The shallows of pensions

Posted by Antonis D. Papagiannidis 05/11/2018 3 Comment(s) Economia Blog,

Just as Greece – or, rather, its economy and its decision-taking political apparatus – was starting to approach the almost-forgotten open seas of independent policy-making, it hit the shallows. The shallows were lurking there all along, but now that the low tide uncovered them it they look daunting indeed.


It is all about pensions, the pension system; it is about pensioners who in Greece tend to be quite younger than abroad; it involves also a large proportion of the electorate (also, an even larger proportion of those citizens who take the pains to go to the voting urn). In an earlier stage of negotiations between Greece and its European creditors, a deal was made whereby – at the instigation of the IMF, who were reticent in accepting that the beleaguered Greek economy could deliver credible fiscal balance at the end of its Adjustment Programmes – the overall burden of pension financing would be cut by 1% of GDP by 1/1/2019. Now that this deadline is quite close, but also Greek elections loom large at the next turn of the road, the Greek Government is quite reticent to do the promised (and legislated in advance) pension-slashing. This in no way is a one-party position: both the major party of Opposition and minor ones are also pushing for a standstill in pension cuts.


The main argument put forward is that fiscal equilibrium has been achieved; in fact, draconian fiscal policies seem to have overperformed, so that there is room not only for pension cuts to be avoided, but also for further socially-sensitive programmes to be financed.


Still, Greece’s creditors are once more waving the motto “pacta sunt servanda”, while the IMF is retrenching behind the argument that pension cuts are mainly a matter of structural importance and not just of fiscal balance. According to this last argument, the high-unemployment - and low-wages-environment that has been the result of three successive Adjustment Programmes, along with a rapidly aging population, has undermined the structural long-term sustainability of the Greek pension system. Given that this system, even after a dozen successive cuts, remains relatively generous by EU terms, a further pruning of existing pension levels is unavoidable – this how the argument goes. (New pensions – i.e. those after mid-2016 – have been already severely cut).


This was causing already concern both in Athens and Brussels and beyond. Now, a new conundrum came to the fore, with Court decisions considering that earlier cuts are unconstitutional. If the new pension cuts are of an order of magnitude of 1% of GDP, the sums to be paid back to pensioners under such new Court precedent may well be of some 3-4,5% of GDP. There is no easy way out for the Greek Government other than procrastination  - or, to put it differently, of some more kicking the can down the road. But is “Europe” ready for such a new version of Greek problems?


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