Government issues controversial social security proposals

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In April 2001, the Greek government announced to the social partners and the public a set of proposals on social security reform, focusing on changes in pensions. The plan involves reductions in pension benefits and less advantageous retirement terms, and has caused conflict with trade unions.

According to the government, the social security system in Greece currently runs at a deficit. This burdens the state budget with costs of GRD 1,300 billion annually, or 3.3% of GDP, not including the costs of civil servants' pensions. This annual deficit is expected to increase gradually, reaching 11.1% of GDP in 2030, and rising even higher thereafter. To give an idea of the significance of these pressures, the deficit in 2030 would be the equivalent of GRD 4,500 billion in 2000 (three times the current figure), a sum representing the total budget allocation for health, welfare, education, defence and part of pensions in 2001. These forecasts may develop in a more or less favourable direction, depending (primarily) on demographic developments.

Over the past decade, the prospect of a diminished inflow of funds from the EU Structural Funds and the need to replace these investments with national funds, the limited ability to draw on other funds which in the past reinforced the national budget, and the need to defray the cost of multiple social, development or other policies, have made the reform of the social security system a necessity. The earlier the changes are made, the less uncertainty there will be and the less intense will be the changes affecting a significant proportion of insured people a few years from now, states the government.

Approach and objectives of reform

Against this background, on 17 April 2001, the Ministry of Labour and Social Security announced the government's proposals for social security reform, focusing on the pensions system. According to the report containing these proposals, the main factors affecting the dynamics of the Greek social security system are:

  • the ageing of the population and the ever-decreasing proportion of the population of working age in relation to the population over 65;
  • the early retirement scheme, under which currently a much greater number of people retire than under the general rules;
  • the method by which pension entitlements increase (currently government decision, rather than indexation to, for instance, wage growth);
  • the level of contributions (in relation to benefits); and
  • the level of pension benefits, in terms of their real purchasing power.

Other factors, such as unemployment or the overall level of employment, have only a slight influence on the dynamics of the system, especially if the time horizon is long term rather than short term.

On the basis of these factors, the measures that the government believes can potentially be used to address the deficits - though each with very different impacts - are as follows:

  • increasing contributions;
  • raising the normal retirement age from 65 to 67;
  • limiting early retirement opportunities for those aged under 65;
  • examining the level of current pension benefits, in terms of their purchasing power;
  • rethinking the manner of calculating pensions - ie should this be based on the employee's final salary (as is the case in the public sector at present), average salary over the last five years of employment (as in the private sector at present) or average salary over the whole period of insurance;
  • examining the rate at which pensions are readjusted;
  • redistributing between schemes the "social resources" which feed the various pension schemes (these are sources of income - such as tobacco taxation receipts - used to finance pensions alongside the normal employer, employee and state contributions); and
  • increasing taxation.

In this context, the government believes that reform of the social security system should have the following objectives:

  • guaranteeing the viability of the system;
  • creating the conditions for social justice;
  • improving organisational structure and operation;
  • being economically feasible; and
  • taking into account the relationship between social security, development and employment.

Government proposals

According to the Ministry of Labour and Social Security, its proposals will make no changes to the general retirement ages, social security contributions, state funding, public nature and rationale of the social security system, or conditions for retirement with regard to entitlement to minimum pensions. Effectively, the following four changes have been proposed.

  • The statutory age for entitlement to a pension is currently 65 years for all those have been employed and covered by social security for the first time since 1 January 1993. For those employed and covered by social security before this date, the official retirement age is 65 for men and 60 for women, though their real age of retirement is 61.5 years for men and 58.5 years for women. The government proposes that the current retirement ages must, after a transitional period of over five years, also come into effect for those insured people to whom they do not at present apply, with any necessary exceptions.
  • At present, the "replacement ratio" of pensions for those employed for the first time before 1993 is 80% of their previous purchasing power. However, it is only 60% for those employed for the first time since 1993. The government now proposes that the 60% replacement ratio be applied to all pensioners.
  • The minimum pension is currently GRD 124,300 per month for those who have performed 15 years of paid work covered by social security, and are aged 65 or above. The government proposes a gradual reduction of the minimum pension to GRD 67,875 per month starting from 2007, to be partially offset in some cases by an additional benefit like the current Benefit of Social Solidarity for Pensioners (EKAS) - for example, where the pensioner has no other means and otherwise would face extreme poverty.
  • Changes to the structure of the social insurance system.

The proposed regulations are to be applied to:

  • all social insurance bodies;
  • all insured people, without discrimination between those insured before 31 December 1992 and after 1 January 1993; and
  • men and women, without discrimination on grounds of sex.

For the basic and supplementary pensions (the Greek state pensions system is currently based on a basic pension, topped up with a supplementary pension), the government could opt for one of the following scenarios:

  • preservation of the current separate branches of basic and supplementary pensions insurance as they have operated to date, with each paying different levels of benefit and levying different levels of contribution;
  • a unification of the two separate branches, through granting a pension whose total amount of benefit and contributions would be the sum of the benefits and contributions for the current basic and supplementary schemes;
  • transformation of the supplementary pensions scheme into "occupational pensions," with the agreement of employers and workers; and
  • transformation of part of the "pay-as-you-go" basis of the supplementary pensions scheme into a capitalisation-based system.

With regard to retirement age, 65 is proposed as the age for entitlement to basic and supplementary pensions for all categories of insured people (including those currently entitled to retire earlier - eg women in employment before 1993). The right to receive a minimum pension would be granted after 4,500 days of work or 15 years of insurance. There would be a right to receive a reduced pension (at the age of 60), as well as a right to receive a pension regardless of age after 40 years of insurance or 12,000 days worked. For special categories of insured workers (eg those in arduous and unhealthy occupations), early retirement would continue to apply, as provided for by existing legislation; however the conditions applying to the relevant occupations would be re-examined. It is proposed to introduce a bonus contribution of two extra years of insurance per child for women with children, regardless of whether they were insured at the time the children were born. The introduction of the new rules would require a transitional period during which retirement ages would be increased by six months per year beginning on 1 January 2007.

As regards calculation of pension benefits, a single method is foreseen, whereby, with 35 years of insurance or 10,500 days worked, the rate of replacement of previous earnings would be 60% for basic pensions and 20% for supplementary pensions. Pensions would be based on average pay in the best 10 of the last 15 years worked, indexed in line with the percentage increase of wages in the economy.

Concerning pension contributions, it is proposed to preserve tripartite (employee, employer and state) financing for people insured after 1 January 1993, as well as the following uniform contributions:

  • basic pension for employees - workers 6.67% of pay, employers 13.3% and state 10%;
  • basic pension for the self-employed - insured person 20% and state 10%;
  • supplementary pensions for employees - workers 3% and employers 3%; and
  • supplementary pensions for the self-employed - insured person 6%.

With regard to minimum pensions, it is proposed to leave the basic Agricultural Insurance Organisation (OGA) pension as it stands and retain it as a social benefit also for uninsured people and those without means of support. Gradual reduction of the current minimum pension is proposed for employees insured after 1 January 1993, though subsidised up to the current minimum where pensioners meet low income criteria comparable to those currently applied to the EKAS scheme.

Finally, with regard to the structure of the system, it is proposed to create eight basic pension insurance funds - the Social Insurance Foundation (IKA), the Social Security Organisation for the Self-employed (OAEE) and funds covering public employees, agricultural workers, employees of public corporations, banks, scientists and journalists. The existing supplementary funds would be abolished, with those insured under these schemes brought under the supplementary insurance branches of their basic insurance funds. The social security system in Greece is currently multi-dimensional and fragmented both horizontally (ie between different occupational groups) and vertically (ie within the same occupational group). A plethora of independent funds have been created, along with separate branches inside basic pensions insurance bodies or special funds aimed at providing supplementary pensions, lump-sum payments, medical care, protection against the threat of unemployment etc. The multiplicity of carriers making up the Greek social security system, combined with the different conditions for retirement and the different benefits, are seen to exert a negative influence on the labour market and impede worker mobility, especially nowadays when the transition to a "knowledge-based society" requires greater flexibility in the labour market.

In the government's view, these proposals will ensure the viability of the social security system for 20-25 years. Quantitatively, this means a savings of about GRD 21,000 billion in the deficit, which would otherwise correspond to GRD 120,000 billion. It would also mean fewer carriers and a better organisation of the system. In addition, the abovementioned proposals would serve the objectives of reform.

Commentary

In its new proposals on social security, the government appears to be moving away from options that would secure funds for the social security system without increasing the "social deficit". In other words, it is opting for its preferred method of collecting funds to offset the financial deficit, and attempting to secure such funds in ways (reducing pension benefits and worsening the terms and conditions of retirement) that increase the social deficit and decrease the conditions for social cohesion and convergence. As a result of this logic, the government report containing its proposals on social insurance has created a strong climate of strife between the government and the trade unions. The trade union movement in both the private and the public sectors has rejected the government measures as a whole, and is not participating in the two-month "express" dialogue proposed by the government, and is organising a series of mobilisations, whose short-term objective is the withdrawal of the proposed measures and the launch of meaningful dialogue. (Evangelia Soumeli, INE/GSEE-ADEDY)

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