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Pension reform in Greece - background summary

Since its inception the Greek social security system has been marred by shortcomings such as the coexistence of various insurance schemes to which workers are affiliated according to their type of work. Law 3655/2008 reorganises the institutions and significantly reduces the number of insurance funds, incorporating them into IKA‑ETAM, the general scheme to which most employees are affiliated. The general social security system is funded by contributions from employers, insured persons and the State. The social security contributions finance all branches(sickness, maternity, old age, invalidity, survivors, unemployment, family allowances).

The pension system is based mainly on a public scheme linked to pay and a basic pension. The private pension system is marginal. The system has been changed radically and dramatically since 2010 by a range of reforms aimed at making the system more viable and limiting public expenditure on pensions.

Rapid change in the pension system since 2010

Numerous changes have been made to the Greek pension system since the start of the crisis, in a range of legislative measures negotiated at length with the country’s creditors. The pension reforms and cuts were a precondition for the loans granted to Greece under the three MOUs.

1.      The 2010-2015 reforms (Memoranda I and II)

The 2010 reform contains a clause limiting the rise in pensions expenditure to a maximum of 2.5 % of GDP in the period 2010-2060 and providing foradjustment of the parameters to be triggered if that limit is exceeded. According to the OECD, in 2008 public expenditure on pensions represented 12.3 % of GDP. [1]

The pension system has been radically modified. The contribution period, retirement age and the level of pensions have been extensively revised. Measures have also been adopted to encourage workers to extend their working life and penalties have been introduced as a disincentive to early retirement.

In 2010 Law 3863 set the retirement age at 65 for both women and men, providing for a change after 2011 depending on life expectancy. In November 2012 the legal age rose from 65 to 67, or from 60 to 62 if the person had been contributing for 40 years.

Another important change is the gradual extension of the minimum contribution period for eligibility for full pension benefits, increased from 35 to 40 years by 2015. Pensions will in future be calculated on working life as a whole and not on the five best years of the past ten.

A solidarity contribution from pensions above EUR 1 400 (from 3 % to 10 %), a pension freeze for three and then five years and a reduction in the pension ceiling are imposed. In addition, a series of measures reduce the amount of main and auxiliary pensions for various categories of pensioners.

In 2012, all pensions were cut by 15 % due to the abolition of the 13th and 14 months.Other reductions were also made: a 12 % cut in main pensions of more than EUR 1 300 in the private and public sectors, cuts of 10 % to 20 % in auxiliary pensions, a 7 % cut in pensions for seamen, etc.

Further changes were introduced in 2012; in particular the various auxiliary pension funds were merged into a single fund, State financing of auxiliary pensions was abolished and the number of high-risk occupations was restricted.

In the period 2010-2015, existing pensions in the private sector were cumulatively reduced by an estimated 15 % in the case of the lowest and over 44 % in the case of the highest (over EUR 2 000). [2]

2.      Reforms since 2015 (Memorandum III)

The Third Memorandum, signed with creditors in 2015, provides for the introduction of ambitious reforms, further savings on pensions (0.5 % of GDP in 2015 and 1 % in 2016), policies to neutralise the budgetary impact of the Council of State decision (2015) declaring the pension cuts introduced in 2012 unconstitutional and a 6 % levy on main and auxiliary pensions (healthcare and pharmaceutical contributions, Law 4334/2015).

The new 2016 reform (Law 4387) provides for the abolition of all special arrangements, the unification of all pension funds and rules on contributions and benefits, in a new body set up in 2017 (EFKA), together with the establishment of a general system of defined benefit pension plans and the introduction of a basic pension financed from general tax revenue.

According to Law 4387, the main pension is made up of two parts: the national pension (set at EUR 384 at the full rate and financed from the State budget) and the ‘redistributive’ pension calculated on the basis of the average reference wage over the whole working life, the length of contributions and the replacement rate.

To qualify for a national pension it is necessary to be 67 years old and have lived in Greece for at least 15 years (the amount of the pension is cut by 1/40th for each year below 40 years of residence in the country). To qualify for a full pension of EUR 384 it is necessary to have contributed for 20 years. That amount will be reduced by 2 % for each year below that number and it is a condition that at least 15 years’ contributions should have been paid (i.e. EUR 345.6 for 15 years’ contributions).

The final reform also provides for the gradual abolition of pensioners’ social solidarity benefit (EKAS) paid to the most frail pensioners (by December 2019), an increase in social security contributions for employees (1 % for employers and 0.5 % for employees) and for professional occupations, freelance workers and farmers (contribution of 20 % of monthly income), as well as a further reduction in replacement rates.

The new method for calculating pensions (from 12 May 2016) is based on the whole contribution period and it lays down lower calculation coefficients for the final benefit, which will reduce pensions for the recently retired(estimated at between 15 and 30 %; the biggest losers will be workers with many years of contributions and large benefits). Current pensions have to be recalculated by the new calculation method and theresulting ‘difference’ will have to be ironed out gradually after the end of the adjustment programme (the IMF requires removal of the ‘difference’ from 2018).

The primary aim of the reform is to help achieve the objective of a primary surplus of 3.5 % of GDP which the creditors require of Greece in 2018. The implementation of these reforms and successive cuts in pensions is tantamount to a planned impoverishment of pensioners, without that making the system sustainable.

3. The crisis and the austerity policies have jeopardised the sustainability of the system

According to the Ministry of Employment and Social Security, 43 % of pensioners currently receive less than EUR 660 per month and the per capita income of people over the age of 65 is about EUR 9 000, compared with the average EUR 20 000 in the eurozone. [3]

In a country where the employment rate has risen dramatically (27.5 % in 2013 and 23.4 % at the end of 2016), 73 % of the total are long-term unemployed, only one unemployed person in ten is entitled to unemployment benefit (of EUR 360) and there is no guaranteed minimum income, [4] pensioners have become the safety net for many families and inter‑generational solidarity plays an important role.

In the pension reforms adopted since 2010 the strategy is aimed at making the system viable in the long term by reducing benefits; creditors and governments address pensions as a purely budgetary issue without also seeking more resources to shore up the system.

However, the fact that the pension system in Greece has reached its limits is due not simply to its structural problems and its previous characteristics (coexistence of various institutions and schemes, complexity and fragmentation, inequalities between occupational categories, pension funds diverted to other uses by the State) but also, above all, to the austerity and domestic devaluation policies operated since 2010 under the three Memoranda, which have seriously exacerbated the crisis in the system in terms of both resourcesand benefits. [5]

Despite the pension cuts since 2010 (over a dozen) and the major changes to the parameters (deferment of retirement age, extension of the contribution period, pension reduction mechanisms, calculation of pensions according to average wage for the whole working life, cut in replacement rates), which progressively reduce pressure on expenditure, expenditure linked to old age as a percentage of GDP still seems high. The economic crisis and the austerity policies operated for the past seven years have led to a 26.4 % fall in GDP, which has also helped to inflate public pension expenditure as a percentage of GDP. It is also noted that at the start of the adjustment problem the wage cuts and the uncertainty about the pension calculation method prompted a wave of early retirement, especially in the public sector. Thus the drastic pension cuts are not reflected in the overall pension account in view of the increased number of beneficiaries.

The prospects for the sustainability of the system depend on certain factors in which there are worrying developments, particularly since 2010: the fall in GDP (26.4 % between 2008 and 2015) and the employment rate (from 61.5 % to 50.8 %), the sharply rising unemployment rate (from 7.8 % to 25 %), the drop in the average wage (20 %) and the minimum wage (22 % and 32 % for the under-25s in 2012 and fixed since then), the increase in precarious and poorly paid employment. Added to that are factors such as the fall in the fertility rate (worse since the crisis) and the increased emigration and brain drain undermining the country. The Bank of Greece estimates that between 2008 and 2013 about 223 000 people between the ages of 25 and 39 left the country (427 000 people between the ages of 15 and 64 in the same period). [6]

In conclusion, irrespective of the reductions made to pensions and the further reductions demanded by creditors, the system will remain in deficit as long as insufficient contributions are received (due to the extremely high unemployment rate, the low level of employment, low wages and the increase in precarious and poorly paid jobs) and no effort is made to find more resources to shore up the system.

[1] According to the IMF study in 2010, expenditure on pensions (main and auxiliary), which represented 14.5 % of GDP in 2009 (EUR 33.7 billion), should be set at 16 % of GDP in 2060. Note that at the end of 2016 pension expenditure represented 18.26 % of GDP (EUR 31.7 billion).

[2] Platon Tinios Hellenic Observatory, LSE http://www.lse.ac.uk/europeanInstitute/research/hellenicObservatory/CMS%20pdf/HO%20staff%20in%20Prees/Misunderstandings.pdf.

[3] Financial Times, 17 February 2017,Article by Effie Achtsioglou, Minister for Employment and Social Security, https://www.ft.com/content/f6be12b2-f3ae-11e6-8758-6876151821a6).

[4] Social solidarity benefit (KEA) was introduced in 2017.

[5] S. Robolis/V. Betsis, Revue Enimerosi INE GSEE, January 2017, Η κοινωνική ασφάλιση στην Ελλάδα (social security in Greece),http://www.inegsee.gr/wp-content/uploads/2017/01/ENHMEROSI_233.pdf.

[6] http://www.bankofgreece.gr/BogEkdoseis/oikodelt201607.pdf.

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