Why they are a flashpoint

By P.W. | LONDON

GREEK pensions have been a source of acrimony since the first bail-out five years ago. Germans in particular, who were being asked to retire later, resented having to help what they regarded as feckless Greeks, many of whom were drawing pensions in their 50s. Yet since then there have been two major reforms, pushing the statutory retirement age up from 60 for women and 65 for men to 67, while pension benefits have been cut. So why are they still such a point of contention?

One reason was the dire starting-point. As George Symeonidis, a board member of the Hellenic Actuarial Authority, said earlier this year, “the reforms have not finished, nor is it possible to reform a system in four years, when nothing has actually been changed for decades.” Before the first bail-out in May 2010 the system was already heading for disaster, with pension outlays among the highest in Europe at 13.5% of GDP in 2009 and projected to reach nearly 25% of GDP by 2050.

In part this reflected an especially generous set of benefits, which provided the highest “replacement rate” (of earnings before retirement) for public pensions among the OECD club of 30 or so mainly rich countries before the euro crisis, in 2008. The basic system required only 35 years of contributions rather than the 40 generally needed in pension systems to get a full pension. Pensions could be taken much earlier than in other countries, with people who had contributed 37 years able to retire in their late 50s on full pensions.

Indeed, those working in strenuous occupations for 25 years and contributing overall for 35 years could retire as early as 55. In 2006, over a third of new pensioners in the country’s main private-sector fund (IKA) belonged to these trades, which remarkably included far from arduous jobs such as hairdressing. And, since a relatively generous minimum pension was available for anyone with at least 15 years’ contributions and there was also a minimum-income top-up payment, it made sense for many to stop contributing once they had reached that threshold of 15 years, by dropping out into the black-market economy.

Reforms in July 2010 and November 2012 did much to put the pension system on a sustainable footing for the long-term. Under the first reform, the formal pension age for women was raised from 60 to 65 by the end of 2013. That was then yanked up for both men and women to 67, with effect from 2013. More important, the minimum retirement age was raised to 62 for both men and women and the number of contributions entitling a pensioner to a full benefit went up from 35 to 40 years; pensions taken before the age of 67 without a full contribution record were reduced in value. Accrual rates (the rate at which pension rights are built up each year) were slashed and benefits were based on career earnings rather than on final salaries, which brought the new system’s replacement rate for pensioners on average earnings down from 96% to 54%. The list of arduous trades treated more favourably was cut back and workers who were still covered could not retire before 62.

Moreover, in the course of austerity, pension benefits were not spared. Two seasonal bonuses were eliminated, an effective cut of 14% for the two-thirds of retirees in the main private-sector fund drawing the minimum pension. Cuts for better-off pensioners were much higher, with reductions of over 40%.

Yet there was a crucial hole in the reforms: they largely sheltered older workers, so that they could retire on broadly the same terms as before. As an example, Platon Tinios, a pensions expert at Piraeus University, highlights the reform limiting the list of arduous occupations. This no longer included new hairdressers from 2012 but all those with more than ten years’ experience retained their previous right to retire five years early. The new accrual rates applied to years worked from 2011; previous years worked still benefited from the earlier more generous formula (although the resulting benefits are then subjected to the cuts applied to pensions in payment). According to Professor Tinios, “the vast majority of those planning to retire this decade are grandfathered” (shielded) from the reforms.

The result has been a wave of early retirements as people take advantage of the old rules at a time of high unemployment. That has pushed up spending while contributions fell away leaving the pension system more and more reliant on huge transfers from the taxpayer, now worth 9% of GDP. Pension spending jumped to an unaffordable 17.5% of GDP in 2012 (although this figure overstates the burden because the economy has been so depressed). The position is not helped by the fact that Greece has the third most elderly population in the 28-strong European Union, gauged by the share of people aged 65 or more in the population, just behind Italy and Germany.

Greece’s creditors now want reforms that will yield annual savings of 1% of GDP by 2016. As well as raising health contributions paid by pensioners (from 4% to 6% on average) their proposals would clamp down on early retirement from the middle of this year by reducing implicit subsidies for pensions taken before the age of 67. A particular point of contention is that the creditors want to phase out by the end of 2016, the top-up payment for low pensions first introduced in 1996 (for a saving of some 0.4% of GDP), although they advocate a minimum-income scheme for the whole population.

The wrangling between the creditors and the Greek government over pensions seems to belong to the “narcissism of small differences”. Yet extraordinarily, this dispute could conceivably push Greece out of the euro area even though, as Professor Tinios points out, poorer pensioners would be the first victims of the surge in inflation that would ensue from a “Grexit”.