Sophia Constantinidou works as a teacher in a private school in Athens. She also has a more lucrative job: remaining unmarried. The 52-year-old gets 400 euros ($496) a month from the Greek government, part of her late mother’s state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn’t tie the knot. “It’s not that I didn’t want to get married,” Constantinidou, whose mother died 20 years ago, said in an interview. “But after I turned 40, I realized I wouldn’t be getting married and that thankfully I had this.”
As the European Union, International Monetary Fund and bond investors scrutinize debt-ridden Greece, they need look no further than the pension system for a prime example of how the country is living beyond its means. Greek pensioners on average live on 96 percent of the salary they had when they worked, more than twice the proportion of earnings as Germans, according to the Organization for Economic Cooperation and Development.
Greece “is a classic case of entitlements granted by short-sighted governments that didn’t bother to secure financing sources,” said Miranda Xafa, a former director at the IMF and now a senior investment strategist at Geneva-based IJPartners. “The political benefit of pension entitlements granted is immediate, but the cost will be incurred later.”
Arduous Jobs
The OECD as long as three years ago described Greece’s state pension system as a “fiscal time bomb.”
Led by Prime Minister George Papandreou, lawmakers will begin passing legislation this month to overhaul the system, which the EU and IMF say contributed to the country’s debt crisis. Under terms of last month’s 110 billion-euro ($123 billion) bailout agreement, Greece will increase the retirement age to 65 from as early as 58, curtail early retirement and calculate payments over a longer period of employment.
The aim is to bring uniformity to a system riddled with exemptions granted over decades by governments yielding to pressure from trade unions and other groups. The bill will be the first enacted by Papandreou’s government since the May 6 package that pledged 30 billion euros of wage and pension cuts and tax increases over the next three years.
There’s one pensioner in Greece for every 1.7 workers, compared with one for every four in 1950, according to a government study published on May 12. There are 637 occupations the Greek state deems to be arduous in nature and qualify to stop work earlier. They include hairdressers, car washers, steam-bath attendants and radio technicians.
‘Paramount Reform’
Constantinidou isn’t included because she’s paid by the hour and doesn’t have enough of a private pension to live on when she’s older. She’s reliant upon the stipend she inherited from her mother, who worked at a state hospital.
Should the country keep its generous benefits, Greek pension spending will rise to 24 percent of gross domestic product in 2060, double the proportion of 2007, the European Commission estimated last year.
Pensions are “going to be the paramount reform in terms of medium-term budgetary perspectives,” EU Monetary and Monetary Commissioner Olli Rehn said on June 11.
With unions promising a “storm” of protests, the government is trying to push through the bill before the September deadline set by the EU and IMF and ahead of Greek municipal elections, tentatively scheduled for October.
Extending Work
Dina Karahali, 47, is waiting to see the final form of the bill to know whether she will be penalized by the new system or manage to escape with the early pension she expected when she began working as a childcare worker 25 years ago.
With a 16-year-old son, Karahali said she could take early retirement now on less than a full payment. What she fears is the new law will make her work an extra 13 years.
“It’s difficult,” she said by telephone in Athens. “Do I get a pension now and not receive any money until I am 50? Or, will I have to work till I am 60?”
About 5,000 state workers, mostly women, have submitted applications for early retirement this year, said Despina Spanou, an official at the civil servants’ labor union, ADEDY. That’s almost double the number filed at the same time last year, she said.
Concerns about Greece’s long-term pension finances have long played a part in the wider spread in Greek bonds over those of Germany or Italy, the OECD said in its July 2009 report.
That was before the 58-year-old Papandreou revealed the country’s budget shortfall was more than twice the previous government’s estimate, stoking concern about Greece’s ability to avert default and prompting the bailout package.
Bonds Collapse
Greek 10-year government bond yields were about 1.4 percentage points, or 140 basis points, higher than benchmark German bunds at the beginning of October as Papandreou came to power. The so-called yield spread widened to as much as 965 points on May 7 and yesterday was at 665 points.
Generous Greek pensions played prominently in Germany, where public opinion has been largely opposed to the bailout.
Germany lifted the retirement age to 67 from 65 in 2007, affecting about half of the nation’s 82 million residents. While Greece has a statutory retirement age of 65, and 60 for women, exemptions and special rules can allow a full pension at 58.
Former European Central Bank Chief Economist Otmar Issing said in February that German taxpayers can hardly be expected to support Greek pensions. Bild Zeitung, Germany’s biggest-selling tabloid, ran a front-page headline in April asking: “Why do we have to pay Greece’s luxury pensions?”
Best Years
Greeks get a pension calculated on the last five years of their working life, which tend to be the highest-paid. German, Italian and Portuguese pensions are based on wages worked over a lifetime. Spain bases them on the best 15 years of work.
In the Greek civil service, the so-called replacement rate can be as much as 149 percent, according to a report by the European Commission in October. The rate is a measure of how effectively a pension system provides income during retirement.
The EU-IMF agreement states that Greece should move to a system basing earnings on the entire lifetime and introduce a price-based indexation system, used by most OECD countries. Such a system, according to the Paris-based OECD, would allow Greece’s biggest retirement fund to scale back spending by some 20 percent by 2050 to 2055, equal to about 1 percent of GDP.
Governments since the end of the military junta in 1974 have struggled to force through reforms the EU has long demanded to the pension system or opening up product and labor markets to make Greece more competitive.
‘Dramatic Worsening’
“The reasons for the dramatic worsening of the pension systems finances are demographic developments, the exhaustion of the abilities of the pay-as-you-go system and decisions of the political system of our country for the past 35 years,” Labor Minister Andreas Loverdos told the International Labor Organization in a June 14 speech.
Civil servants didn’t pay anything towards their pensions until 1992. Female civil servants with children under 18 can get early retirement. Unmarried daughters of state workers say the payment became a factor in staying single.
Unions argue that going after employers who don’t pay mandatory contributions to pension funds is preferable to cutting benefits and raising the retirement age.
Non-payment of contributions to state pension funds, prevalent among the self-employed, is estimated by the OECD at between 20 percent and 30 percent of revenue collected.
Constantinidou is one such worker. She never managed to secure a permanent post and doesn’t get state benefits in her job supplementing the studies of high-school students at a central Athens college.
“I work in the private sector and would need to work till I’m 65 to get a pension but it’s not going to happen,” she said. “No-one is going to hire a 60- or 65-year-old woman. Thankfully I have this.”
--With assistance from Matthew Brown in London, Kati Pohjanpalo in Helsinki and Paul Tugwell in Athens. Editors: Rodney Jefferson, Tim Quinson
To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net.
18.06.2010
