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Government proposes raising public sector retirement age to 63

Download article in original language : CY0506101FCY.DOC

In May 2005, the Cypriot Ministry of Finance submitted to the trade unions a proposal for raising the retirement age for employees in public and educational services and semi-governmental organisations from 60 to 63. This article outlines the content of the proposal, along with the anticipated effects of the higher retirement age and the responses of the unions.

On 30 May 2005, the Ministry of Finance sent to the Pancyprian Public Employees Trade Union (PASYDY), Pancyprian Federation of Labour (PEO) and Cyprus Workers' Confederation (SEK) - trade union organisations representing employees in the public services and semi-governmental organisations - a proposal to raise the retirement age for employees in public and educational services and semi-governmental organisations from 60 to 63 years of age. In order to facilitate consultations with the trade union organisations, the Ministry had sent them an explanatory report on 13 April 2005.

Background

According to the Ministry of Finance’s explanatory report, the retirement age in the public and broader public sector should be raised for the following reasons:

  1. the cost of pensions has been steadily increasing, due to the substantial improvement in retirement benefit schemes for employees in the public and broader public sector, as well as the increased numbers of employees due to retire in the coming years;
  2. the union organisations have submitted demands to reduce the period of service required for full pensions (33 years and four months at present) for certain categories of employees, such as education staff and others requiring many years of studies who begin working later in life;
  3. newly appointed employees should be able to complete the years of service required for full pensions, since as a rule they begin working at a later age than formerly, due to the competitive environment, which necessitates postgraduate studies and time-consuming job-filling procedures;
  4. Cyprus should be brought into line with current international standards, particularly in the other EU countries, where retirement ages range from 65 to 70;
  5. a single retirement age should be introduced, the same as in the private sector, where retirement ages range between 63 and 65, thus helping to eliminate this inequality;
  6. average life expectancy at the age of 60 has increased in Cyprus - according to the latest data from the Statistical Service it now stands at 80.3 for men and 83.4 for women (general life expectancy is 76.1 for men and 81.0 for women); and
  7. the social and financial problems arising from the forced inactivity of the labour force at a time of life when long experience and knowledge are invaluable assets, in conjunction with the low unemployment rate in Cyprus, must be addressed.

The proposal

The proposal by the Ministry of Finance provides for gradually raising the mandatory retirement age, beginning on 1 July 2005, from 60 to 63, as follows:

  • the mandatory retirement age for employees whose 60th birthday falls between 1 July 2005 and 31 December 2006 would be 61. For those whose 60th birthday falls between 1 January 2007 and 30 June 2008 it would be 62, and for those whose 60th birthday falls on or after 1 July 2008 it would be 63;
  • permanent employees in service on 1 July 2005 would have the right to decide whether they will remain in the job beyond the age of 60. This right, along with the employer’s obligation to accept any decision they may take, would also be laid down in law;
  • for permanent employees in service on 1 July 2005, the current 'coefficients' for calculating annual pensions (1/800) and the lump-sum gratuity (14/3) would be guaranteed, along with the right to voluntary early retirement at 45 with pension payments beginning at 55 years of age. However, the lump-sum gratuity of people in service on 1 July 2005 who retire on or after their 61st birthday and have completed at least 412 months of service counting towards a pension would be calculated using a coefficient of 14.5/3. Similarly, for those who have reached the age of 62 and have completed at least 424 months of service counting towards a pension, the coefficient would be 15/3, and for those who have reached the age of 63 and have at least 436 months of such service it would be 15.5/3;
  • people appointed to a permanent position on or after 1 July 2005, whether currently employed under a contract or not, would retain the existing coefficients for calculating annual pensions (1/800) and the lump-sum gratuity (14/3), and would thus be entitled to full pension benefits after 400 months of service. However, those who retire on or after their 61st birthday and who have completed at least 412 months of service counting towards a pension would be entitled to receive increased lump-sum gratuities, on a sliding scale, as set out above for permanent employees in service on 1 July 2005; and
  • employees appointed to a permanent position on or after 1 July 2005 will be entitled to take early retirement upon reaching 48 years of age, with pension payments beginning at 58, instead of the ages of 45 and 55 currently in force.

Anticipated effects

According to the Ministry of Finance, a higher retirement age will have a significant effect on the economy, public finances, savings and the Social Insurance Fund (TKA), as well as on employees and the labour market.

As far as the national economy is concerned, implementation of the measure is expected to lead to an increase in the economically active population and, by extension, to the maintenance of high growth rates in the medium and long term. The adverse effects of the ageing of the population on growth will also be addressed, and there will be better utilisation of the labour force over 60, as it will be possible to make use of their accumulated experience for a longer period of time. It should be noted that the demographic dependency ratio of people aged 65 and over to people aged 16-64 is expected to reach 19.7% in 2010, 28.3% in 2020 and 33.5% in 2050.

As regards the labour market, the proposal’s main advantages, according to the government, entail the channelling into the private sector of a larger number of new entrants, directly leading to a reduction in dependence on foreign workers. Unemployment will not increase, since the new entrants temporarily not employed in the public services will be absorbed into the private sector.

However, the proposal predicts a possible fall in productivity in the public and broader public sector, due to the low performance of some workers over 60 years of age. Also, the fact that it will not be as easy for new labour market entrants, who may have better qualifications and skills, to seek jobs in the public and broader public sector is seen as another disadvantage.

According to the Ministry of Finance, implementation of the measure will lead to an increase in savings, since people over 60 have fewer consumer needs. Increased savings in turn will reduce the economy’s dependence on external financing.

With regard to public finances, the proposal’s claimed basic advantages are the following:

  • it will help achieve the national EU convergence programme’s fiscal objectives, since the lump-sum gratuity will not be paid to employees for a period equal to the increase in the mandatory retirement age. It will also help achieve the government’s strategic goals of adopting the euro and entering the euro zone;
  • it will increase income from taxation, because highly paid employees will remain in their job;
  • it will immediately save an amount equal to 3.1% of the pay of people who have completed 400 months of service and are still working, since such employees will contribute 6.3% of their pay to the TKA; and
  • the government’s contributions as employer will go to the Social Cohesion Fund for a period equal to the increase in the retirement age.

However, disadvantages are seen to be, on the one hand, the fact that the government as employer will pay high wages instead of pensions for a period of up to three years, and on the other that the government as employer will pay either higher pensions or a higher lump sum to employees retiring at the new mandatory retirement age.

The impact on TKA is expected to be a particularly positive one, since the Fund will continue to receive the contributions of employees and of the government as employer and as the state for a period equal to the increase in the retirement age. The benefit from the additional contributions may help improve TKA’s viability and help avoid more severe measures for all workers. For people retiring at 63 years of age, unemployment benefits will not be paid.

Finally, the main perceived benefits for employees may be summed up as follows:

  • older people will stay in the labour market longer, with all the advantages that entails;
  • in the near future, employees in the public and broader public sector will obtain the benefits now available from occupational development schemes.
  • employees’ overall financial situations will improve immediately, since they will continue to receive wages rather than pensions;
  • there will be more opportunity for advancement to higher positions/income brackets, thus increasing pension benefits;
  • some employees will be able to complete the years of service required for full pensions, whereas this would not be possible if they retired at 60; and
  • there will be an additional benefit since supplementary pensions will be paid by TKA.

Commentary

Even though the dialogue on the higher retirement age in the public and broader public sector is ongoing, it is obvious that the government intends to go forward with immediate implementation of the measure by 1 July 2005; however, it will seek the greatest possible consensus among the trade union organisations. To this end, the content of the proposal as presented above differs, albeit marginally, from the Ministry’s initial proposal, as a result of criticism voiced by the trade union movement. The most important change is the lengthening of the transitional period and recognition of the right of people in service on 1 July 2005 to decide whether they will remain on the job beyond the age of 60. This development has satisfied PEO to some extent, although it continues to have strong reservations on whether the proposed measure is really a progressive proposal for the long term. Taking into account the positions of the other parties involved in the dialogue and the government’s commitments to the EU under the convergence programme, PEO will not oppose the introduction of the measure. Nevertheless it is obvious that the issue of raising the retirement age is dividing the trade union movement. The greatest opposition comes from the professional organisations of teachers in primary and secondary education, who are seeking to keep the teaching sector outside the scope of the measure, while making it clear that they are not bound by any agreement by the Democratic Labour Federation of Cyprus (DEOK), PASYDY, PEO or SEK. For its part, SEK remains adamant on its longstanding position (CY0409102N), citing universality of the measure as a necessary precondition. As far as PASYDY’s position is concerned, the Ministry’s proposal will be placed before its collective bodies and will then be referred to the congress, which will have the final say. (Eva Soumeli, INEK/PEO)

Page last updated: 23 June, 2005
About this document
  • ID: CY0506101F
  • Author: Eva Soumeli
  • Country: Cyprus
  • Language: EN
  • Publication date: 23-06-2005