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Greece and its creditors - Starting to list

2015-04-09 07:36:53

Pensions are at the heart of the continuing row over Greece s parlous finances

Apr 4th 2015 | From the print edition

ONCE again, Greece s new left-wing government has handed a list of reforms to

other euro-zone governments and the IMF in the hope of securing the next dollop

of the country s bail-out. The list was due to be reviewed by senior euro-zone

financial officials on April 1st, after The Economist had gone to press, but

the initial reaction was dismissive.

Some of the iciest comments concern pensions. Greek spending on them is the

highest in Europe as a share of GDP, an astonishing 17.5% in 2012. That

contrasts, for example, with expenditure worth 12.3% of GDP in Germany, Greece

s main creditor. It is double the share of GDP that goes to them in Slovakia,

one of Greece s fiercest critics.

Lavish spending on Greek pensions has been a source of acrimony with northern

creditor nations ever since Greece was first rescued, almost five years ago.

Germany had only recently pushed through a pension reform raising the

retirement age from 65 to 67 between 2012 and 2029. That made Germans

ill-disposed to dip into their pockets to help a country whose workers were

able to retire much earlier on generous pensions. Slovakia, a poorer nation

than Greece, pulled out of the first bail-out in the summer of 2010 in response

to public anger at the prospect of subsidising Mediterranean spendthrifts.

In fact, a series of reforms in Greece have restricted pension spending. A big

overhaul in 2010 slashed prospective promises that would have caused pension

expenditure to vault to 25% of GDP by 2050. The retirement age was raised to 67

for men and women from 2013. The replacement rate the value of the pension in

relation to prior earnings was reduced from 96% for average earners, the

second-highest in the OECD, a club mainly of rich countries, to 54% in 2012.

And pensions have been cut by eliminating two annual bonuses.

Payback time: Greece's financial dilemma, in graphics

But the reforms have not gone far enough. In particular it is still relatively

easy to retire early, and the link between contributions paid in and benefits

received is too weak; the system is not actuarially fair. Although the revised

reform list includes a pledge to reduce early retirement, Greece s creditors

will want to see hard evidence that this will be tough enough. The proportion

of 55-64-year-olds who work in Greece, just 36% in 2013, is unusually low; in

Germany the share was 63% (see chart). There is a lot of ground still to make

up.