The Greek Pension Reform


The Greek Pension Reform

Law 4387/2016

The Greek pension system was highly fragmented, inefficient and socially unfair, reflecting the influence of practices of clientelism, suffering from the confluence of its structural deficiencies and the repercussions of the crisis, the high levels of unemployment and recession, the significant losses caused by the PSI, as well as the increasing demographic problem of the country. As a result, it needed significant annual transfers from the State budget.

Βy implementing the new pension reform the government’s intention is not merely to fulfill its MoU commitments, but most importantly to guarantee a socially fair and sustainable pension system.

The fundamental principles of the reform are equality and social justice, which is served through a thorough harmonization of all rules, horizontally in the private and public sector by the introduction of a national pension, which is not financed by contributions, but directly by the State budget, and introduces an important distributional effect to the system.

The concrete policies, which apply the fundamental principles of the reform, are the following:

–   Integration of funds. Currently, there is an important number of funds corresponding to different categories of insured (for example, a fund for independent professionals, for self-employed scientists, for farmers e.t.c.). All main pension funds are unified into one single entity with common administration and accounting office. This reform enables the redistribution of funds and the harmonization of rules applied to different categories of insured persons, reduces operational costs and allows the quick issuance of pensions.

–   Harmonization of rules. All pension contribution rates are harmonized immediately, with the exception of farmers, where the harmonization will be gradual, till the end of 2021. Benefit rules are also harmonized. All special pension regimes are abolished and the supplementary pension rules are restructured.

–   Welfare (social assistance) benefits are separate/ independent from the pension system. Healthcare services and their financing are also separate.

–   Main pension. The main pension consists of the national pension and the contributory defined-benefit component. More specifically:

a) National pension. The national pension is set at the poverty threshold of €384 per month and funded by the State budget. The national pension is not a welfare benefit as it is linked to minimum years of contributions and is granted to every pensioner. It is granted to all individuals with 20 years of contributions and will decrease by 2% per year for individuals with at least 15 years of contributions. It includes a “growth clause”, that is, it will be equal to 60% of the middle income and will increase in accordance with GDP growth rates and the overall improvement of the economy.

b) Contributory defined-benefit component. The second component of the main pension is the pensionable earnings element.  Pensions are calculated on the basis of the insured’s contributions and earnings throughout his or her working life. Therefore, total years of working experience, as well as, the overall average wage is taken into account in order to calculate the contributory defined-benefit component.

–   Contributions

a) employers and employees: Contributions to supplementary funds only increase by 0,5% for employers and for employees for the next three years and by 0.25% for the three years thereafter, in order to avoid horizontal cuts to the pensions.

b) self-employed and independent professionals: With regards to the contributions of self-employed and independent professionals the notional income base is eliminated (replaced with an actual income base) from 2017 onwards; contributions will be based on declared income subject to minimum and maximum contribution rules. Therefore, contributions will be calculated on an individual basis and will reflect the actual income of the insured.

c) farmers: With regards to the contributions of farmers the actual income base will also apply to set contributions subject to minimum and maximum contribution rules. Contribution rates will increase gradually until the end of 2021 when they will become equal to those of the other categories of insured.

Minimum and maximum contribution thresholds apply to all professional categories.

–   Accrual rates and benefits. They are defined at marginal terms.

–   Current pensioners. Their pensions will be recalculated according to the new system. If the pensions that they are already receiving are higher, the pensioners will continue receiving the additional amount as a “personally guaranteed difference”, which would be reabsorbed (offset) to the extent that future pensions increase, so as to be phased out over time.

–   Recapitalization of the pension system through the use of the funds’ assets within a modernized, credible and transparent framework.

–   Improved collectability of contributions and adoption of an integrated action plan against various forms of undeclared work.

Overall, the government’s main goal is to ensure that no additional measures related to reduction of pensions will be required to achieve the fiscal target of 1% GDP savings by 2018 (around €1,8 billion) from the social security budget.