Pen­sion­ers brace for lat­est cri­sis cuts

De­spite sev­eral spend­ing re­duc­tions and re­forms of pen­sion sys­tem since 2010, Athens urged to do more

Kathimerini English - - Focus - BY NICK MALKOUTZIS

ANAL­Y­SIS One group of Greeks that will look upon the re­turn of cred­i­tors to Athens for talks aimed at com­plet­ing the sec­ond re­view with some trep­i­da­tion is the coun­try’s 2.7 mil­lion pen­sion­ers.

Since 2010, when Greece signed its first bailout with the eu­ro­zone and the In­ter­na­tional Mon­e­tary Fund, the re­tire­ment age and so­cial se­cu­rity con­tri­bu­tions have in­creased, while pen­sions have come down. There is rarely a re­view that leaves pen­sions un­touched and this one promises to be no dif­fer­ent as lenders are tar­get­ing a re­duc­tion of an­nual pen­sion spend­ing by about 1.8 bil­lion eu­ros, or 1 per­cent of GDP.

The IMF has been the most vo­cif­er­ous among Greece’s lenders re­gard­ing the need for a fur­ther over­haul of the coun­try’s pen­sion sys­tem to make it sus­tain­able in the long run.

Between 2000 and 2010, pen­sion spend­ing in Greece climbed from 11 to 15 per­cent of GDP, mostly due to large in­creases in nom­i­nal pen­sions, gen­er­ous ben­e­fits and op­tions for early re­tire­ment. Dur­ing this pe­riod, Greece’s fig­ure was the sec­ond high­est in the eu­ro­zone af­ter that of Italy, ac­cord­ing to the IMF.

De­spite two sets of re­forms leg­is­lated in 2010 and 2012, pen­sion ex­pen­di­ture con­tin­ued ris­ing and hit 17.7 per­cent in 2015, largely due to a GDP con­tract­ing by 25 per­cent while the av­er­age pen­sion de­creased by 8 per­cent between 2010 and 2015.

The IMF be­lieves the com­bi­na­tion of low con­tri­bu­tion rev­enues and high pen­sion spend­ing led to the pen­sion deficit climb­ing from 7.3 per­cent of GDP in 2010 to 11 per­cent in 2015, mak­ing it by far the high­est in the euro area.

De­spite cuts to pen­sions in pre­vi­ous years, the Fund es­ti­mated the av­er­age pen­sion in Greece at 978 eu- ros in 2015, which is sim­i­lar to the eu­ro­zone av­er­age ad­justed for the pur­chas­ing power par­ity. How­ever, the Fund ar­gues that pen­sions in Greece are granted at younger ages and are based on shorter con­tri­bu­tion pe­ri­ods.

De­spite a rise in the early and stan­dard re­tire­ment age to 62 and 67 years re­spec­tively, the av­er­age re­tire­ment age fell to 59 years dur­ing the cri­sis since vested rights were pro­tected un­der all pre­vi­ous re­forms. The distri­bu­tion of re­tire­ment ap­pli­ca­tions in Greece at the end of 2015 re­vealed that it re­mained skewed to­ward few years of work, the IMF claims. About half of ap­pli­ca­tions re­lated to less than 26 years of con­tri­bu­tions, while only a quar­ter in­volved ap­pli­ca­tions made af­ter 35 years of con­tri­bu­tions, the Fund said.

In ad­di­tion, the gross re­place­ment rate (de­fined as the ra­tio of av­er­age pen­sion to the av­er­age wage) in Greece was the high­est in the euro area, at around 81 per­cent at the end of 2013, al­most 30 per­cent­age points above the eu­ro­zone av­er­age.

The in­ter­pre­ta­tion that the Greek pen­sion sys­tem is too gen­er­ous was openly chal­lenged by La­bor Min­is­ter Effie Acht­sioglou ear­lier this month. She wrote to the Fi­nan­cial Times to claim that the data is not be­ing used to fairly re­flect re­al­ity.

“The nar­ra­tive about Greek pen­sions is driven by de­mands of its cred­i­tors,” she wrote. “It is based on the crude statis­tic that pen­sions re­quire an­nual trans­fers from the state bud­get of around 11 per­cent of GDP in Greece com­pared with the eu­ro­zone av­er­age of 2.25 per­cent. This com­par­i­son is mis­lead­ing.

“Fol­low­ing the im­ple­men­ta­tion of the new pen­sion law last year, to­tal state fi­nanc­ing of pen­sions is pro­jected at less than 9 per­cent of GDP. Fur­ther­more, the eu­ro­zone av­er­age re- lates solely to the cost of fi­nanc­ing pen­sion sys­tem deficits and not to­tal spend­ing. The com­pa­ra­ble fig­ure for Greece is around 5 per­cent of GDP,” Acht­sioglou ar­gued.

Pen­sion re­form is a peren­nial is­sue in Greece. It was high on the agenda dur­ing the first re­view, which con­cluded in the sum­mer of 2016. At the time, the gov­ern­ment leg­is­lated a num­ber of mea­sures yield­ing 1.5 per­cent of GDP by 2018, while the longterm sav­ings were seen at 2.7 per­cent by 2025. Athens hoped that this would be enough to put the pen­sion is­sue to bed. How­ever, the IMF ar­gued at the time that this would not be suf­fi­cient and it now says that the in­ter­ven­tion still leaves a pen­sion deficit of 9 per­cent of GDP over the medium term.

The re­form in­tro­duced a new, uni­fied pen­sion sys­tem with a fresh set of rules that ap­plies to all cur­rent and fu­ture pen­sions. In ad­di­tion, the main pen­sion was split into two parts: the na­tional pen­sion, which is a fixed amount set at 384 eu­ros for any­one with a min­i­mum of 20 years of con­tri­bu­tions, and the con­trib­u­tory pen­sion, which is based on a worker’s con­tri­bu­tions over their en­tire work­ing life.

The re­form means that pen­sions al­ready be­ing paid out have to be re­cal­i­brated in line with the new rules by Septem­ber 17. The scheme fore­saw that any pen­sioner set to lose part of their re­tire­ment pay as a re­sult of the re­cal­cu­la­tion would in­stead have this so-called “per­sonal dif­fer­ence” frozen un­til the gap was elim­i­nated by an in­crease in the coun­try’s GDP and in­fla­tion rate.

How­ever, the IMF has ap­par­ently con­vinced the other lenders that the per­sonal dif­fer­ence has to be scrapped. The lenders are be­lieved to be tar­get­ing sav­ings of 1 per­cent of GDP (1.8 bil­lion eu­ros) but the Greek side would like to limit them to 0.75 per­cent (1.4 bil­lion). This would cor­re­spond to an av­er­age re­duc­tion of 15 to 20 per­cent in the ex­ist­ing main pen­sions for 1.4 mil­lion pen­sion­ers who will be af­fected by the change.

The dis­cus­sions about fur­ther re­form of the pen­sion sys­tem, given that there have been sev­eral rounds of cuts since 2010 and al­most half of Greek house­holds say they rely on pen­sions as their main source of in­come, will be par­tic­u­larly dif­fi­cult for the coali­tion.

The gov­ern­ment showed what im­por­tance it at­taches to keep­ing pen­sion­ers (a size­able pool of vot­ers, even if they do not cast their bal­lots as a united bloc) when it risked the wrath of its cred­i­tors in De­cem­ber by hand­ing out a Christ­mas bonus of 617 mil­lion eu­ros to 1.6 mil­lion pen­sion­ers from the ex­cess 2016 pri­mary sur­plus.

It looks like the re­tirees who treated the hand­out with skep­ti­cism are about to be proved right.

Rarely does a bailout re­view go by leav­ing pen­sion­ers un­touched, and the on­go­ing one promises to be no dif­fer­ent.

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