Greece’s Pension Paradox?
The plight of 79-year-old Athenian Zina Razi and thousands like her strikes at the heart of why talks between Greece and its creditors have collapsed. She lives off a pension system that helps to consume a huge proportion of state spending and can appear overly indulgent – but still she’s broke.
Razi barely keeps up with her power and water bills, and since her middle-aged son lost his job, supports him as well. “I am always in debt,” she said. “I can’t even imagine going to the cinema or the theatre like I did in the past.”
This paradox goes a long way to explain why the leftist-led government and its creditors at the European Union and IMF have failed to bridge their differences over a cash-for-reform deal, leading to Sunday’s breakdown of talks.
Five years of austerity policies imposed at the creditors’ behest have helped to turn a recession into a full-blown depression, and still they want more. Athens has flatly refused to achieve further savings by raising value-added tax on essential items or, crucially, slashing pension benefits.
As it inches closer to default and a potentially calamitous exit from the eurozone, the government has dismissed such demands as “absurd” or designed to pummel Greeks’ morale.
To the lenders, the pension system is still too generous compared with what the country can afford. Greece spent 17.5 per cent of its economic output on pension payments, more than any other EU country, according to the latest available Eurostat figures from 2012.
With existing cuts, this figure has since fallen to 16 per cent.
However, one person familiar with the talks said wages and pensions together still eat up 80 per cent of primary state spending, before debt servicing costs. “The remaining 20 per cent is already cut to the bone, indeed too far,” he said. “Civil servants have no pencils to write with, buildings in need of maintenance are crumbling. It’s not possible to make public finances sustainable without working on wages and pensions.”
Despite years of reforms, many Greeks can still retire early, especially workers in the public sector and professions classified as hazardous such as the army.
One high profile example is Fofi Gennimata, who became the leader of the opposition PASOK party last weekend. She is a former bank clerk with three children who applied for a pension last year aged just 51. Her office says she has stopped taking the pension payment since becoming a member of parliament.
Greece’s state spending on pensions is three times’ higher as a proportion than Germany’s, and critics accuse Greece of wanting a soft life at somebody else’s expense.
Demographics haven’t helped Greece. The number of pensioners has been rising since 2009. That’s either because the state has offered incentives to workers to retire as part of efforts to cut wage costs, or because workers themselves rushed to do so before the government raised the retirement age.
To many Greeks, not least the Syriza party that stormed to power in January promising to push the clock back on austerity, the creditors’ demands are yet another way to clobber vulnerable people needlessly.
The lenders have denied asking for specific pension cuts. But the Greek side said among their suggestions was slashing a top-up payment that supports some of the poorest pensioners. For Razi, that would mean losing 180 euros ($203) out of her 650-euro monthly pension.
The average Greek pension is 833 euros a month. That’s down from 1,350 euros in 2009, according INE-GSEE, the institute of the country’s largest labor union. Moreover, 45 per cent of pensioners receive monthly payments below the poverty line of 665 euros, the government says. With more than a quarter of Greek workers jobless, many rely on parents and grandparents for financial support.
“They can take our money, but they cannot take our hearts and souls. We live for our dignity,” Razi said.
Pension reform is a vexed issue for many European countries with aging populations that can no longer support a generous entitlement system. Italy raised the retirement age under unpopular reforms in 2012.
With pension spending equivalent to 14 per cent of economic output, France’s pensions advisory council estimates the system will run a deficit of 9.2 billion euros by 2020 despite reforms decided already. Attempts by Greece’s EU neighbour Bulgaria, where some public sector workers can retire in their forties, to raise the pension age recently provoked protests.
But Athens is running out of time to find savings acceptable to the European Commission, European Central Bank and International Monetary Fund to seal a deal on unlocking aid it needs to repay 1.6 billion euros to the IMF at the end of June.
Both sides have agreed on a budget surplus Greece should target but not on how to achieve it. The lenders want Greece to make savings on pensions equivalent to about 2 billion euros a year. Greece offered cuts of only 71 million, the lenders said.
Giving ground on pensions would force Prime Minister Alexis Tsipras into a U-turn that could prompt calls for new elections or a referendum. One of Tsipras’s campaign promises was restoring a Christmas bonus for low-income pensioners, although that plan may be postponed.
Previous governments have tackled the problem. Pensions have been cut by an average of 27 per cent between 2010-2014 and by 50 per cent for the highest earners. The average retirement age was raised by two years in 2013 and Greece has said it is willing to curb early retirement benefits further.
On average Greek men now retire at 63 and women at 59, according to government data. In Germany, the average retirement age for those receiving an old age pension in 2014 was 64 years. But that figure goes down to 61.3 years once those taking early retirement on health grounds is taken into account, according to 2013 data.
Five years ago, Sissy Vovou’s pension was €1,330 (£953) and landed in her back account 14 times a year: you used to get, she wistfully recalls, a full extra month at Christmas, plus a half each at Easter and for the summer.I recently discussed the plight of Greek pensioners in my comment on a Greek suicide, referring to articles from CNBC and Bloomberg, but also referring to comments Greek finance minister Yanis Varoufakis made in Germany in his keynote speech:
Now it is a monthly €1,050 – and there are only 12 months in the Greek pensioner’s year. “In all,” she said, “I’ve lost 30% of my income. And I’m one of the lucky ones. I’m in the top fifth; 80% of Greek pensioners are worse off than me.”
Vovou, 65, who began work at 17 in the publishing industry and ended her career at the state broadcaster, ERT, is also lucky because her son, now 40, has a good job and a regular salary. She does not need to help him out.
Eleni Theodorakis, on the other hand, retired in 2008 from her job as an administrative assistant in a regional planning service, aged 55. “My pension is €942 euros a month – not too bad, really,” she said, almost shamefacedly, fishing the statement out of her handbag.
“Fortunately my son is all right, just about, though sometimes he gets paid late. And once or twice, not at all. But my daughter’s husband has been unemployed for four years now. They have a baby … I give them what I can. It isn’t easy. Thankfully, my sister has a big garden. We grow things.”
There are many like Theodorakis among Greece’s 2.65 million pensioners. According to a study last year by an employer’s association, pensions are now the main – and often only – source of income for just under 49% of Greek families, compared to 36% who rely mainly on salaries.
With a jobless rate of about 26% – youth unemployment is at 50% – and out-of-work benefits of €360 a month generally paid for no longer than a year, pensions have become “a vital part of the social security net for many, many people,” said Vovou. “Retired parents are having to help their adult children everywhere. And now they’re demanding we cut them even more? It’s just so very wrong.”
Pensions have become arguably the biggest hurdle in the tortuous, on-off negotiations between the leftwing government of the prime minister, Alexis Tsipras, and Greece’s creditors: its eurozone partners, the European Central Bank and the International Monetary Fund.
Before they will release €7.2bn in aid that Greece needs to pay public-sector salaries and pensions and repay €1.6bn in IMF loans, those lenders want further reforms to the pensions system, including penalties to put people off taking early retirement and more cuts to even the lowest pensions.
Tsipras is so far refusing to implement the measures, aimed at shaving the equivalent of 1% of GDP off the country’s pension bill, arguing they will do nothing to help Greece emerge from a slump that has seen the country’s economy shrink by 25%, and may only deepen its humanitarian crisis.
There is little doubt Greece’s pensions system needed reform. The EU’s most expensive, at about 17.5% of GDP, it was made up of more than 130 different pension funds and hid widespread abuse: a pension census ordered in 2012 as part of the country’s bailout conditions turned up more than 90,000 entirely bogus claimants – mostly the relatives of long-dead pensioners – and 350,000 more inconsistent claims.
Greece also had a remarkable 580 professions deemed hazardous or strenuous enough to qualify for early retirement: firemen and construction workers, certainly, but also hairdressers (because of the chemicals), wind instrument players (gastric reflux) and radio presenters (microbes in microphones).
But some reforms are under way: those 130 funds have shrunk to 13, the standard retirement age for men has been lifted to 67, and, above all, since 2010 public and private sector pensions have been severely pruned, on a scale ranging from a 15%-cut for the very lowest (under €500 a month) to as much as 44% for highest (more than €3,000).
Greek pensions are now, on the whole, far from exorbitant: social security ministry figures show the average main pension is €713 a month, and the average top-up pension – typically funded by an industry retirement scheme – €169 per month. Some 60% of pensioners get less than €800 gross a month, and 45% live on less than the monthly poverty limit of €665.
The problems the system faces now are closely related to the country’s particular plight – and Athens is not alone in arguing that further flat, across-the-board pension cuts of the kind envisaged by its creditors are unlikely to accomplish much beyond hurting pensioners even more.
The record-high unemployment rate, for example, means the pensions system is running a big deficit: contributions coming in are forecast, this year, to be roughly €2bn less than benefits going out.
That shortfall has widened further because of the large number of older Greek workers seeking early retirement: demand is up 14% in the private sector and 48% in the public sector since 2009.
With unemployment among the over-55s at about 20%, compared to just 6% five years ago, “I felt it was the wisest thing to do,” said Ioannis Konstatinidis, who retired four years early from a large, now privatised bank in 2012.
“People were losing their jobs, salaries were being cut, and there was so much uncertainty I just thought it was better to be sure of getting at least something.” Konstatinidis has ended up getting nearly 40% less than he had counted on, however. “Our retirement will not be quite as comfortable as we’d thought. But we’re luckier than lots of people.”
They are. Among the pension cuts being proposed is the abolition of the EKAS, a variable supplementary payment made to nearly 200,000 Greek pensioners to bring their monthly income up to €700 a month. (Other suggestions made by Greece’s creditors would hit people like that particularly hard: a hike in the tax on electricity, for example, from 13% to 23%).
Few Greeks think further pension cuts will achieve anything. They may also be illegal: the country’s highest court has already ruled that the private-sector pension cuts pushed through in 2012 were unlawful because they “deprived pensioners of the right to decent life”.
Unsurprisingly, the country’s pensioners’ unions have called for a major demonstration against further cuts on 23 June. “The government must absolutely not give in,” said Anastassios Georgiadis, of the retired postal workers’ association. “And Europe has to understand that it is not by making us even poorer that Greece will emerge from this crisis.”
I am often asked: “Be that as it may, why have you not concluded the negotiations with the institutions? Why are you not agreeing with them quickly? There are three reasons why.The Bloomberg article also quoted Varoufakis as saying this:
First, the institutions are insisting on economically unsustainable macroeconomic numbers. Consider three such crucial numbers for the next seven years: The average growth rate, the average primary surplus and the average magnitude of fiscal measures (e.g. new taxes, benefit or pension reductions). The institutions propose to us actual numbers that are inconsistent with one another. They begin by assuming that Greece should achieve an average growth rate of about 3%. That’s fine and good. But then, in order to remain consistent with their ‘goal’ of showing that our debt can come down to 120% of our national income by 2022, they demand primary surpluses in excess of 3%, with large fiscal measures to achieve these primary surpluses. The trouble here, of course, is that if we were to agree to these numbers, and impose upon our weak economy these highly recessionary fiscal surpluses, we will never achieve the above 3% growth rate that they assume. The end result of agreeing with the institutions on their unsustainable fiscal numbers is that Greece will, yet again, fail miserably to achieve the promised growth targets, with appalling effects on our people and on our capacity to repay our debts. In other words, the past five years of spectacular failure will continue into the future. How can our new government consent to this?
Secondly, we may be an ideological government of the Radical Left but, unfortunately, it is the institutions that carry ideological fixations that make it impossible to reach an agreement. Take for example their insistence that Greece should be a labour protection-free zone. Two years ago, the troika and the government of the time disbanded all collective bargaining. Greek workers are left to their own devices to bargain with employers. Labour rights that took more than a century to win were swept away in a few hours. The result was not increased employment or a more efficient labour market. The result was a labour market in which more than one third of paid labour is undeclared, thus condemning pension funds and the government’s tax take to permanent crisis. Our government has tabled a highly sensible proposal: To take the matter to the International Labor Organization and to have them help us draft a modern, flexible, business-friendly piece of legislation that restores collective bargaining to its rightful place in a civilised society. The institutions rejected that proposal, branding our stance “backtracking from reforms”.
The third reason why we have not been able to agree with the institutions are the social unjust and unsustainable measures that they insist upon. For example, the lowest of pensions in Greece amount to 300 euros, of which more than 100 euros are made up by what is known as ‘solidarity pension’, or EKAS. The institutions insist that we eradicate EKAS while at the same time proposing that we push value added taxes on pharmaceuticals (that pensioners relay upon) from 6% to 12% and electricity from 13% to 23%. Put simply, no government that has a smidgeon of sensitivity toward the weakest of citizens can ever agree with such proposals.
“Of course this pension system is not sustainable,” Finance Minister Yanis Varoufakis said in Berlin on June 8. “Any butcher can take a cleaver and start chopping things down. We need surgery. We need to find ways of eliminating early retirements, of merging pension funds, of reducing their operating costs, of moving from an unsustainable to a sustainable system, rationally and gradually.”In his comment on a new deal for Greece, Varoufakis stated this:
Additional wage cuts will not help export-oriented companies, which are mired in a credit crunch. And further cuts in pensions will not address the true causes of the pension system’s troubles (low employment and vast undeclared labor). Such measures will merely cause further damage to Greece’s already-stressed social fabric, rendering it incapable of providing the support that our reform agenda desperately needs.I partially agree with Varoufakis but as I've previously stated, he conveniently ignores to mention the single biggest problem with Greek pensions, namely, the total lack of proper governance which introduces real transparency and accountability. Instead, the people running these pensions are political appointees or union hacks who are completely and utterly clueless on proper pension governance.
Pension governance, or lack of, is the true cancer of the Greek pension and economic system. If Greek pensions weren't forced by law to buy Greek bonds, maybe they wouldn't have taken a huge hit when Greece restructured its debt in 2012.
Instead, you have a bunch of clowns that are politically appointed by the ruling government du jour running a number of public pensions that should have been consolidated a long time ago. No Greek government has ever taken pension management seriously. If they did, they would scour the globe to hire the best and brightest Greek pension managers, pay them properly and protect them from political patronage.
Who are these people? There are plenty of extremely sharp Greeks in finance and some of them have experience running large pension funds. One example is Theodore Economou, someone I've profiled on my blog and think very highly of. There are many others working all over the world.
But before Greece starts hiring "the best and brightest," it should change its laws, introduce real governance like nominating a qualified independent board of directors, making public pension funds more transparent and a lot more accountable.
Of course, no Greek government wants to do this because good governance is anathema to the Greek way of life where corruption and inefficiency run rampant.
Keep all this in mind as the endgame for Greece and Europe plays out once again. I still maintain Greece will get some form of debt relief, but I'm worried that the country I love so dearly has fallen so far behind that no matter what deal it gets, it's doomed for decades of economic weakness.
Below, Bloomberg reports with Greece’s fate in the balance, European finance ministers converge on Luxembourg with little hope for a deal as German Chancellor Angela Merkel seeks to restore calm to increasingly rancorous exchanges.