Social Security reforms to harmonise the retirement benefits of public and private sector workers came into force in Northern Cyprus on 1 January.
The inequality of pension benefits between the public and the private sectors has been a feature of the social security system since its inception. Until now, civil servants have enjoyed better retirement benefits than private sector employees.
Under the previous system, civil servants who began their career before 1987 contribute only 2.5% of their salary to the retirement fund of Northern Cyprus. On retirement, they get a lump sum and a monthly pension paid out of the general budget. Those who started working after 1987 contribute approximately 9% of their salary to the retirement fund, which also pays retirees a lump sum and a regular pension, although the lump sum is smaller and the required working period is longer.
However, non-civil servants paid 8% of their salary into the first pillar social insurance fund, and employers an additional 10%. The state was supposed to contribute a further 6.5% to bring the total contribution rate to 24.5%. Employees were likely to get a significantly smaller pension than civil servants.
People could retire under different provisions, the so-called 50, 55 and 60 conditions, according to the Turkish Cypriot Social Insurance Fund. Those aged 50 could claim a pension if they had paid contributions for 25 years, at 55 with 15 years' contributions and at 60 men could get a pension if they had logged an average of 150 premium days per year for at least 15 years and women if they had paid an average of 150 premium days per year for at least 12 years.
Private sector employees also pay 5% of their salary to a second pillar provident fund. Their employer matches this contribution. On retirement, the provident fund pays out a lump sum.
Under the new system, everyone employed after 1 January 2008, whether civil servants or employed by the private sector, will contribute the same percentage of their salary to pensions. Under the new system both private sector workers and civil servants now contribute 13% of their salaries towards their pensions. So the contributions of private sector employees stay at the previous level - 8% to the social insurance system and 5% to the provident fund - but civil servants who enter the system after 1 January 2008 will contribute an additional 4%. In addition, employers contribute 11% and the state 6%. New employees will have to work 25 years to gain pension rights.
"The new system was developed in accordance with EU norms, as it consists of contributions by the worker, the state and the employee," Ahmet Uzun, minister of finance in the Turkish Cypriot administration, told IPE. "The purpose of introducing the same pension rights for public and private sector employees is to ease public sector congestion."
The new system will follow the German system of points so that each working day counts towards a pension. The government is also planning to increase the minimum retirement age from 50 to 55 and bring it into line with the retirement age for existing civil servants. The normal retirement age for everyone employed after 1 January will be 60.
"Although the reform applies only to those who will start their employment after 1 January 2008, we expect there will be a reduction of the pension deficit going forward," Uzun said. He added that the aim of the new legislation was also to bridge the existing pension deficit.
The Social Insurance Fund, which was founded in 1977, was in surplus until the second half of the 1990s. As a result the state did not actually pay its contribution into the system. But the reserves began to be drawn down in 1992 when those who could retire at the age of 55 having paid 15 years' contributions began to draw their pensions and the surplus disappeared in 1996-97.
The system received a second blow in 2002 when those who fulfilled the 25-year requirement retired. Consequently, the state, having not paid its contributions into the system, has instead covered the deficit.
The deficit stood at 7.27% of GDP in 2006, down from 8.15% in 2003. The fall was the result of an initiative to seek out previously unregistered workers from Turkey, mostly in construction, which resulted in some 25,000 extra people paying contributions to the social insurance fund.
A 2006 World Bank report, entitled Sustainability and Sources of Economic Growth in the Northern Part of Cyprus, warned that the system was unsustainable. It noted that total budget deficits in the EU averaged 2.6% of GDP while in the northern part of Cyprus the public pensions system alone generated a deficit of 6.3% of GDP and the civil servants' pension system an additional 8.4%.