Pensioners And Greek Banks Amid Record Deposit Outflows...A customer collects her change in euro coins after paying a trader for fresh groceries at a farmer's market on Kassandrou street in Thessaloniki, Greece, on Thursday, May 28, 2015. Greek banks, forced into a central bank liquidity lifeline, are poised to report sustained losses as they grapple with record deposit outflows and an economy that plunged into double-dip recession. Photographer: Konstantinos Tsakalidis/Bloomberg
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After months of agonising bailout negotiations between Greece and its creditors, one issue has proven more fraught than the rest: pensions reform.

At the insistence of the International Monetary Fund, creditors are demanding that Athens tighten the screws on what they believe is an unaffordable system. Officials from Greece’s hard-left, Syriza-led government complain they have already made painful adjustments and are threatening to blow up the talks.

So how generous is the Greek pension plan? How does it compare to others in Europe?

Until the crisis struck, Greece’s pay-as-you-go state pension system offered some of the most generous benefits in the EU, with pensions in some sectors, such as banking, rising to more than 100 per cent of final salaries. Tales of public sector workers taking retirement as early as the age of 50 have angered citizens in Germany and other creditor countries.

Now, after eight cuts in four years, the situation looks very different. Main pensions have been slashed 44-48 per cent since 2010, reducing the average pension to €700 a month. Contributors to a supplementary scheme receive a top-up averaging €170 a month.

About 45 per cent of Greek pensioners receive less than €665 monthly — below the official poverty threshold.

What reforms are the bailout monitors demanding?

In spite of the cuts to date, the system needs a further overhaul to remain sustainable over the long term.

The bailout monitors want Greece to adopt a “zero deficit” system that would end budget subsidies for the pension system and ensure it remains sustainable until 2060. They are pressing for across-the-board cuts in both main and supplementary pensions; the abolition of a special monthly stipend for pensioners receiving the lowest benefits; an increase in the retirement age to 67; the ending of special arrangements that allow working mothers and people in so-called “dangerous” occupations to retire early on full pensions; and the merger of dozens of sectoral pension funds into three main funds.

Why didn’t the earlier reforms make the system sustainable?

Greece’s pension funds lost an estimated €25bn of reserves that were held in government bonds as a result of a debt restructuring at the height of the crisis in 2012. They have been unable to replenish them.

Contributions to the system fell sharply as unemployment soared above 25 per cent. Meanwhile, outlays rose sharply as more than 60,000 public sector workers opted for early retirement, fearing their jobs would soon be eliminated.

Even though benefits shrank, employers’ and workers’ contributions still remained high, discouraging hiring in the formal economy.

One reason the costs are so high is because the sectoral funds still operate independently even though they were nominally unified in a 2010 reform. As a result, the funds employ more than 15,000 workers — about twice the number needed to run the system — many of them political appointees.

So why is the Syriza-led government holding out on pension reform?

Opposition from powerful public sector trade unions dissuaded a succession of Greek governments from embarking on pension reform, and many leading Syriza officials with a union background are determined to protect the current system.

The political cost of implementing reforms would be high: Syriza came to power promising pensioners there would be no further cuts, while benefits would be gradually restored, starting with the 13th monthly pension paid at New Year.

Syriza’s economic team is willing to make a start on reforms, however. It is prepared to pass legislation that would discourage workers from taking early retirement before the age of 62 by cutting their pensions by about 5 per cent.

To reduce rampant fraud and tax evasion in the current system, self-employed professionals would make contributions and receive benefits on the basis of their taxable income, while contributions would be collected by the tax authorities — not the pension funds.

Is there any room for compromise?

It will be a tough negotiation. Cuts in pensions are a “red line” that cannot be crossed, according to the Greek government. But pension reform is a key issue for the bailout monitors.

According to analysts in Athens, there is room for the government to make concessions: even hardline Syriza MPs accept that the retirement age must be raised. Even so, Alexis Tsipras, the prime minister, will face difficulty pushing a compromise on pensions through parliament.

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