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Anastasia Balezdrova

On Tuesday, the Greek government submitted to parliament the draft law that aims to carry out reforms in the pension system. The public reactions to the legal text began weeks earlier, after it became clear that the plan envisages increasing the contributions paid by employers and freelancers. The changes will affect farmers, who have turned their threats into actions and roadblocks have been a fact for several days.

Despite the discontent, however, the fact is that the Greek pension system needs to be reformed, otherwise very soon pensions will not be able to be paid. Are the measures proposed by the government in the right direction, are the protesters right, which is the sustainable pension reform for Greece? Financial analyst Kostis Lympouridis answered the questions of GRReporter.

Mr. Lympouridis, almost all professional groups in Greece, namely lawyers, engineers, doctors and other freelancers, farmers and so on, are protesting against the government proposal for pension reform. Why?

I think that this proposal is not actually a reform that aims to rescue and ensure the sustainability of the social security system, as the government claims. In fact, it is an attempt to rescue the system for a period of 3-4 years, within which the government believes it will be in power. The goal is to show that it has "fought against" the pension reduction.

At the same time, however, the government has signed the memorandum with creditors, which provides for cost cuts in the social security system amounting to 1.8 billion euro.

To combine these two things, the government claims on the one hand that it will not reduce the basic pensions but points out that the people who will retire after 1 January 2017 will receive much lower pensions than those who will retire this year. Therefore, the trend is to transfer the burden of big cuts to the new pensioners instead of reducing all pensions, but with a much smaller amount. The reason not to do so is that the new retirees will have no basis for comparison. It is one thing to reduce a retiree’s pension from 850 euro to 800 euro and quite different to give a new retiree a pension of 700 euro.

This whole tactic has a purely communicative character and affects one part of the reform burden. The other is related to the increase in social security contributions by 1% for employees and 0.5% for employers or vice versa. There are talks of various options but all is still rumours, there is nothing official yet. Anyway, I do not think that creditors would approve such a measure.

Nevertheless, it would result in additional burdens for the labour market. Employers now have difficulties paying the social security contributions and the trend is for them to increase. This would cost the employee a reduction of income by 1%.

For freelancers, the social security contributions currently amount to 3-5 thousand euro per year on average. Now the government is trying to link them to their income and to calculate their amount as a percentage of the income in accordance with a table that starts with 20% plus another 6% for health insurance, etc. The total "bill" amounts to about 35%. All those whose annual income exceeds the sum of 15,000 euro will pay much larger amounts than they are paying at present.

All these people are aware that this money will not be used properly and that it will not return to them at some point in the form of a pension. From the moment that the tax for freelancers is 26-29% and they are obliged to prepay its full amount for next year, the imposition of social security contributions amounting to 35% practically will leave nothing to them. They will work only for taxes. Therefore, the planned changes are not perceived as a reform but as taxation and an attempt to perpetuate an anyway unjust system.

Are there measures in the right direction in the proposed bill?

I have always believed that it is necessary to distinguish between the national (social - author’s note) pension and the pensions based on the length of service. Since the state budget provides 13 million euro to the pension system, the government could totally eliminate the social security contributions and announce that each citizen who turns 65 would receive a pension of 600 euro.

As for the higher pensions, ways should be found to link things to what the insured have paid to date. The pension system in Greece is not a system of capital cover, i.e. contributions are not collected anywhere to be returned in the form of pensions years later. It is a pay as you go system, which means that the pension funds are secured by the pension contributions and the state compensates the difference when there is a shortage of sufficient funds.

Therefore, I think that the establishment of a social pension envisaged in the bill makes sense, although it is not properly introduced. I.e. it does not say that it will give a specific amount to all but that it will give a specific amount to those who have length of service.

Furthermore, I believe it is necessary to introduce a strictly regulated retirement age, for example 65 or 67 years depending on the demographics. This rule should apply to all, with minimal exceptions only for particularly heavy occupations to which people could not respond at that age. I mean to remove all the existing exceptions, such as those for the military who retire at the age of 45, for the employees at the state enterprises and for the state employees who retire early on the basis of conditional length of service (e.g. the military service is recognised as length of service) and so on. In Greece, there are too many people aged 50 and 55 who are receiving pensions. All this should have been cancelled so far, overnight and without any transitional arrangements.

Unfortunately, I do not find similar measures in the presented bill. All I see is an attempt to avoid the reduction of pensions at this point and to shift it in time, for when SYRIZA will no longer be in power.

Which is the sustainable pension system for Greece? What changes should be made?

As already mentioned, this is a pay as you go system and pensioners are enlisted in a large number of pension funds that had gained various privileges over the years; the situation cannot continue in this form. The main reason is that today's workers are receiving much lower salaries than the previous generation. In fact, today employees with salaries of around 500 euro are expected to fund with their contributions pensions amounting to 1,500 euro, just because it is considered an acquired right.

Obviously, this cannot continue, so I think we need to move to a new system, similar to the one I have previously described. That is to introduce a national pension of 600 euro for all upon turning 65 or 67, without any other requirements. A pension fund should also operate that would collect pension contributions and pay pensions to those entitled to receive a second pension based on their length of service and paid contributions.

Further on, a system of capital cover should operate, based on private insurance, which would be optional. Employees and employers should be able to "invest" money in it in return for tax concessions that would be converted into capital, which would allow them to be paid a third, supplementary pension in the future.

The establishment of this absolutely logical, sustainable and equitable scheme would take a transitional period in which workers and employers would pay gradually decreasing contributions and consequently the very high pensions would be reduced.

Are the grounds for carrying out the pension reform demographic or economic and to what extent?

I think they are partly demographic. The population is aging, but this is true for the whole of Europe. On the one hand, the number of adults is growing and on the other, the number of pensioners is growing much faster than the number of workers. Thus, each worker is bearing a heavier burden.

That is not the main problem in Greece. Here it was that for many years the political system pretended not to see this fact, namely that life expectancy is increasing, that young people are entering the labour market later because they are studying longer, etc. Instead of beginning to provide solutions to the current imbalance, the political system exacerbated the problem. The people insured in some pension funds were entitled to retire at an earlier age, attempts were made to find funding for some funds from other sources, in the form of taxation of third parties. For example, the pension fund of journalists is funded with a percentage of the ads. The fund of lawyers received funding as a percentage of the fees for the transfer of immovable property. I.e. privileges were established that worsened the economy in favour of specific guilds. According to me, "the root of evil 'is namely that the political system did not tell the truth to the citizens and did not provide a solution to this problem.

According to the report of the Bank of Greece, trade turnover fell by 15% in the third quarter of last year and capital controls caused serious difficulties for small and medium businesses. Would they be able to survive if the social security contributions increase?

No. As I have said earlier, they are struggling to pay them now and many people owe money to their insurance funds. The situation will worsen if they increase.

I think that the intention of the government is the product of obsession of the left wing that no matter how much taxes increase, there will always be people who will pay them. Well, no cow gives milk forever. At some point it stops.

In conjunction with the problems caused by the imposition of capital controls and taxes, many people will prefer to close their businesses. This will open up a bigger hole in revenue than expected.

Therefore, the solution is not to try to continuously provide new revenues but also to limit costs. But, as you understand, this measure is particularly unpopular.

Will the particular pension reform take place or could it put an end to this government?

I think creditors will anyway reject the proposal to increase pension contributions.

Moreover, it is uncertain whether the 153 MPs of SYRIZA and Independent Greeks will vote on the bill. I see no desire on the part of other parliamentary parties to support it. On the other hand, SYRIZA has not tried to maintain an open contact with parties like PASOK or Potami that, under certain circumstances, could potentially enter the government coalition. The Union of Centrists itself has burned the bridges of likely cooperation, saying that it does want to enter the government.

The political situation is quite complicated and I am not sure that under pressure from the farmers’ blockades and whistles there will not be three government MPs to bend down, resulting in the bill not being passed.

But I cannot predict what might happen afterwards because reforming the pension system and cutting the costs for it by 1% of GDP (1.8 billion euro) is a commitment that the country took on in August last year.

Therefore, even if a new government comes, this commitment must be met. I do not know under what political conditions something different could happen.

However, all options are open and my opinion is that we are about to experience a period of uncertainty and instability, like that in 2015 with the fear of Grexit, with disapproval of the measures applied and therefore of the money tranches on the part of creditors, etc.

We have a government that promised many things to so many people but the promises were nothing more than lies, because they are totally unrealizable. I am not sure that having signed and begun to implement the memorandum despite its initial promises to do just the opposite, this government will be able to convince the public of the necessary changes.