GREEK PENSION SYSTEM AND AGEING DEMOGRAPHICS Fiscal and Social Implications

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1 Panos Tsakloglou Athens University of Economics and Business, Hellenic Observatory (LSE) and IZA (Bonn) GREEK PENSION SYSTEM AND AGEING DEMOGRAPHICS Fiscal and Social Implications Ελληνο-Αμερικανικό Εμπορικό Επιμελητήριο Μπορεί να Υπάρξει Βιωσιμότητα και Επάρκεια Παροχών στην Κοινωνική Ασφάλιση; Αθήνα, 30 Μαρτίου 2016

2 The facts Pension reform crucial in Greek crisis Birth certificate : 2001; failed pension reform Greece is ageing fast Fertility rate below 1.4 Old-age dependency ratio from 31.2% in 2013 to 60.8% in 2060

3 The facts Social spending in GDP rose fast since 1990s Substantial differences in structure of spending 31 Share of Social Protection Expenditure in GDP Greece and EU15, Structure of Social Protection Expenditure: Greece and EU28, EU15 Greece Other Unemployment Disability Family Sickness / Health Care Pensions 0 EU28 Greece

4 The facts Pay-as-you-go pension system; clearly unsustainable NOT a problem of revenues / No actuarially fair rules; over-compensation 25% Pre-reform actuarial projections 20% 15% 10% 5% 0% Pension Expenditure/GDP Social Insurance Contributions / GDP Deficit / GDP Pension spending one of the main contributors to deficit creation Many elections were won on pension promises Over two thirds of post-2000 increase in debt due to budget transfers to pension system

5 The facts Pension spending in Greece (as % of GDP) the highest in the EU In 2012 almost 18% of GDP; marginal declines in following years A little less than half from budgetary transfers Pension spending in 2012 (% of GDP) Source: Eurostat

6 The facts Pensioners the only segment of the Greek society with a Minimum Income Guarantee scheme Minimum Pensions; Pensions for Uninsured; EKAS Despite pension cuts Elderly improved their relative position during the crisis Decline even more pronounced using more sophisticated poverty indices 40 Relative poverty rate: Greece Total, young, elderly Total Less than 16 years 65 years or over 10 Source: Eurostat

7 The facts Important pension reform in 2010 Main elements Basic Pension - related to contributions and income Proportional Pension reduced and non-linear replacement rates Fund consolidation common rules Landmark pension reform, which is far reaching by international standards (IMF, 2010) Greece showed the largest improvement in the burden of pensions forecast for 2060 of any EU country (EPC 2012)

8 The facts Adverse macroeconomic developments Extensive grandfathering Does not suffice any more, despite successive rounds of pension cuts Short-term / Long-term 25% 20% 15% 10% 5% 0% Pension Expenditure/GDP Social Insurance Contributions / GDP Deficit / GDP

9 What should be done? Political economy considerations of pension reform Losers (now); Gainers (in the distant future) Tendency to procrastinate Need for a new reform? Parametric changes to the 2010 system could have been sufficient Fix the long-term target Budget transfers x% of GDP (it cannot be high) Separate temporary from long-term effects Rise in unemployment; Decline in wages; Mass retirements; Difficulties of the self-employed Temporary measures for temporary effects; structural measures for long-term effects

10 Are cuts necessary? Two conditions for decent pensions for the next generation of pensioners Very productive next generation of workers Next generation of workers must stay in Greece (esp. the most productive) Policy implications Shift resources from other areas (incl. pensions) to productivity-enhancing activities Education; Training; R&D; Infrastructures Do not increase taxation to very high levels they may migrate Social Security contributions in Pay-As-You-Go systems are pure taxes

11 Are cuts necessary? Who should bear the cost of cuts? Till now, low pensions relatively well protected Only cuts in 13 th and 14 th pension (+ health-related cuts) Pensions corresponding to very low contributions Argument for anti-poverty effects of pensions to non-elderly rather flimsy Introduce Minimum Income Guarantee High pensions have been slaughtered Over-compensating before the crisis Probably, not any more Social Security Contributions: Forced savings They should have relatively decent returns Otherwise, wrong signals; incentives for contributions-evasion

12 The structure of the new system Two-tier: National pension & Contributory pension State transfers only to National pension Level? Even 360 euro per month with income criteria very ambitious 384 without conditions from the state budget + state guarantees for contributory pension => probably even more serious problem than current projections Contributory pensions Common rules for all (one Fund?) Decent returns to avoid contributions-evasion Why not Notional Defined Contributory system? Room for Occupational Funds and Private Insurance Auxiliary Funds obsolete? Transform them to Occupational Funds (fully funded) Perhaps, tax-incentives for moderate Private Insurance premia (in the future) Incentives to save Adverse distributional effects

13 Pensions and growth Long-term viability: Growth If the economy does not gain (serious) growth momentum, no solution Imbalances corrected But, reforms, investment/savings, climate? Growth requires competitive firms If non-wage labour costs high, low competitiveness No increases and, if possible, reductions in SICs for pensions Move to a true NHS funded out of general taxation / abolish SICs for health care

14 Thank you very much for your attention

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