A reform package due to be implemented later this year will reduce the burden on the state pension system but falls short of adding a second pillar, says Reeta Paakkinen

In a move motivated by an alarmingly high social security deficit and calls by the IMF to reform the social security system, Turkey’s parliament passed a comprehensive social security reform in April.

The social security deficit reached TRY25.04bn (€12.06bn), or 4% of GDP, in 2007. The IMF also set a reform of Turkey’s social security system as the precondition for the transfer of the remaining $3.7bn (€2.4bn) tranche of a $10bn loan, which was to expire on 10 May.

The main feature of new law, coming into force on 1 October 2008, is phasing in a raising of retirement age. From 2036 to 2048 the retirement age will gradually increase from the current 58 years for women and 60 years for men to reach 65 years for both. The number of contribution days required for a full pension will increase from the current 7,000 to 9,000 for new entrants to the system. The reform also unifies Turkey’s three social security institutions: the Bag-Kur for self-employed workers and farmers, the SSK, for private and public sector workers and the Emekli Sandıgı for civil servants. The law also provides a legal framework for tighter inspection of enterprises’ social security payments.

One of the main reasons behind the current social security deficit is a lack of long-term pension planning. The retirement age, which was 60 for both men and women in the 1950s, was eliminated by the end of 1969. Retirement rights and social welfare have been debated ever since.

The first attempt to reform the system occurred in 1999 when the number of contribution payment days was raised from 5,000 for SSK and Bag-Kur members and the outgoing minimum retirement ages were set.

The reform is expected to affect the social security deficit almost immediately, as it allows the single unified social security institution to cross check company accounts and salary details with the premiums firms have paid. This should overcome the practice whereby employers try to evade the relatively high social security premiums by registering their employees as earning the minimum wage of TRY608.4 while in practise paying higher salaries. At present some 35.6% of Turkey’s active labour force of 24.7m are registered as minimum wage earners but the actual proportion on minimum wage is estimated at around 20% of the workforce.

An employment incentives package passed in early May is intended to support the social security reform by cutting down on unregistered employment. It consists of a five percentage point reduction in social security payments for companies that are not in debt, and introduces measures to improve labour market flexibility, including facilitating part-time work and requiring private employment agencies to inform a regional employment office about the employment of an individual by the client company.

State minister for economy Mehmet Simsek (pictured right) told a conference earlier this year that the reform would make a notable contribution to state finances in the long-term. “The reform is likely to save Turkey around $1.2-1.3trn by 2075,” he said. “There will still be a [social security] deficit, but in the future it will be significantly smaller.”

However, the reform was not welcomed by the opposition Republican People’s Party (CHP) on the basis that it “erodes the existing social state” and it has declared it would apply to the Constitutional Court for an annulment of the law, although it is not clear on what basis. In addition, Turkish trade unions protested against the reform throughout the spring.

Hasan Hayır, spokesman for the Confederation of Public Employees Labour Unions, says his grouping sees the reform as another move to cut the social security benefits for its members. “The new law will not reform but deform the current welfare system,” he claims. “We oppose the new law because, once again, it cuts the social benefits of workers. We were told there was a need to revise the system seven years ago and yet again we are at the same point. There has to be a stop to this.”

“Raising the retirement age means retirement will turn into a dream,” says Süleyman Çelebi, (pictured left) president of the Confederation of Revolutionary Workers’ Union. A poll conducted in 2,892 locations earlier this year found that 99.4% of the 2.24m respondents rejected the reform.

Çelebi says the increase in the contribution days is particularly harsh on those employed in seasonal work. “Those employed in tourism, construction, agriculture and other seasonal sectors, need to work 75 years to earn a full monthly pension, or 45 years to earn a partial monthly pension. Pension rates will drop by between 23% to 33%.”

But the local pensions industry points out that the unions have overlooked key elements of the reform.

“Unions are correct in noting that pension benefits will be reduced by some 20% in the future,” says Gökhan Dereli, general manager of the Oyak Emeklilik pension insurance company. “But it is also true that without the reform the current system would just collapse. It is important to note the reform will not affect those who are already registered as employed and with longer years in employment people will be able to save more for their pensions.”

“The reform will improve the solvency of the whole social security system,” says Erhan Adalı, president and CEO of Garanti Pension. “The changes were much discussed in the public arena. The discussions increased the retirement awareness of the citizens. Unfortunately, we have a long way to go in educating the public in regard to saving for their retirement, or saving at all.”

Dereli adds that the legislative reform in itself is not enough to close the social security deficit. “The implementation of the reform is of utmost importance. Indeed, it is possible and relatively trouble-free to change the whole actuarial basis of the system and merge the institutions. But this must be coupled with a clampdown on the informal economy.”

And Dereli sees the next challenge to make the system sustainable. “We already have a first and third pillar so there should be second pillar as well, and it should be compulsory,” he says. “The government is likely to discuss the issue in the future. Turkey’s young demographics offer a notably good opportunity for a smooth transition to the second pillar. If the system is made compulsory now, introducing the change would be relatively easy.”

Adalı agrees. “Introducing second pillar is definitely something that should be considered. This would give an instantaneous boost to the pension sector.”