’ s priestess would be fascinated by the opportunities for confusion, at least to the inexpert eye, offered by the degree of fragmentation.
And there is also the less-inspirational but equally important issue of costs. According to the Institute of Economic and Industrial Research (IOBE), a think-tank funded by Federation of Greek Industry (SEB), social security expenses amounted to 12.6% of GDP in 2000, and estimates it will double to 24.8% in 2050.
If the 2002 pension reform, watered-down by the Pan-Hellenic Socialist Movement (PASOK) as a compromise between public consensus and much-needed changes, is anything to go by, things should soon get a little easier. But not necessarily cheaper for the state.
The reform commits the state to financing social security through the budget, in addition to employer and employee contributions, but also to bring about the consolidation of the first pillar in a single social insurance fund, IKA-TEAM.
Auxiliary funds should also be neatly separated from the rest of the primary insurance, but the original plan to extend the number of working years until retirement has been discarded.
The reform’s far-reaching aspect is to provide a springboard for the development of the second pillar, which according to IOBE currently accounts for 4% of the GDP.
All this is supposed to happen by 2008, when the reform should be in place. Three years after the launch of the pension reform and with three years to go, little seems to have changed.
In 2004, PASOK was defeated by the conservative New Democracy party. The change of political guard has brought no new pension reform nor a more radical approach to its implementation.
The New Democracy party even promised to increase civil servants’ benefits in its pre-election manifesto.
In the meantime, most pension funds face depleted reserves and spiralling pension claims. In November 2004, only eight months after New Democracy came to power, the government was approached by TEBE, the social security fund for small traders and the self-employed: TEBE, which had payments pending of E166m against E49m reserves, pleaded with the government to pay part of what it owed so that it could hand out pensions and the annual Christmas bonus to its members.
At the same time, the IKA found it necessary to put out a statement that the Christmas bonus would be paid, amid worries that it too was in too dire financial straits to meet its obligations.
In the face of spiralling debt, New Democracy is wary about incurring the wrath of the trade unions, whose leader Christos Polyzogopoulos of trade union confederation GSEE is vocal in opposing private insurance playing a significant pension role, and has so far steered clear of pension reforms.
In the first year since election, New Democracy’s ministers have gone out of their way to assure that the parameters of the current system are not likely to be modified.
In a recent report prepared by the ministry of economy and finance for the EU, growth estimates and analysis of the Greek economy are provided, but nothing is said about further pension reform.
The issue of social security is relegated to a paragraph at the end of the report, which deals with the sustainability of public finances.
Even so, the report presented in March 2005 and called ‘The 2004 update of the Hellenic Stability and Growth Programme 2004-2007’, only mentions the 2002 reforms with reference to more radical plans.
“There are many measures included in the 2002 law yet to be implemented and evaluated before new elements are brought to the system,” it says. “The implementation of Law 2002 still lies at the heart of efforts to reform the pension system,” the report says.
And yet the ministry admits that the country “is about to face profound changes in its population structure”, and that expenses for old age pension will grow from 12.4% of GDP in 2005 to 22.6% in 2050.
Real GDP growth, on the other hand, is estimated in the same report to change from 3.7% in 2005 to 0.85% in 2050.
Maybe the warning that pension reforms would meet with “strong opposition” from the powerful GSEE, clearly spelt out by Polyzogopoulos last September and often implied in recent months, is enough to freeze any attempted reforms. Perhaps it is the fact that pension benefits are the only social aid the poor can actually count on and people would refuse any action that would modify them, even partially.
Greece occupies a unique position in the field of state-provided benefits. The average EU poverty rate is 40%, this falls to 24% when including pensions and plummets to 15% with welfare benefits. In Greece the figure amounts to 22% with pensions, but falls only 1% to 21% with other social benefits, meaning that other than pensions few state benefits are available to help the poor.
This may explain why finance minister Giorgos Alogoskoufis announced in February that salaries and pensions for the public sector will increase above inflation rates, a promise that will cost an extra E720m.
But giving pension perks will not solve the problem and it will be progressively difficult for the government to turn a deaf ear to the pressure for changes in the system.
The issue of pensions has directly and indirectly had a prominent role in the new government’s agenda in the last 12 months. Since its election the government has had to deal with the hot potato of the banking system’s pension deficit, for example.
The background of the debacle is that Greek banks have to comply with the international financial reporting standards by the first quarter of this year. This means they will have to disclose their pension liabilities on their balance sheet, a prospect that threatens seriously to dent the capital base of some of the banks.
The government, banks and the unions began talks last year. At stake is the harmonisation of the banking sector’s pensions into a single auxiliary fund for all employees, an idea favoured by the Federation of Bank Employees Unions (OTOE), as well as the integration of the sector’s pension promises with the public IKA fund, favoured by banks.
However, talks stalled in February. The unions said the integration with IKA was a burden to public funds.
They also argued that the move would make the banks’ auxiliary pensions dependent on the state and that it would ultimately imply cuts to pension benefits and the raising of the age of retirement.
So far the government has attended the talks as a stakeholder but has declined to take a clear stance. It has said that it will pay amounts in proportion with the state’s holding in the banking sector, but has also encouraged the sector to bear the brunt.
This ambiguity was greeted by Polyzogopoulos’ warning that a pension reform by the back door would lead to confrontation with the unions. A 24-hour strike followed.
Negotiations have now resumed, with OTOE insisting on a single fund for the sector and protection of pension rights. The state, on the other hand, has said that if nothing was decided it would stop talks with the sector as a whole and start negotiations with banks in which the state has holdings, like Emporiki.
A series of one-to-one negotiations between banks and the state would be a wasted opportunity for the sector as a whole to tackle its pension liabilities problem.
At the same time, the government has presided over the long negotiations for restructuring the 37.7% state-owned telecom group OTE.
OTE has devised with trade unions a voluntary redundancy plan for a third of its workforce, about 6,000 workers, to cut costs and shore up profits. The scheme would cost the operator, and consequently the state, over E1bn.
OTE telecom’s trade union has recently insisted that the government pass legislation clearing the way for early retirement by employees before the operator discusses policies for new staff.
As if this was not enough, the government has also had to face a political storm regarding E800m of pension contributions, which have been allegedly illegally levied for the LAFKA fund, set up in 1992 to boost the social security system.
This case is not directly connected with this government, although it was started by the head of the deputy economy minister office, Vassilis Goulas, who filed a suit during the PASOK administration. His aim was to have the sum returned to pensioners. He won the case in 2004 but at the beginning of the year withdrew the suit, which was going to be examined by the State Auditor Council.
He has not offered any explanation for his action, has resigned from his post and since has been unavailable for comment.
The government in turn has promised to pay back the E800m if ordered to do so by a court, but the case has highlighted the frailty of the pension system and triggered protests by pensioners, who marched through Athens wanting to claim back the LAFKA money.
The government’s response was to make a vague promise, with deputy finance minister Petros Doukas announcing that low-pension earners might get a refund, probably before 2008.
International bodies watching Greece will not be content with vague promises, though. The International Monetary Fund (IMF), has already called for “early action to address the high projected costs of popular ageing”.
“Pension reforms 2002 consolidated a number of funds, but did not address underlying expenditure pressures” the IMF added in its staff report for the 2004 Article IV Consultation.
The IMF also warned: “There is some risk that the 2005 deficit could prove larger than expected and strong medium-term adjustment is all the more important since population ageing will begin to exert fiscal pressure in the next decade and pension reform is off the policy agenda for the time being.”
It also featured a comment to the question of the possible transfer of the banking sector’s liabilities to public fund IKA, saying that the measures planned would provide “one opportunity to launch a wider debate”.
The powerful shadow of the EU is also hard to escape. The EU has rebuked Greece for inconsistent financial reporting and has called for reform of the social security system.
The country has been given until 2006 to bring its deficit down to EU-acceptable levels, giving the government little time to act.