Before the most recent reforms to Greek public pensions, taxpayers faced a likely increase in costs to 24% of GDP by 2060. Pensions weren’t Greece’s only problem at the time of the reforms but they were quite serious. Greece had to make changes, if only to meet conditions laid down by the EC, the European Central Bank and the IMF.
“Greece has gone a long way towards laying the foundations for more sustainable pensions, not only limiting the superfluous, but sacrificing at the same time a part of the essential.”
The Greek public pension was effectively an occupational scheme that aimed to maintain retirees’ living standards in retirement. Pre-reforms,“…the first Pillar, Social Security, accounts for more than 99% of the whole system.” Annual pension accrual rates varied between 2% and 3% of ‘pensionable earnings’ (“calculated on the last 5 or 10 years of a person’s career”). The maximum accrual period was 35 years and the ‘effective’ retirement age was at age 62.
Note: The report’s reference the “the first Pillar” is confusing. In PensionReforms’ lexicon, the main Greek pension is a Tier 2 arrangement.
It was probably the most generous Tier 2 pension in the world.
Now, the public pension is in two sections:
- Tier 1: a basic, means-tested ‘safety net’ – the report gave no detail on the means-test but it seems as though it will be against both income and assets (as in Australia);
- Tier 2: a proportionate part of the past calculation so that accrual rates now vary from 0.8% to 1.5% a year of full career-average pay, from age 65 and with a maximum of 40 years to count.
Benefits are now indexed to the Consumer Price Index and public servants hired after 2010 will be on the same basis as everyone else.
“It was, without question, an important and necessary action. However, since real people lie behind the numbers, it is vital that adequacy is also guaranteed, so that the people reaching the third age are able to manage with integrity and pride. As it is, of course, each individual’s responsibility [is] to cater for an adequate pension by contributing to the system continuously throughout their life and investing on the side on other pension products. The main driver for reform in 2012 and before was the output of the Ageing Working Group in sustainability. In the upcoming round (2015), the Group is anxiously expected to make adequacy its priority.”
More changes are expected.
“It is time for the Government to distinguish between welfare and pension, to educate people on the demographic developments and the utmost importance these play on their pension income when they retire in a few decades, as well as face the fact that DC systems are – in most countries – and should be – in Greece also – a part of everyone’s third age income.”
PensionReforms thinks that the Greek reforms were a golden opportunity missed. Change was clearly inevitable but PensionReforms thinks it would have been better to:
- Install a ‘liveable’ PAYG, Universal, Tier 1 at a level that mitigated or even, perhaps, prevented poverty. That pension should have been linked to a general wage index, not consumer prices.
- Protect all Defined Benefit pension rights that were accrued under the old, unaffordable system but only up until the reform date – there would be no further accruals.
- Fold social security ‘contributions’ into the general tax rates and eliminate the rules that tie entitlements to contributory periods.
- Eliminate the tax preferences for private retirement saving.
PensionReforms suspects that such a package would significantly reduce pension costs to Greek taxpayers and would allow the state to do what only it can do – directly address poverty in old age. As the report itself notes, 19.9% of pensioners were ‘at risk of poverty’ in 2011. That, for PensionReforms, is the most important current indicator of policy failure. (File size 791 KB; 14 pp) 696