Largesse in Greece's pension system is one of the main sticking points in the country's negotiations with its creditors that led to the government defaulting on its sovereign debt this week.
The stoush over pensions looms large in the lead-up to the snap referendum on July 5. To strike a deal the Greeks will have to agree to work longer, because the perceived largesse of their retirement benefits is a significant source of tension with other Europeans who are being asked to help fund their bailout.
"Ordinary Germans are incensed that they have been asked to take a haircut on debts to Greece while they are being forced to work till 69 years of age and many Greeks are still retiring at 58 years old. So the troika's demands for Greece to tighten the rules around its retirement age has become a real flashpoint in the negotiations," Grattan Institute economist Jim Minifie said.
Germans are incensed they are being forced to work until 69 while many Greeks are still retiring at 58. Photo: Milos Bicanski
Greece spends a lot on pensions. Almost 18 per cent of its gross domestic product goes on pensions, the highest proportion of any country in Europe.
That is despite Greece having already instituted a raft of reforms over the past five years to reign in the costs, including lowering payments to the point that 45 per cent of pensioners live below the poverty official poverty line now.
Now its creditor troika – the European Commission, the European Central Bank and the International Monetary Fund – wants Greece to crack down on its citizens retiring early.
Unsustainable pension system
A low retirement age is one of the key historical reasons cited for creating an unsustainable pension system in Greece.
Since 2007 Greece has lifted its official retirement age from 58 to 67, angering workers' groups, who in 2007 were lobbying for the retirement age to be lowered.
But the nation's creditors are furious that too many Greeks are exploiting a carve-out provision, intended only for people in dangerous industries or in special circumstances, to retire early.
More than half a million Greeks have retired early in the past five years, with the problem exacerbated by older workers struggling to hang on to their jobs or to find a new one in a dire economy.
This has led to older Greeks seeking the exemption because they cannot find new work. That in turn has added strain on the government.
The Greek pension system is also criticised for having too many funds – there are more than 100 – creating inefficiencies.
Terrible returns
These funds invested in domestic government bonds, which have suffered terrible returns because the crisis trashed Greece's credit worthiness.
That has meant the biggest problem facing the Greek pension system is weak funding ratios, which in turn reflects the poor balance sheet of the country as a whole.
Mr Minifie said the crisis in the Greek pension system served as an extreme example of why countries like Australia should act in good times to tackle the sorts of difficult structural changes needed to ensure a sustainable retirement incomes system.
In 2014 the Abbott government lifted Australia's official retirement age to 70, effective from 2035.
The troika's demands for Greek pension reform:
- Broadly bring forward the application of the new retirement age of 67 years.
- Immediately enforce new penalties and disincentives to discourage people from retiring early.
- Higher annual penalties for early retirees withdrawing from the social insurance fund.
- Make all supplementary pension funds self-financed only.
- Phase out a "solidarity grant" (EKAS) for all pensioners by December 2019.
- A freeze on nominal guaranteed monthly contributions until 2021.
- Increase pensioner healthcare contributions from 4 per cent to 6 per cent.
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