POLICY ANALYSIS RESEARCH UNIT

Department of International and European Economic Studies
Athens University of Economics and Business



Newsletter 9/2016

Equity and fairness in Greek pensions
By Chrysa Leventi & Manos Matsaganis

Pensions are once again at the top of the policy debate in Greece. The latest bailout agreement (signed 19 August 2015) committed the government to "further reforms to strengthen long-term sustainability targeting savings of around ¼% of GDP in 2015 and around 1% of GDP by 2016". In response to that, the pension reform plan released by government (on 4 January 2016) guarantees current benefits paid to existing pensioners, shifting the burden of adjustment to workers retiring from 2016 onwards. The case for sheltering current retirees, partly espoused by the Constitutional Court, rests on two assumptions: (a) that pension benefits have been paid for via social insurance contributions by workers and their employers; and (b) that the cuts of 2010-2013 have reduced the return on contributions to such an extent that current retirees have now become net contributors to the pension system. Our research examines both these assumptions by analysing a 13.3% sample of all workers retiring in 2008 with a main pension from IKA (the social insurance agency for private sector employees), amounting to 4,599 observations. Once the contribution history of these workers has been reconstructed (resorting, where necessary, to reasonable assumptions), we compute an actuarially fair pension benefit on the basis of a 2% annual notional real return on contributions, taking into account their life expectancy at retirement. We finally compare our actuarially fair benefit with the actual pension received by each worker in 2008. We find that 98.5% of current pensioners still receive a net transfer over and above the actuarially fair level (down from 99.5% before the recent cuts). We estimate the average net transfer at 35% of the actual pension (relative to 49% prior to the cuts), amounting on a lifetime basis to approx. €63,600 (compared to €123,900 before the 2010-2013 cuts). We calculate that net transfers are larger than average in absolute terms for those receiving higher pension benefits, and for those retiring at an earlier age. We conclude that the recent cuts have reduced (but not eliminated) the absolute size of net transfers received by the current generation of retirees, while softening (but not neutralising) the regressive nature of their distributional impact. On the whole, our research shows that dominant assumptions about current pensions having being fully paid via contributions are generally false. In fact, the size and distribution of net transfers remain large and regressive, violating both inter- and intra-generational notions of equity (relative to income) and fairness (relative to contributions paid).

The full text of the Newsletter is available here (in Greek).