Economic survey of Greece 2007: Pensions: a comprehensive reform is urgently needed

 

Contents | Executive Summary | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise Chapter 3 of the Economic survey of Greece, published on 30 May 2007.

Contents                                                                                                                           

What are the main options for reforming the pension system? 

A major pension reform is urgently required primarily to ensure fiscal sustainability, but also to eliminate disincentives to work at older ages and enhance the effectiveness of the system in alleviating poverty. Pensions are mostly provided by a large number of earnings-related schemes. They are run by the public sector on a pay-as-you-go defined-benefit basis with practically complete coverage of the population. A defining characteristic of the pension system is the high degree of fragmentation both across sectors of employment and economic activity. While there is clearly a wide range of possible reform options, certain elements would seem to be key to any reform.

  • On unchanged policies, spending on pensions is projected to increase to mid-century by most in the OECD. Reform is required not only to ensure fiscal sustainability, but also because otherwise pension outlays will account for more than one-fifth of unrevised GDP and inevitably crowd out other necessary social expenditure. A fall in pension benefits relative to average wages (through a lowering of the replacement rate and/or indexation to prices) will inevitably need to figure as one important element of any reform, although the extent of this adjustment can be limited by reforms which reduce disincentives to continue work in old age and by curtailing the many alternative early retirement pathways.
  • Financial disincentives to continue working at older ages are among the highest in the OECD, and have led to a low employment rate among older workers. The pension system discourages continued work at older ages because of high statutory replacement rates, with tenuous links between contributions and benefits and a range of special provisions that allow early retirement before the “normal” retirement age of 65. Pensions should be linked to lifetime contributions to remove disincentives while the wide range of early retirement schemes should be phased out. The most blatant case for reform is the favourable conditions granted for early retirement from occupations which are classified as “arduous or unhygienic”. There is a valid argument for preferential treatment when employment in a particular occupation leads to a lower life expectancy. However, the scale on which these provisions are currently granted (40% of all male retirees and 15% of female retirees, under the main employee pension fund) as well as the extensive list of occupations to which they apply, suggests that the current provisions go far beyond the aforementioned rationale. Once the normal age of retirement has been established as a genuine benchmark against which earlier or later retirement is judged and appropriately compensated, then consideration would need to be given to periodically increasing it in line with increases in life expectancy.
  • Despite high aggregate pension outlays, the diversity in replacement rates across different funds means that pension expenditure is not always targeted to those most in need. Reducing overall pension expenditure while more effectively tackling poverty in old age is likely to mean that any safety net pension benefit will be available only at the official age of retirement in place of current minimum pension arrangements which severely distort incentives to retire early. There is a range of options for the safety net pension. It might, for example, be means-tested (to keep the fiscal costs down, but with potential adverse effects on savings) or alternatively could be universally available subject to legal residency requirements (though creating adverse incentives for immigration) or could even be based on current minimum pensions (but only available at the official age of retirement).
  • The main pension system for the self-employed is similar in some respects to those for employees, but with important differences in the assessed earnings against which the pension is evaluated and contributions are determined. Assessed earnings are unrelated to actual earnings and instead correspond to notional income classes which, depending on the fund, increase with years of experience. The resulting share of social security contributions by the self-employed in aggregate appears low compared to their share in total employment, and also in comparison with other European countries. The implication is that notional income underestimates actual income, and that the implied lower cost of pension contributions is a problem because it represents a distortion in favour of self-employment over dependent employment (rather than a financial sustainability problem). Ideally it would make sense to switch the basis for self-employed pensions from notional to actual earnings or some proxy measure such as turnover. A prerequisite for such a change would be further improvement in the tax auditing of the self-employed. If such a switch is not feasible, then the level of notional income bands against which the self-employed make contributions would need to be raised.

Long-term projections of pension expenditure
In per cent of GDP

 

1. 2004 for EU15.
Source: European Commission (2006), “The Impact of Ageing on Public Expenditure”, European Economy, Special Report No. 1, Economic Policy Committee and European Commission, Brussels; Ministry of Employment and Social Protection and Ministry of Economy and Finance (2005), “The Greek National Strategy Report on Pensions” and (2002) “The Greek Report on Pensions Strategy”, Athens.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.

The complete edition of the Economic survey of Greece 2007 is available from:

Additional information                                                                                                  

 

For further information please contact the Greece Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Dave Turner, Vassiliki Koutsogeorgopoulou and Pamfili Antipa under the supervision of Peter Hoeller.

 

 

 

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