Friday, 28 March 2008

The sins of the fathers

The opposition has thrown everything it can, including the kitchen sink, at New Democracy's social security reform. Nationwide strikes were followed by a demand to submit the law to a referendum. The government has rightly refused this, saying that if all major reforms were submitted to this treatment none of them would pass. The former head of the Left Coalition, Alekos Alavanos, asked the president to send the legislation back to parliament. Socialist opposition leader George Papandreou won an eleventh-hour delay by bringing forward a motion of no confidence in the government.

Despite the hysteria, the social security bill offers some important new benefits to women. Mothers would be credited with a year's worth of social security contributions for each of their first three children - a 50 percent rise on existing credits. Each child means retirement a year earlier. Those insured with the Social Security Foundation (IKA) would also be entitled to eight months off work after childbirth rather than the current two. Their existing right to another two months off work before childbirth and a 25 percent reduction in working hours for 18 months upon return would not be jeopardised.

New Democracy has rolled back the generosity of the state towards women at the end of their careers. Early retirement with full pension would move back from age 50 to 55, with a one percent annual penalty for pensions claimed in the intervening period. The government argues that women need time off work when they are having their children; but they have given mothers fewer years' worth of free social security credits at childbirth than they have taken away in their fifties (not to mention that they have made life harder for their employers).

Where parliamentary clamour is less justified is in New Democracy's efforts to curb early retirement. Current law allows anyone with 35 years' worth of social security contributions to retire as early as 58. Beginning in 2013, the bill would gradually raise that to 60.

"A chap has done his 35 years. Why can't he get out of work and claim his pension?" asked the Left Coalition's Panayotis Lafazanis. "This is a qualitative change to the system that opens up extremely dangerous paths in the future. " One is left to imagine what those dangers might be; perhaps the possibility of working all the way from graduation to 65 - a period of 43 years for those who get into university and graduate on first try.

Employment Minister Fani Palli-Petralia also attempted to tie 37-year careers to a minimum retirement age of 58. Here the opposition was so great that in mid-parliamentary session on March 20 she rescinded the relevant paragraph to cheers from her own side.

People employed in hazardous and unsanitary professions did not escape unscathed. Today they may retire as early as 55. Beginning in 2013, the bill would raise that to 57. But hazardous profession status is so fraught with abuse that the government has left it to a future bill to evaluate which of 500-odd professions should remain in it.

Another storm swirled around the government's stipulation that auxiliary pensions, which bolster primary ones, cannot be more than 20 percent of the primary. That is a large cut, given that they sometimes come close to matching primary pensions; and the fact that the measure affects people entering the workforce before 1993 bodes ill for everyone else.

Two of the concerns are more well-founded. One is that the consolidation of 133 funds into 13 is a first step towards a harmonisation of benefits and perhaps even a standard national pension. The current bill allows many funds sucked into IKA to retain autonomy, but it is easy to see a government breaking that autonomy a few years hence. Not only does it make no sense to have different benefit schemes within the same fund; the state holds many funds in its thrall because it owes them money. The people at greatest risk from this delayed harmonisation - such as the employees of the Public Power Corporation (PPC) or the Hellenic Railways Organisation (OSE) - are a labour aristocracy created by Pasok in the state sector during the 1980s. Society foots the bill for their benefits and they are right to imagine some sort of hard landing.

The other well-founded concern is that the autonomy of the Bank of Greece may be affected by its consolidation into IKA. The bill calls on the bank to contribute 345 million euros to IKA over 15 years as its share of the burden. The European Central Bank's president, Jean-Claude Trichet, expresses concern that these payments "may undermine the Bank of Greece's financial independence". That, in turn, says Trichet, could undermine the bank's institutional independence. Trichet calls on the government to audit the bank's pension fund in order to determine whether such payouts are required, or whether they would end up financing IKA. (Such audits are foreseen by the bill for each fund being consolidated into IKA.)

The bill has tried to offer a positive form of savings as well. It will encourage people to extend their working careers by three years with a ten percent bonus; but there is no disguising the ugly end of early retirement.

The real problem with the bill is not that it does the wrong things. It is that it does not go far enough. As reported by this newspaper, 15.8 percent of tax revenues this year will subsidise social security organisations, up from 8.7 percent a decade ago. That is forecast to rise to a quarter of the budget by mid-century. This bill is forecast - as reliably as any such forecast can be - to save about six billion euros a year by 2030. But that is peanuts compared to the 153.5 billion euros our analysis has forecast the government will spend topping up pension funds that year with today's growth, inflation and social spending trends (see our February 22 issue). The bill simply does not overcome the problem that with Greece's declining birthrate, each pensioner is backed up by 1.75 workers.

Another problem is the underperformance of pension funds we highlight today. An analysis of the 25 pension funds with the largest real-estate, cash and securities assets reveals that only a handful outperform inflation (see Sophisters, economists and calculators column on page 18).

Stuck between mismanaged funds and limited savings, the government has no option but to pull more money out of the budget, which is exactly what the unions are asking it to do. Last month Prime Minister Costas Karamanlis announced the formation of a generational solidarity fund that will subsidise the social security system after 2019. Until that time the fund will quietly absorb four percent of VAT receipts and a tenth of the tax-derived receipts that would go to a few solvent funds. But even this solidarity fund will probably amount to no more than about 17.6 billion euros in 2019, and since the budget is not balanced, this money will have come at the expense of paying down the national debt. In other words, we will borrow with interest to retire people whose descendants will foot the bill.

This bill is self-evidently not the final word on social security reform; it is a step towards deeper cuts which may or may not balance the system. As former finance minister Stephanos Manos wrote in a newspaper column last month, "If every pensioner received an average of 10,000 euros a year [much more than the standard IKA pension] the system would be solvent. So where is the money going?"

The prime minister offered the answer in parliament on February 15: "Some of our fellow citizens are retired on the basis of more years than they actually worked, and others are struggling to secure a minimum pension. Some have pensions larger than their salary, and others receive minuscule amounts."

This madness is the result of political favouritism by two decades of Pasok governments, which put a quarter of retirees in some funds on disability pensions. Many more have spurious army veteran pensions; and then there is the scandalous generosity of the bloated public sector. Given the abuse of the public trust, it is difficult to see how this country will sustain meaningful pensions in a pay-as-you go system two decades hence. It is far more likely that the pensions retirees are attempting to live off today will in future be seen as supplements to individual retirement accounts or employer-based schemes. Don't expect the social security burden on households to lighten and create income for a private scheme. That will be an added, but inevitable, burden. That is precisely the future Pasok deputies decried in parliament, which is the greatest hypocrisy imaginable.

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