Journal Issue

Greece: Selected Issues

International Monetary Fund
Published Date:
January 2006
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II. Greece: Issues in Pension Reform1

A. Introduction

1. As has been known for several years, as their populations age virtually all advanced economies will face increasingly severe fiscal pressures stemming from rising costs of so-called first-pillar pensions and of health care. According to the most recent figures available (the 2001 EPC study), Greece is projected to experience by far the largest increase in these costs between now and 2050 of any EU-15 country (Figure 1). This fact, and an already very high level of public debt in relation to GDP highlight the importance of pension reform in Greece.

Figure 1.Pension Expenditure

(in percent of GDP)

Source: EPC/ECFIN/655/01, and European Commission.

2. In brief, the Greek pension system relies almost exclusively on government-backed—that is, first pillar—pensions, which offer comprehensive coverage, are largely unfunded, and are provided by a very large number of self-governed social insurance funds. While these funds have considerable autonomy (in terms of investing funds, for example), the fact that they are backed by the government implies that shortfalls will, one way or another, be reflected in the overall general government fiscal position.

3. It is this aggregate level, as distinct from the actuarial prospects of the individual funds, that is appropriate for analysis of the sustainability of the pension system.2 A key concept of the analysis is the “pension balance”: social insurance contributions (plus possibly revenue from funds’ assets) less benefits. Other tax revenue or payments by central government to the pension system—earmarked taxes, contribution subsidies for certain employees, legally mandated general contributions to some pension funds, or ad hoc transfers to cover the cash flow deficits of funds—are not pension revenue, but government transfers.

4. The Greek pension system already has a significant deficit, which is projected to rise sharply in the years ahead. Assuming pension costs evolve according to the 2001 EPC study, overall deficits evolve according to the staff baseline projection until 2010, and a constant non-pension primary deficit (at the 2010 level) thereafter, the combination of increasing pension deficits and interest payments ensures the debt-GDP ratio will explode (Figure 2). If instead the staff alternative scenario of budget balance by 2010 is assumed (but the other assumptions are maintained), the rise in the debt-GDP ratio would be significantly slowed, but would nevertheless still explode eventually (Figure 3).

Figure 2.Long-run Fiscal Dynamics

(in percent of GDP)

Source: IMF staff estimates and projections.

Figure 3.Fiscal Sensitivity

(in percent of GDP)

Source: IMF staff estimates and projections.

5. In light of these observations, this chapter surveys the current state of the Greek pension system, presents our understanding of its financial state, analyzed specific institutional features that contribute to its unusually high projected rise in costs, discusses the impact of the system’s fragmentation, and considers further reforms based on the experiences of other European countries.

B. An Overview of the Greek Pension System

6. The system is very fragmented, reflecting its history of evolution from a piecemeal system of occupational schemes. Hence, membership and insurance rules, which are based on the sector of employment, vary substantially. Despite consolidation in the 1990s, there are still 173 social security funds (Table 1).3 Of these, 24 are primary funds that provide the main pension, and 124 are supplementary, lump sum, and provident funds. In addition to pensions, most primary funds also provide health cover, or provide it through another fund. Some funds provide additional benefits, like family benefits.

Table 1.Greece: Structure of the Social Insurance Fund system 2004, by supervising agency
I. Ministry of Labor and Social InsuranceMain insurance

Supplementary insurance

Sickness funds

Lump sum benefit funds

Other benefits (e.g., unemployment, housing)




II. Ministry of DefenseSupplementary insurance

Lump sum benefits

III. Ministry of Economy and FinanceSupplementary insurance1
IV. Ministry of MarineMain insurance

Supplementary insurance


Lump sum benefits



V. Ministry of AgricultureInsurance of agricultural production1
VI. Hellenic ParliamentLump sum benefits1
VII. Insurance AgenciesSickness benefits for employees of public water utility1
VIII. Mutual Aid SocietiesProvident funds54
IX. Occupational fundsFully funded provident funds3
Total funds173
of which
Main insurance24
Supplementary insurance39
Lump sum benfits31
Mutual aid provident funds54
Other benefits4
Fundes occupational funds3
Source: Ministry of Labor and Social Insurance, Social Budget 2004.
Source: Ministry of Labor and Social Insurance, Social Budget 2004.

7. The major private-sector funds are: IKA, which covers most dependent employees; OAEE, for the self-employed (it has three constituent funds, TEBE, TSA, and TAE); and OGA, for farmers, the rural population, and the otherwise uninsured. IKA provides both primary pension through IKA-ETAM, and supplementary pensions, through IKA-ETEAM, but not all those insured in IKA-ETAM are also insured in IKA-ETEAM. OAEE and OGA do not have supplementary insurance funds.

8. The primary pension funds usually provide a replacement rate of 70 percent. Insurance in supplementary pension funds was made mandatory for dependent employees in 1983, with a customary replacement rate of 20 percent. Thus, the total replacement rate is typically 90 percent. In addition, provident funds can provide lump sum payments upon retirement. Special primary and supplementary funds—mainly for various professional groups (e.g., lawyers, and doctors), public enterprises, and banks4—typically provide more generous benefits. The standard retirement age is 65 years, although some funds with earlier ages are still in the process of moving to this standard.

9. The standard contribution rates for primary pension are 6.67 percent for the employee, 13.33 percent for the employer, and (for labor market entrants after 1992) 10 percent by the government. OGA receives 7 percent from farmers, and 14 percent from the government. For supplementary pensions, the standard rates are 3 percent for the employee and 3 percent for the employer. Lump-sum benefit funds are financed solely by employees. Higher contributions apply to some funds, and for jobs in heavy and unhealthy occupations that allow for earlier and more generous retirement. Pension plans sponsored by companies (e.g., banks, public enterprises) often have much higher employer contributions to finance an existing deficit.

10. Many rules for pension contributions, and the calculation, vesting, and levels of benefits vary significantly across funds. For example, IKA benefits are calculated usually on the basis of the final 5 years of salary, OAEE pensions take into account the whole contribution history, and OGA pensions have up to three different components, as past changes to the scheme have resulted in different rules for groups of enrollees.

11. Rules also differ across beneficiaries within funds. The major break is between those who entered the labor force before December 31, 1992, and those who entered after, reflecting a set of reforms that were implemented in 1990-1992 in the wake of severe financial difficulties facing some funds at the time. Generally: rules were made more uniform across funds; contributions were increased or, for some schemes, introduced; insurance periods were lengthened; vesting rules were tightened; and the replacement rate was reduced (though this was never fully implemented and was later reversed). However, those who entered the labor force before 1992 were grandfathered in many respects.

12. A number of changes to pension rules were introduced in the last decade, mainly to make the system more comprehensive and less fragmented. Some of these changes are still in the transition phase. For OGA, an existing non-contributory basic pension was supplemented by a contributory supplementary pension scheme in 1987, and in 1997 a primary pension scheme introduced that will gradually replace the basic pension, and the abolished supplementary scheme. In 1996 a means tested supplementary pension (EKAS) was introduced for those with low benefits. Since the early 1990s, funds were merged or abolished, but mergers of some major primary funds (legislated in 1999 for the self-employed funds into OAEE, and in 2002 for some special funds with IKA) still need to be effected. In 2004, uniform rules for calculating pensions if contributions were made to multiple funds were established.

13. Apart from the funds described above, which apply to those working in the private sector, is the civil service system. For civil servants, primary pensions are paid from the budget. In addition, regular civil servants are insured by three supplementary funds. Benefit levels were until recently more generous than for IKA, but a phased reduction in benefits has been legislated: the calculation of benefits will be shifted from final salary to the average of the last 5 years, replacement rates will be lowered from 80 percent to 70 percent, and the retirement age for women will increase to 65.

14. Funded occupational pensions (second pillar schemes) are very small. They were introduced only in 2002, having previously been prohibited. As of October 2005, only three occupational pension schemes for small professional groups had been authorized. No specific legal provisions for individual pension savings (third pillar schemes) exist in Greece.

C. The Financial State of the Pension System

15. Because the pension system is so complex, reliable projections depend on detailed data. The most recent comprehensive study was carried out around 2000 on the basis of 1998 data, and formed the background for the Greek report on the costs of aging to the European Commission in 2001 (Government of Greece, 2001 a, b, c).5 As no detailed projections have been prepared since, this chapter is largely based on these estimates (Table 2).

Table 2.Greece: Projections of pension deficits under different assumptions (as of 2001)(As a percent of GDP)
2000202020302050Change Difference 2000 to 2050 in change 2/ rel. to central (1)
Central projections
1Pension deficit (total required government transfers)4.86.911.116.812.0
Memorandum item: Pension expenditures 1/12.615.720.224.812.2
Central assumptions
Adjustments of pensions: Inflation plus 1 percent
Average salary growth equal average real growth of 1.75 percent over projection period
Headline pension replacement rate: 80 percent for labor market entrants post 1992 (60 percent primary, 20 percent supplementary)
Average inflation: 2.5 percent
Sensitivity analysis
2Lower fertility, higher life expectancy4.84.311.420.415.63.6
3Higher labor force participation4.
4Real salary and growth 1.5 percent after 20304.87.61218.213.41.4
Combination scenarios
5Adverse: low fertility, high life expectancy, low labor force participation, low growth4.88.713.423.018.26.2
Optimistic: high fertility, lower life expectancy, high labor force participation, lower
6unemployment, high growth4.
Pension parameter analysis
7Pension indexation by inflation4.85.48.812.88.0-4.0
8Normal retirement age of 67 for everyone under age 50 in 20014.85.08.613.28.4-3.6
Faster transition to post-1992 rules: Pension rules for post-1992 labor market entrants also apply
9to pre-1992 labor market entrants for contribution years from 2001 onward4.86.610.316.211.4-0.6
Pensionable earnings calculated based on lifetime earnings history with earlier years’ earnings
10revalued at average earnings increases (instead of final earnings formulas)
Source: Government of Greece (2001a).

Expenditures net of contributions for civil service scheme.

For Greece, pension deficits increase throughout the projection period reaching the maximum in 2050.

Source: Government of Greece (2001a).

Expenditures net of contributions for civil service scheme.

For Greece, pension deficits increase throughout the projection period reaching the maximum in 2050.

16. The 2001 projections estimated that pension expenditures would increase by 12.2 percent of GDP from 12.6 percent of GDP in 2000 to 24.8 percent of GDP in 2050. As contributions were expected to remain nearly constant in relation to GDP, the pension deficit increased by a similar magnitude. The analysis shows that only very optimistic macroeconomic developments (scenario 6) or fairly drastic changes to the pension parameters (scenarios 8, and 10) would significantly reduce this very large pension deficit. Looking at the somewhat shorter run, the pension deficit was projected to rise by 2.1 percent of GDP (to 6.9 percent of GDP) by 2020.

17. In 2002 Greece reported updated pension projections to the EU that reduce the projected increase until 2050 by 2.2 percent of GDP. This revision was the result of five offsetting factors. Three factors reducing costs were a policy commitment to adjust pensions only in line with price inflation, rather than civil service wage increases (a saving of about 4 percent of GDP by 2050), a phased reduction of civil service primary pension replacement rate from 80 percent to 70 percent, and more benign population projections. Raising costs was a reversal of the decision to cut the primary pension replacement rate to 60 percent, and more generous calculations for minimum pensions in IKA.

18. More recent developments, however, indicate that the initial 2001 projections may prove more accurate, though the necessary detailed analysis remains to be done. Importantly, revised demographic projections prepared for the EU Working Group on Aging (European Commission, 2005a) indicate that the population and employment dynamics may be worse than previously assumed (Table 3). While the old age dependency ratio (ages 65 an up in relation to ages 15-65) is expected to increase by a similar magnitude, the effective economic dependency ratio (not employed, 15 years and older, relative to the employed 15 years and older) increases much more sharply (Figures 4). This outcome is due to revisions of assumptions along a number of dimensions: longer life expectancy, lower fertility rate, lower female labor market participation, and a smaller decline in unemployment.1

Table 3.Greece: Comparison of Assumptions for Pension Projections 2001 and 2005.
2001 EPC projections 1/2005 EPC projections 2/
20002050Change 2000 to 2050 3/20052050Change 2005 to 2050 3/
Dependency ratios 4/
Potential economic: Not in labor force 15+/ labor force 15+9810911.09312734.5
Effective economic: Not employed 15+/ employed 15+123121-2.010813526.8
Total: All not employed 0-90+/ employed 15-64163155-8.015017828.2
Old age: Population 65+/ population 15-64265428.2275932.0
Population projections (in millions)
Total population10.510.2-0.311.010.7-0.3
Age structure
of which 80+
Key factors determining population evolution
Life expectancy at birth, male76.981.04.176.581.14.6
Life expectancy at birth, female81.785.03.381.585.94.4
Fertility rate1.411.600.21.291.500.2
Migration per annum (thousand)22253.04335-8.0
Labor market assumptions
Employed 15-64 (percent of age group)
Labor participation rates
Males 15-5481.081.50.582.382.70.4
Males 55-6454.651.6-2.961.261.50.3
Males 65+9.67.9-
Females 15-5451.872.420.659.666.46.8
Females 55-6423.041.718.728.645.917.3
Females 65+3.73.2-
Unemployment ratio (in percent)11.05.5-
Basic macroeconomic assumptions (Annual avgerages; 2005 refers to initial 5 year period, 2050 refers to total projection period)
Labor productivity2.32.0-
Real GDP growth3.42.0-1.4
Potential GDP growth2.91.5-1.4
Sources: Economic Policy Committee, European Union, 2001 and 2005.

Budgetary challenges posed by ageing populations, EPC/ECFIN/655/01.

Draft - The 2005 EPC budgetary projection exercise (ECFIN/CEFCPE(2005)REP/54772 plus background paper, annexes and table).

Pension expenditures increase throughout the projection period and reach their peak in 2050. The size of the working age population (ages 15-64) reaches it peak about 2010, and peak employment is in about 2015.

Ratios are IMF calculations using the population projections for the baseline study, and macro assumptions as stated. in EPC/ECFIN/655/01. Resulting ratios may differ slightly from EPC report.

Sources: Economic Policy Committee, European Union, 2001 and 2005.

Budgetary challenges posed by ageing populations, EPC/ECFIN/655/01.

Draft - The 2005 EPC budgetary projection exercise (ECFIN/CEFCPE(2005)REP/54772 plus background paper, annexes and table).

Pension expenditures increase throughout the projection period and reach their peak in 2050. The size of the working age population (ages 15-64) reaches it peak about 2010, and peak employment is in about 2015.

Ratios are IMF calculations using the population projections for the baseline study, and macro assumptions as stated. in EPC/ECFIN/655/01. Resulting ratios may differ slightly from EPC report.

Figure 4.Greece: Population and Employment, 2000-50

(in thousands)

Source: 2005 Economic Policy Commission.

Recent Financial Developments in Social Security Funds

19. Recent data on pensions and the social security funds also indicate an upward drift in pension expenditures, in contrast to the 2001 projections which showed fairly flat spending until about 2010. It seems, however, that the gap between pension expenditures and contributions remained roughly constant, and hence the pension deficit remained approximately in line with the 2001 projections. Unfortunately, no data directly comparable to the 2001 pension study are easily available. The main sources of information are the Social Budget,2 the European System of Integrated Social Protection Statistics (ESSPROS), and the national accounts.

20. The Social Budget shows a clear upward trend in pension expenditures since 1998 (an increase of 2 percent of GDP), mainly driven by the main primary insurance, and the means tested program EKAS that provides supplementary pensions for low pensions (Table 4). At the same time, total social insurance contributions also increased, slightly increasing the gap between pension expenditures and total social insurance contributions (by about 0.3 percent of GDP).3

Table 4.Greece: Pension Expenditures, 1998-2004
(In millions of Euro)
Pension Funds 1/9,74710,55811,76012,91514,23315,63417,569
Primary 2/8,3468,94610,16611,23012,37713,56213,763
Supplementary 2/6787937197218028522,435
Civil Servants 1/2,2602,5392,7442,9853,1643,4413,640
EKAS 2/141202263323388463728
(As a percent of GDP)
Pension Funds 1/
Primary 2/
Supplementary 2/
Civil Servants 1/
Memorandum items:
Social security contributions to Funds under the Min. of Employment and Social Protection 4/
In Euro (million)8,7939,94410,66711,47012,50914,38116,325
As a percent GDP8.
Source: Social Budget 2004; Greek authorities; and IMF staff estimates.

Social Budget 2004.

Funds under the supervision of the Ministry of Employment and Social Protection.

In 2004 changes to IKA-ETEAM.

Data from Greek authorities.

Social Budget 2004. Includes all contributions, not just for pensions.

Source: Social Budget 2004; Greek authorities; and IMF staff estimates.

Social Budget 2004.

Funds under the supervision of the Ministry of Employment and Social Protection.

In 2004 changes to IKA-ETEAM.

Data from Greek authorities.

Social Budget 2004. Includes all contributions, not just for pensions.

21. The pension deficit in 2004 was about 5 percent of GDP, which needed to be funded from other government resources or asset-related incomes. In 2004, according to the Social Budget, funds under the supervision of the Ministry of Employment and Social Protection (MESP) showed a pension deficit of 2.8 percent of GDP (Table 5). A deficit of 3 percent of GDP in the primary funds was somewhat off-set by a small surplus in the supplementary funds. In addition, net funding for the civil service pension system (Euro 3,640 million pensions paid from the budget less primary pension contributions accruing to the budget of about Euro 1 billion), EKAS (Euro 728 million), and the Seamen’s funds (Euro 540 million) required funding of about 2.3 percent of GDP.4 This is in line with the 2001 EPC projections.5

Table 5.Greece: Revenue and Expenditures of Social Security Funds under the supervision of the Ministry of Employment and Social Protection, 2004 and 2003
TotalMain fundsSupplementary fundsHealth and OtherTotal
(In millions of Euro)
Actual social security contributions16,32512,6222,92278014,380
Pension contributions11,4708,6712,799
Other contributions (or mixed)4,8553,95112378014,380
From general government7,8127,597149666,940
Social contributions6,8136,607149576,035
Government participation99999009905
Other revenue4944393817521
Other benefits1,128687863551,000
Administrative, and other expenditures2,6291,9512494292,268
Pension balance-4,745-5,092364
(As a percent of GDP)
Revenues, of which15.412.62.0114.9
Actual social security contributions9.87.61.709.3
Other (or mixed)
From general government4.
Expenditures, of which14.612.61.6013.7
Pension balance-2.8-3.00.2
Source: Social Budget 2004.
Source: Social Budget 2004.

22. In contrast, ESSPROS data6 show some increase in pension expenditures since 1998 until 2001,7 but a slight reduction thereafter (Table 6). Overall pension expenditures increased from about 12 ½ percent of GDP to about 13 percent of GDP, but it should be noted that pension expenditures reported in ESSPROS tend to be quite a bit higher than those reported in the Social Budget. Total actual social security contributions are reported at 11 to 11½ percent of GDP, again indicating a fairly constant pension deficit. Overall government funding computed for all the general government social protection schemes declined slightly from 1998 to 2004, reducing the overall surplus of the social protection schemes.8 There has been no major change in the composition of pension expenditures or social security contributions except that lump sum benefits seem to decline.

Table 6.Greece: Social protection revenue and expenditures of general government (ESSPROS) 1/
As a percent of GDPAs a share of expenditures
20002001200220032004 2/20002001200220032004 2/20002001200220032004 2/
Total receipts31,05833,70735,66637,37225.225.625.124.2105.1102.4103.0101.7
Social contributions18,11020,09821,40722,66814.715.315.014.761.361.161.861.7
Actual contributions13,85815,60516,39117,09511.311.811.511.146.947.447.446.5
Employers’ social contributions6,3187,0777,5108,0555.
Central government1582633273220.
Social contributions by the protected persons7,5408,5288,8819,0396.
Pensioners and other2783453774070.
Imputed employers contributions4,2384,4774,9985,5543.
Central government4,2384,4774,9985,5543.
Rerouted from Rest of the World151617190.
General government contributions10,37510,82511,37411,6078.
Earmarked taxes from central gov.1,2371,4881,3931,3031.
Central government revenue7,9357,9638,3988,8156.
State and local government revenue5866397328030.
Central government, other receipts6187358526850.
Other receipts2,5722,7832,8853,0972.
Property income (mainly from corporations)1,1521,1651,2101,3520.
of which: Rest of the World9791,2831,2301,2900.
Total expenditures29,55332,91834,61336,75139,95724.025.024.323.823.9100.0100.0100.0100.0100.0
Pension benefits (cash)15,90318,23819,10820,10521,74712.913.813.413.013.053.855.455.254.754.4
Old age13,66215,74116,39417,19411.111.911.511.246.247.847.446.8
Lump sum5927485624290.
Means tested2372853464530.
Means tested991221572010.
Means tested961211562000.
In kind benefits3333954734150.
Old age1061021081190.
Means tested00000.
In kind7,2337,9398,4279,1585.
Other benefits4,9525,1895,4975,8583,4884.
Administration and other expenditures9889999391,0212,7410.
Memorandum items:
Total receipts from government14,77115,56516,70017,48312.011.811.711.350.047.348.247.6
Source: Greek authorities; and IMF staff estimates.

ESSPROS: European System of Integrated Social Protection Statistics

This table only includes general government schemes, and excludes employer, and private sector expenditures.

According to Social Budget 2004. Pension expenditures include EKAS scheme.

Source: Greek authorities; and IMF staff estimates.

ESSPROS: European System of Integrated Social Protection Statistics

This table only includes general government schemes, and excludes employer, and private sector expenditures.

According to Social Budget 2004. Pension expenditures include EKAS scheme.

23. Trends in the national accounts’ data9 also show an increase in both social contributions and social benefits although there is a decline in both in 2004 (Table 7).10 However, social benefits (which are largely driven by cash pension expenditures) increased more rapidly than social contributions, indicating a widening pension deficit of perhaps ½ percent of GDP.

Table 7.Greece: General government: Social Security revenue and expenditure, 1998-2004
(In millions of Euro)
of which:
d61Social contributions14,78216,10717,19418,39721,31023,72324,467
d611Actual social contributions12,51913,41114,47315,51418,12820,18420,460
To social insurance funds11,64012,79213,80214,80817,34819,25119,443
Employers’ actual social contributions5,6426,1106,7457,1588,5779,3009,395
Employees’ social contributions4,1554,7115,0055,4176,2477,1167,201
Social contributions by self- and non-employed persons1,8431,9712,0522,2332,5242,8352,847
To government8796196717067809331,017
d6111Employers’ actual social contributions156200088
d6112Employees’ social contributions7236176717067809251,009
d6113Social contributions by self- and non-employed persons0000000
d612Imputed social contributions2,2612,6952,7232,8843,1823,5394,007
of which:
d.1Compensation of employees12,66013,84714,44315,18017,25718,28121,115
d.11Wages and salaries9,96710,63111,09711,57113,23413,75516,052
d.12Employers’ social security contributions2,6933,2163,3463,6094,0234,5265,063
d.121Employers actual SS contributions4325216237268419871,056
d.122Employers imputed SS contributions2,2612,6952,7232,8843,1823,5394,007
of which:
d62Social benefits other than social transfers in kind17,16018,65120,39922,49924,18527,33428,735
d62-CGCentral government3,8354,1004,2664,4474,8625,1755,724
d62-LGLocal government3336679
d62-SSSocial security funds13,32314,54816,13018,04619,31722,15223,002
b9Net lending (+) /net borrowing (-)-2,685-2,117-5,151-7,970-7,146-8,938-10,900
(As a percent of GDP)
of which:
d61Social contributions13.6%13.7%14.0%14.0%15.0%15.4%14.6%
d611Actual social contributions11.5%11.4%11.8%11.8%12.7%13.1%12.2%
To social insurance funds10.7%10.9%11.2%11.2%12.2%12.5%11.6%
Employers’ actual social contributions5.2%5.2%5.5%5.4%6.0%6.0%5.6%
Employees’ social contributions3.8%4.0%4.1%4.1%4.4%4.6%4.3%
Social contributions by self- and non-employed persons1.7%1.7%1.7%1.7%1.8%1.8%1.7%
To government0.8%0.5%0.5%0.5%0.5%0.6%0.6%
d6111Employers’ actual social contributions0.1%0.0%0.0%0.0%0.0%0.0%0.0%
d6112Employees’ social contributions0.7%0.5%0.5%0.5%0.5%0.6%0.6%
d6113Social contributions by self- and non-employed persons0.0%0.0%0.0%0.0%0.0%0.0%0.0%
d612Imputed social contributions2.1%2.3%2.2%2.2%2.2%2.3%2.4%
of which:
d.1Compensation of employees11.6%11.7%11.7%11.5%12.1%11.9%12.6%
d.11Wages and salaries9.1%9.0%9.0%8.8%9.3%8.9%9.6%
d.12Employers’ social security contributions2.5%2.7%2.7%2.7%2.8%2.9%3.0%
d.121Employers actual SS contributions0.4%0.4%0.5%0.6%0.6%0.6%0.6%
d.122Employers imputed SS contributions2.1%2.3%2.2%2.2%2.2%2.3%2.4%
of which:
d62Social benefits other than social transfers in kind15.7%15.8%16.6%17.1%17.0%17.7%17.2%
d62-CGCentral government3.5%3.5%3.5%3.4%3.4%3.4%3.4%
d62-LGLocal government0.0%0.0%0.0%0.0%0.0%0.0%0.0%
d62-SSSocial security funds12.2%12.3%13.1%13.7%13.6%14.4%13.8%
b9Net lending (+) /net borrowing (-)-2.5%-1.8%-4.2%-6.0%-5.0%-5.8%-6.5%
Nominal GDP108,977117,850123,173131,769142,370154,153167,170
Source: Eurostat; and IMF staff estimates.
Source: Eurostat; and IMF staff estimates.

24. While somewhat ambiguous, the financial data seem to indicate an increase in pension expenditures and possibly the pension deficit. Moreover, the reasons for the increase in social insurance contributions is not clear. If higher contribution levels are related to stronger enforcement or higher employment, they would be sustainable. If, however, reported contributions relate to special employer funding to finance gaps in the smaller pension schemes, they are unlikely to be sustained.

The Evolution of Pensioners and Contributors

25. The overall number of pensioners for the major pension funds has evolved approximately as predicted, but there are some changes between funds. In particular, OGA has a lower number of pensioners, while the number of civil service pensioners seems much larger (Table 8). The number of contributors according to the Social Budget 2004, however, appears to be much larger, implying a better ratio of contributors to pensioners, and providing an explanation for the good performance of social insurance contributions. The funds’ own data, indicate a somewhat larger pensioner population than the Social Budget does.

Table 8.Greece: Status of major pension funds, 2004
TotalIKA 1/TEBE 2/Civil serviceOGA 4/Other 5/
excl. otherTotalStandardEKASTotalStandardEKAS3/TotalBasicPrimaryPrimaryEKASSuppl.
Pensioners 7/2,312,818903,675183,195183,195369,743856,205836,082483,581
Old age1,509,777535,43095,33795,337229,230649,780633,148431,756
Very old uninsured56,90756,90756,907
(In millions of Euro)
Pension expenditures, annual14,7576,5536,1903631,4331,3231103,6403,1302,5246063,7092553,085
Old age4,2974,146152862823382,7442,3191,795524
Very old uninsured181181
(In Euros)
Average annual pension expenditures6,3807,2517,8247,2239,8453,6563,0191,253
Old age8,0269,0378,63311,9713,5692,8351,214
Very old uninsured3,1863,186
Memorandum items: Comparison dataTotal excl civil service
Social budget 2004 (as of 8/1/2003)2,146,165879,000178,393852,000236,772
Projected for 2005 (2001 EPC study)2,385,000986,000150,000233,000944,000305,000
Old age 6/589,00074,000634,000194,000
Social budget 2004 (as of 8/1/2003)3,852,4921,917,000583,500734,000617,992
Projected for 2005 (2001 EPC study)3,324,0001,594,000575,000508,000627,000528,000
Dependency ration
Social budget 2004 (as of 8/1/2003)1.802.183.270.862.61
Projected for 2005 (2001 EPC study)1.391.623.832.180.661.73
Sources: Greek authorities; and IMF staff estimates.

Financial data from Social Budget, 2004, holiday-leave bonus was allocated to categories stated.

Data from TEBE. Paraplegia allowance and holiday-leave bonus was allocated to categories stated.

According to Social Budget 2004; distribution across categories estimated from current monthly payments.

Data provided by OGA.

Primary and supplementary according to Social Budget 2004, EKAS according to data submitted by Greek authorities.

Data provided by insurance funds

For civil service: All pensioners including disability and survivors.

Sources: Greek authorities; and IMF staff estimates.

Financial data from Social Budget, 2004, holiday-leave bonus was allocated to categories stated.

Data from TEBE. Paraplegia allowance and holiday-leave bonus was allocated to categories stated.

According to Social Budget 2004; distribution across categories estimated from current monthly payments.

Data provided by OGA.

Primary and supplementary according to Social Budget 2004, EKAS according to data submitted by Greek authorities.

Data provided by insurance funds

For civil service: All pensioners including disability and survivors.

The Impact of Pension Fund Mergers

26. The effort to reduce the number of pension funds, and in particular merge them into IKA, can affect the financial status of the pension system. Simple mergers leave the general government accounts unaffected, but often they are accompanied by changes to pension rules and employer obligations to finance any deficit. Mergers can also generate a temporary cash inflow into the pension system, that may mask a (possibly worsening) long-term deficit. Since a set of mergers was initiated in the mid-90s, and some of the arrangements are still being implemented,46 such effects may be partly responsible for the increases in social insurance contributions observed in recent years: for example, sponsors of abolished funds may have settled financial obligations like clearance of arrears, transfer of assets, or lump sum contributions to pay future obligations.

27. The ongoing reforms of pensions in the banking sector and the telecommunication company (OTE)—both have generous pension plans—also may impact the time path of the general government pension deficit with temporary effects for about the next 10 years47 as well as higher long-term deficits. Law 3371/2005 authorized the integration of the banking sector’s primary funds into IKA, provided that the supplementary funds were integrated into IKA-TEAM and a new “Integrated Bank Employees’ Social Security Fund” (ETAT).

28. The absorption of the primary funds will increase the public pension deficit, as the additional employer contribution to finance the deficit is eliminated. However, as the government already had made a commitment to accept these primary funds (Law 3029/2002) and it was unlikely that the sponsoring institutions would finance the accumulated liabilities of the pension funds in their existing form, this transfer is best viewed as an acknowledgement of existing implicit government liabilities. Moreover, the effect is likely to be small when set against the projected long-term changes of the pension system as a whole.

29. The transfer of the supplementary bank pension funds may improve the pension deficit in the near term, but worsen it in the longer term. Law 3371/2005 specifies the transfer of supplementary pension insurance to IKA-ETEAM, but the new banking sector fund ETAT will provide an additional pension dependent on employment status:

  • Existing pensioners’ full pension (which was established according to banking sector rules) will henceforth be paid by IKA, but adjusted according to IKA rules.
  • Current members who joined by 1992 will be awarded a pension upon retirement according to the rules of their bank fund. The primary pension, and the IKA supplementary pension will be paid according to IKA terms, and adjusted annually. The component of the initial pension in excess of IKA terms will be paid by ETAT.
  • Current members who joined between 1993 and 2004 will receive pensions according to IKA terms, plus an additional pension based on their accumulated contributions in excess of IKA contributions between 1993 and 2004. This additional supplementary pension will be paid from ETAT resources.
  • Bank staff who joined after 2005 will be regular members of IKA pension funds.

Box 1.The Scope of Existing Banking Sector Pension Funds

Only two banks operate their own primary pension fund: National Bank of Greece (NBG) and Agriculture Bank. Primary pension insurance for all other bank staff was already with IKA-ETAM. In contrast, most banks operate their own supplementary pension fund but their scope and benefits, as well as the obligations of sponsoring banks differed widely by historical legislation. Some funds subsidized the primary pension in addition to providing the supplementary pension, some operate as normal auxiliary pension funds, and some used IKA’s supplementary pension fund.

Thus, while formally most pension obligations arise in the supplementary schemes (which generally only aim to replace 20 percent of income), a comparison of Emporiki’s and NBG’s pensions demonstrates the existing disconnect between pension fund organization and employers’ financial obligations. Emporiki’s supplementary fund was required to provide the same pension level (combined primary and supplementary) as the NBG, effectively by topping up IKA pensions. Emporiki, as the sponsor, had an unlimited liability to make up any deficit (supplementary pension contributions less expenditures). In contrast, NBG obligations to finance the deficits of its primary pension fund were legally limited, but it was unclear who would make up any additional shortfall arising from mandatory benefit rules.

30. ETAT is a closed fund, that is expected to be prefunded by banks to cover the existing pension obligations in excess of IKA terms. Law 3371/2005 envisages banks settling their pension liabilities fully through transfers of assets of existing pension funds, other lump sum transfers, or excess social security contributions over 10 years, as determined by a financial study. While the banks make payments to ETAT (and thus the social security system), additional receipts accrue to general government. Once these payments subside, any pension deficit from the transferred bank pensions (whether on IKA terms or in excess of it) has to be covered from general government cash flows without special contributions from employers, although asset sales from ETAT can contribute to financing.

31. A short-term positive cash flow to the pension system could also arise from the expected merger of OTE’s pension fund with IKA (legislated by law 3029/2002), in combination with the current early retirement program. The legislation authorizing early retirement for OTE employees in conjunction with the change in labor conditions (Law 3371/2005, Article 74), specifies that any pension costs associated with the early retirement program are to be born by OTE and the Greek State. The Greek government will settle its obligations through a specified transfer of OTE shares to the OTE pension fund. Thus part of the cost of the early retirement program fall on general government, and the cash flow will be affected from the moment that early retirement is taken.48 The law does not specify OTE’s terms of contribution, but if OTE fully settles its obligations towards the pension system during a pension fund merger a short-term positive cash flow to the pension system could arise.

Ad hoc Legislative Changes

32. Ad hoc adjustments to pensions beyond the stated rules seem to contribute to increasing pension expenditures beyond projections (i.e., the assumed effects of demographic changes). A major area are the increases to low pensions in excess of consumer price inflation (see section IV below). There is a declared policy that the pensions in the three component funds of OAEE (for the self-employed) are to be unified and the lower pensions of TSA were already increased to TEBE levels.49 Moreover, the annual adjustment for minimum pensions was larger than price inflation for most recent years. Law 3029/2002 redefined the reference for the minimum pension, and changed supplementary pensions for dependents including for existing pensions. It also gave an additional benefit to those entitled to the minimum pension by adding a bonus for years worked beyond 15 years. These effects are not insignificant as a large share of pensioners receives minimum and low pensions (e.g., in IKA 63 percent of pensioners receive the minimum pension).

33. Some changes to individual schemes increase costs. For example, the benefit formulas for the supplementary fund MTPY, the civil service “share” fund, were recently changed fundamentally, with the stated objective of increasing the very low pensions of long-time pensioners; existing nominal pension levels are protected. Similarly law 3232/2004 increased survivors’ benefits of the TEADY fund.

34. Thus, the adverse dynamics identified by the 2001 exercise persist, despite (or, in some cases, because of) reforms introduced since then. The next section examines the Greek pension system more closely, to identify factors that make even current pension expenditures in Greece high in comparison with many other countries, since such factors are arguably a focus for reform efforts.

D. Factors Contributing to High Pension Expenditures

35. This section discusses five factors that seem to contribute to the already high pension costs in Greece, and that will carry forward into the future: High replacement rates, benefit calculations based on final years’ salaries; generous minimum pensions; relatively short contribution year requirements; a wide differentiation of benefits across funds; and a still maturing system. Other factors sometimes mentioned in this regard are the widespread classification of jobs as heavy and unhealthy work, and the frequent use of disability pensions, but their analysis requires more detailed data than were available for this study.

Replacement Rates

36. Greece’ mandatory main pension system expects a pension (with 35 year’s of service) of 70 percent of final year’s earnings from the primary pension and 20 percent from the supplementary pension. As the standard employee pension contribution rates are 6.67 percent and 3 percent, respectively, this implies a net replacement rate of close to 100 percent. This is very high by OECD standards, where the net replacement rate typically falls with income (Figure 5).

Figure 5.Net replacement rates by earnings level, mandatory pension programs, men

Source: OECD (2005).

Final Year Calculations

37. The effects of a high replacement rate are compounded by calculating pensionable earnings in relation to the earnings of the final years of work, because seniority increases average earnings for most of the working life. Based on the profile of average earnings by age group derived from household surveys (Figure 6), for a retiree at age 60, the current calculation of lifetime earnings based on the last 5 years results in pensionable earnings are 23 percent higher than if the whole lifetime earnings history (from age 16) had been taken into account. This method—using current earnings in current year prices—is equivalent to a revaluation of earlier earnings in relation to average earnings. If only price increases were taken into account for revaluing earlier earnings (not the real growth in average earnings), the difference in the estimation of pensionable earnings would be even bigger.

Figure 6.Average employment earnings

(including self-employed and farmers), by age group

Source: Data from Greek authorities.

Minimum Pensions and Their Adjustment

38. Greece has repeatedly taken measures to increase the minimum pension, as a large share of pensioners receive them (Table 9). Minimum pensions, which depend on the fund, currently range from 37 percent of minimum wage to about 75 percent of minimum wage (Table 10), although they do not apply in certain cases of reduced pensions at early retirement. In many cases, additions to these minima are granted, and if applicable, supplementary pensions can be received:

Table 9.Greece: Pensioners receiving minimum pensions(in thousands)
NumberShareNumberShareNumberShareNumberShareNumberShare 1/NumberShare 1/
Source: Greek authorities.

Share of all OGA pensioners.

Source: Greek authorities.

Share of all OGA pensioners.

Table 10.Greece: Minimum retirement pensions, 1998-2005
In Euro
OGA primary, max125.9146.9170.8193.4217.7242.9265.1289.7
OGA primary, min68.775.984.893.0102.1111.7119.5128.5
OGA basic93.7897.44126.78141.46156.13170.8200.8212.86
Increase, in percent
OGA primary, max16.616.313.312.611.69.19.312.6
OGA primary, min10.511.
OGA basic3.930.111.610.49.417.66.012.4
Pension as a share of minimum wage (married, 1st semester)
OGA primary, max29.332.437.441.544.446.749.050.6
OGA primary, min16.016.818.619.920.821.522.122.4
OGA basic21.821.527.830.431.932.937.137.2
Memorandum items
Mininum wage429.3452.8456.3466.0490.0519.9540.7572.3
Nominal GDP growth8.
Source: Greek authorities; and IMF staff estimates.Note: OGA primary pension is usually granted in addition to the basic pension (until the transition to the primary system only is completed.)
Source: Greek authorities; and IMF staff estimates.Note: OGA primary pension is usually granted in addition to the basic pension (until the transition to the primary system only is completed.)
  • For persons currently retiring in OGA, both a primary pension and the full basic pension are awarded (although the amount of the basic pension will be reduced as the number of years under the primary system increases).
  • For IKA pensioners, an additional pension of 1 percent per year is given for years worked in excess of 15.
  • Pensioners with very low pensions (except OGA) can receive a means tested supplement EKAS, which in particular applies to IKA pensioners.
  • There is also a range of rules on more generous minimum pensions (relative to contribution history) for disabled persons, mothers with children, and early retirement.

39. While the differentiation of minimum pensions by fund and hence recipient group probably addresses to some extent differences in living circumstances, there may be scope to rationalize the system, and agree on a more uniform level of minimum protection without overlapping rules and possibly simultaneous access to minima-related income. For example, the widespread use of minimum pensions in IKA could be related to non-traditional work histories including some insurance periods abroad or with other pension funds that generate independent pension rights, and possibly contribution evasion. Moreover, in principle, increases in minimum pensions feed through the whole scale of pension increases. Although in recent years this effect has been mitigated (lower increases have been awarded to higher pensions, Table 11), this policy, and the implied compression of pensions, may not be sustainable in the long run.

Table 11.Greece: Pension benefit increases for IKA primary insurance
Pension increases if pension below
€ 3525.50%
€ 4003.50%
€ 5004.00%5.00%
€ 5873.50%2.75%
€ 6201.50%
€ 7333.90%
€ 8801.40%
€ 9100.75%
€ 1,0002.00%3.00%
Above highest2.50%3.40%4.00%0.00%0.00%0.00%0.00%4.00%
other limit
Minimum IKA pension
In €320332345364377392412428
Source: Ministry of Employment and Social Protection; and IMF staff estimates.
Source: Ministry of Employment and Social Protection; and IMF staff estimates.

Effective Retirement Age

40. The effective retirement age in Greece, 60.4 years, is low by international comparison (Figure 8). Data for the civil service and IKA confirm the continuation of early retirement. The average retirement age for Greece is raised by later retirement in OGA where retirement before age 65 is difficult. However, civil service pensions are more generous (currently still 80 percent replacement rate for the primary pension) than the private sector, which contributes to the high total pension expenditures.

Figure 7.Effective and official retirement ages in the EU15 (2000/01)

Source: Eurostat.

41. A contributing factor to early retirement is likely that a full pension is obtained with 35 contribution years, which many full-career workers will reach well before age 65. Recent legal changes, including to allow retirement without age restrictions after 37 contribution years (which also implies a replacement rate in excess of 70 percent for the primary pension), will contribute to continued low effective retirement ages.

A Differentiated and Still Maturing System

42. Greece was the only country in Europe (EU 15), that in the 2001 EPC study expected a significant increase in pension expenditures due to an increase in the benefit ratio, and one of four with a significant increase in eligibility. Of the projected total increase of pension expenditures of 12.2 percent of GDP, an estimated 9.9 percentage points are due to an increase in the dependency ration, 1.4 percentage points to increased eligibility, and 4 percentage points to increases in the benefit ratio (a saving of 3.6 percentage points stems from a higher employment rate).

43. Some of the increase in the benefit ratio will be the result of further economic development. Owing to differences in benefits across schemes, average benefit ratios will tend to drift up as employment continues to shift out of agriculture. Moreover, some schemes are still maturing implying higher benefits as retirees have increasingly longer contribution histories.

44. These in-built pressures for benefit enhancements are aggravated by the recent reform dynamics. Mergers of funds lead to pressures for improved entitlements on the basis of the most favorable existing rule (e.g., in the merger of OAEE), while downscaling of very generous rules tends to be subject to long grandfathering periods. As downscaling inevitably leads to inequities in the system, the long grandfathering rules also provide opportunities for requests to reconsider the benefit reductions, as has happened with a number of important rule changes introduced for post-1992 labor market entrants (e.g., reinstatement of primary pension replacement rate of 70 percent, easing of age restrictions for retirement, and reinstatement of some preferential treatment for mothers).

E. The Impact of Fragmentation

45. The previous section analyzed some factors that drive pension expenditures in Greece, and repeatedly the fragmentation of the system played a role. This section highlights the tension between a defined benefit system and its organization in numerous autonomous pension funds.

46. In a defined benefit system the government is responsible for covering the deficit arising from the contribution and benefit structure. However, in the first instance each fund, as an independent entity, focuses on its own financial status. The efforts by each fund to ensure sufficient and timely availability of resources leads to a complicated system of precommitted government contributions and transfers, which can easily result in over funding of some funds, while other funds still have a deficit. In Greece, funds are entitled to certain taxes (“social contributions”). In addition, the general government is committed to a wide range of contributions, including: the employer contribution for OGA, a 10 percent pension contribution for all post-1992 labor market entrants (tripartite financing),50 a mandatory contribution to MTPY, and an annual transfer equivalent to 1 percent of GDP to IKA. The government is also directly responsible for certain benefits, including the pensions for the very old uninsured, and the financing of EKAS. Last, the government may make transfers to assist directly with a deficit. As a result, reportedly, not all mandated government contributions are effected in cash (or even included in the budget), but just included in the accounts. While the allocation of each of these resources is justified by different considerations, effectively each is equivalent to a transfer from central government.

47. Restrictions on the availability of central government financing in funds that operate in more than one branch can lead to cross-financing within the fund to alleviate temporarily a shortfall. This currently seems to be the case in IKA, which uses the transfer to the pension branch (intended for asset accumulation) to finance (partly) the deficit in the health branch.

48. Difficult valuations of claims between funds, because of the defined benefit nature of pensions and the differences in rules between funds, make it likely that many compensations between funds are not actuarially fair, differentially impacting the financial status of the funds concerned. This over time could also lead to limitations on the interactions between funds. Indeed, a number of funds raised objections to the rules on settlement of claims between funds arising from pensions generated by insurance in multiple funds (Law 3232/2004).

49. A fragmented system accommodates pressures to increase benefits. If the financial status of a fund is good, even while others operate in a deficit, a case can be made to improve benefits, especially if those benefits are less favorable that those of other funds in an apparently weaker financial position. In contrast, funds in financial distress receive government transfers, which are not generally conditional on reducing benefits or raising contributions. This asymmetry may undermine the system viewed as a whole.

F. Approaches to Reforms: Some Examples

Considerations for Reforms

50. As noted at the outset of this chapter, Greece is far from alone in facing rising pension cost that potentially will destabilize the public finances. Several other countries have already responded to this challenge by implementing, or at least legislating, reforms. This section draws on these experiences to illustrate options that have proved politically feasible, although each involves difficult trade-offs that each country has handled differently.

51. The approaches to reform are of two types: parametric or paradigmatic. A parametric reform maintains a defined-benefit structure that links pension benefits to financial and social criteria not closely related to the contribution history. Such reforms include changes to the retirement age, factors for the calculation of benefits for each contributory year, contribution rates, or early retirement provisions. By contrast, a paradigmatic reform fundamentally changes the nature of the system. Most prominent is changing from a defined benefit to a defined contribution system. In the latter, benefits are determined by contributions and earnings on capital saved. This has many implications, including less certainty about retirement income (assuming the government promise under a defined benefit system is viewed as certain), typically less redistribution across lifetime incomes, and limits on future government liabilities. Another paradigmatic shift would be from a comprehensive first pillar scheme with benefits related to income, to a minimum first-pillar scheme intended to avoid poverty coupled with an expanded second pillar system. Again, depending on the details, government liability could be limited, even if the first pillar were defined benefit.


52. Austria has one of the highest current pension expenditures in Europe, and is one of the most rapidly aging countries. Prior to reform, Austria had a fairly fragmented pension system, with two major schemes covering dependent employees, many self-employed, and farmers, but smaller schemes for special groups. Civil servants had a non-contributory scheme financed from the budget. Relatively high pension costs were due to generous benefit rules, which included a maximum 80 percent replacement rate, pensionable earnings assessed on the last 15 years’ earnings instead of lifetime earnings, indexation to net wages, and an early effective retirement age. Two reforms, in 2003 and 2005, achieved major changes.

53. The 2003 reform introduced substantial changes in parallel into the major pension systems including for civil servants, but did not address the gaps between schemes. Reforms included an increase in the retirement age to 65 with a 4.2 percent deduction (bonus) for early (late) retirement; a shift to assessing pensionable earnings on 40 years of contribution, and a change to price indexation. Most of the 2003 reforms were phased in over 5 to 25 years, a cap on benefit losses relative to the previous regime is in place until 2032.

54. In the 2005 reform, most groups of workers including most civil servants (but excluding most civil servants of subnational governments) were brought into a unified system that follows the (reformed) rules for contributions and benefits of the main private system. Full integration was not achieved, as contribution rates for farmers (15 percent) and the self-employed (17.5 percent) are lower than the general rate (22.8 percent), with the difference made up by the government. Only small groups, including civil servants of subnational governments, remain outside of the unified scheme. The harmonization of the pension systems applies only to those below age 50.

55. Overall, the reforms, especially those to civil service pensions, are expected to reduce pension expenditures by about 3 percent of GDP in the long run relative to no-reform estimates, eliminating most of the anticipated increase.


56. The German public pension system is a defined-benefit scheme with 26 funds. Most employees belong to either the fund for salaried employees, or regional funds for wage earners (although the distinction between these two groups was removed in 2005), but pension rules still differ somewhat for smaller funds for miners, seamen, and farmers, and some specialized funds, e.g., for artists. Civil servants receive a pension from the budget.

57. The declared objective of keeping the pension contribution rate below 20 percent until 2020, and below 22 percent until 2030 has been met in part by transfers from the budget and in part by incremental tightening of pension rules. The retirement age was gradually increased to its current value of 65. While pensions are generally indexed to wages, a sustainability factor was introduced (beginning in 2005) that reduces pensions depending on changes in the ratio of pensioners and employed pension contributors (but, the average pension cannot drop below 46 percent of current average earnings).

58. A host of other cost-saving measures have also been introduced. Due to the increasing labor force participation of women, the generosity of widows and widowers pension has been repeatedly reduced. Survivors pensions for younger couples were reduced in 2002 from 60 percent to 55 percent and stricter limits were placed on duration. The 2002 legislation also introduced pension splitting for married couples, e.g., pension entitlements accrued during the marriage are split between the two partners and no survivor’s pension is paid. Earlier still, rules had been introduced that take into account the own income of the survivor when calculating the survivor’s pension.

59. Reforms have also enhanced incentives to work. Around the retirement age, this incentives is provided by a deduction of 0.3 percent of the pension for each month of early retirement, and a bonus of 0.5 percent for later retirement. An option for a partial pension was introduced for older workers who wish to work part time. Conversely, for retirees below the regular retirement age of 65, employment income is capped. In addition, for low income jobs, the employer pays pension contributions based on the gross salary, but the employee can choose a reduced contribution, thus enhancing net earnings (though benefits will also be based on the lower contribution). Finally, the new government intends to further raise the retirement age to 67 years.

60. Most changes have been phased in, with transition periods are linked to the date of birth. Other grandfathering rules like personal circumstances when the law went into effect are also used. Some reforms are “reforms of reforms,” e.g., by accelerating the phasing of changes introduced with earlier legislation, as was done for the increase in retirement ages. In addition, to help compensate pensioners for such reductions in public entitlements, Germany has recently strengthened occupational pension insurance and introduced incentives for savings in an individual pension account (the “Riester Rente”).

61. In the 2004 updates to the pension cost estimates, Germany reported a reduction in projected 2050 pension expenditures of 2.4 percent of GDP, relative to 2001 projections.


62. Pension expenditures rose very rapidly in Italy in the 1980s, and by the early 1990s Italy’s pension spending was, as a percent of GDP, some two-thirds higher than the EU average at the time. As a result, two major reforms were implemented to contain the rise in spending and put the system on a better long-term footing.

63. In 1992, the “Amato” reform sought to harmonize pension parameters (across the private and public sector, for example) and stabilize the pension spending as a fraction of GDP. To achieve the latter, the prevailing generous benefits were reduced in a number of ways, including by extending the reference period for calculating benefits, increasing the minimum number of contribution years (from 15 to 20), and indexing benefits to prices rather than prices and the industrial contractual minimum wage. These measures were phased in, to limit the shock to current pensioners. In addition, incentives were provided to build up second-pillar pensions, to help compensate for the reduction in first pillar benefits. Although the measures, especially price indexation, reduced the growth of pension outlays, it soon became apparent that more would be needed.

64. In 1995, the “Dini” reform ushered in a profound change by linking benefits closely to contributions via a capitalization formula. Past contributions were calculated as 33 percent of past wages and capitalized at the five-year moving average of GDP growth at the time the contribution was paid. Payouts were annuitized assuming an internal rate of return of 1.5 percent and a transformation coefficient that adjusted for the age of retirement relative to life expectancy. The new system therefore took on aspects of a defined contribution scheme. A system in which payouts are not linked to ex post returns on actual investments, however, is sometimes called a “notional defined benefit” scheme.

65. The “Dini” reform also enhanced incentives to stay in the workforce via the transformation coefficients and by abolishing “seniority” pensions, which had allowed early retirement without penalties.

66. Finally, it included a long phase-in period for those who were already in the workforce in 1995. For others, the replacement rate will fall by as much as 30 percent.

67. According to the 2001 EPC estimates (Figure 1), which take account of these reforms, Italy has the highest pension costs in the EU, but is projected to have very little further increase between now and 2050.


68. Before reforms in the early 1990s, the Swedish pension system was a defined benefit system with a flat-rate universal component and an earnings-related component. During the 1980s, as wage and labor force growth slowed, concerns arose about the sustainability of this system. On the heels of a recession, the government charged a body of representatives from the political parties (and some experts) to propose reforms, and the legislation for a new pension system was enacted in 1994.

69. A key objective of the reform was to ensure the solvency of the pension system even in the face of demographic shocks. To this end, a notional defined benefit plan (the focus of this discussion) was put in place, alongside a smaller funded component. In the Swedish scheme, an “interest rate”, normally depending on the growth in nominal average income, is applied to contributions to compute a notional asset value, and benefits are paid according to an annuity formula. Two important factors keep the system in balance. First, the annuity rate is adjusted for life expectancy; all else equal, if life expectancy rises, either retirement must be postponed or the benefit declines. Second, if the liabilities of the scheme outstrip the capacity to pay (which is possible since benefits are not governed by an ex post return on actual assets, as would be the case in a classic funded defined benefit program), the “interest rate” is adjusted downward until balance is restored.

70. The reform also made the system more neutral as regards the retirement decision, by allowing early retirement (after age 61) with less contribution and therefore less pension, and allowing workers to accumulate “capital” by continuing to work and pay contributions without limit. It is even possible to work and contribute while collecting a pension benefit.

71. The new system was phased in. Those born before 1938 remain in the old system, those born after 1953 are entirely in the new system, and those born in between face a weighted combination of the two, with the weight on the new system rising for those born later.

72. As in the case of Italy, projections suggest that pension spending will not rise much as a fraction of GDP. In both cases, however, it is worth emphasizing that adjustment to unforeseen developments is, by the logic of a defined contribution scheme, via changes in benefits (rather than changes in contributions, as would be the case in a defined benefit scheme). Thus, there is a risk that such benefits will prove politically unacceptable, and that the scheme will therefore be made more generous than now envisaged.

G. Conclusion

73. The Greek pension system is already relatively generous, as measured against Greek incomes, and, according to the best available evidence, will in the long run experience the largest increase in spending in relation to GDP of any EU country. This evidence should be updated as soon as possible, consistent with the ongoing exercise at the EU level. Nevertheless, the admittedly incomplete data now available suggests that the situation as estimated at beginning of this decade had not materially improved in the past five years.

74. Pension reform will be needed to ensure the long-term viability of the system. Fiscal consolidation now—specifically balancing the general government budget by the end of the decade—will stave off the time when the debt-GDP ratio begins to rise sharply as a result of aging costs, but will be insufficient to ensure debt sustainability. Considerations of possible reforms, which should draw on the experiences of other European countries but also be sensitive to the situation in Greece, should begin as soon as possible. Since pension reforms typically take some time to become fully effective, owing for example to necessary grandfathering provisions, early action will help to avoid more painful choices down the road.


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Prepared by Christiane L. Roehler (FAD).


Greek statistics therefore correctly classify social insurance funds as part of general government.


The National Statistical Service of Greece (NSSG) currently includes 140 social insurance funds in its recently established survey, used to compile fiscal statistics.


Recent legislation has provided for bank pensions to be folded into other first pillar schemes.


See the selected issues paper for the 2002 Greece Article IV report (IMF Country Report No. 02/58) for a more detailed description of these estimates.


The new projections have a more optimistic immigration assumption of 35,000 a year (as opposed to about 25,000 a year in the initial projections), which implies that by 2050 about 2 million of 10.5 million residents will be immigrants arriving after 2004 or their descendents.


This is prepared annually by the Ministry of Employment and Social Protection, and usually published in about October of the budget year. The data for this paper are based on the Social Budget 2004.


Social insurance contributions also include contributions for the health branches, and some other benefits. The Social Budget does not isolate a time series of pension contributions, but Table 5 indicates that pension contributions are about 70 percent of total social insurance contributions collected by social security funds under the supervision of the MESP. Some other contributions, and the contributions for the primary pension of civil servants, are collected by the government.


The pension deficit for social security funds outside of the MESP is not known, but the Social Budget reports that the Seamen’s funds require a transfer of Euro 540 million.


The projected pension deficit of 4.3 percent of GDP assumed other net inflows of about 0.6 percent of GDP.


ESSPROS data are based on an annual survey of social insurance funds that is conducted about one year after the budget year, with a view to obtaining information from final accounts. Hence, statistical data are only available with a lag of nearly two years.


ESSPROS data for all schemes (not just general government schemes as in Table 6) show pension expenditures in cash in 1998 at 13.0 percent of GDP, and in 1999 at 13.1 percent of GDP. About ½ percent of GDP of total pension expenditures reported in ESSPROS is not paid by the general government.


Government funding estimates include a large component of imputed funding for schemes financed from the budget.


National accounts data also utilize a survey of social insurance funds, which has many similarities with the survey used for ESSPROS, but has only recently been introduced and is conducted quarterly.


Item D62: Social benefits other than transfers in kind.


A major incomplete merger (albeit likely without cash injections) is the establishment of OAEE, which is to be created from the main funds for the self-employed TEBE, TSA, and TAE. This was legislated by law 2676/1999, but the funds still operate independently under the umbrella of OAEE.


The reform of banking sector pensions was made urgent by prospect of the move to IFRS, which requires the recognition of unfunded pension liabilities. Reforms of OTE’s pensions are related to efforts to commercialize OTE. Financial studies to estimate the financial effects of these changes are currently being carried out.


This assumes that the OTE supplementary fund TAP-OTE is considered part of general government.


Minimum pensions for TAE currently are higher than TEBE levels, but have been increased at the same rate as TEBE pensions in recent years.


Excluding IKA since the introduction of an annual transfer in 2002.

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