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unemployment - 2 2007f Mar 2007

Unemployment has become a way of life for tens of millions of peoples all over the world. For some decades now, this phenomenon continues be one of the must serious problems of the World Economy.

Comments on the European Commission’s

 “Green Paper towards Adequate, Sustainable and Safe European Pension Systems

The Changes in the Cypriot Social Insurance Fund

In July 2010, the European Commission published what is known as the “Green Paper towards Adequate, Sustainable and European Pension Systems”, prepared by three commissioners (László Andor, Olli Rehn and Michel Barnier). It covers a variety of systems, such as demographic ageing, the extension of working life, internal markets and pensions, the consequences of the crisis, the movement of pensions in the EU, the gaps in the EU-level regulatory framework, the future state of the employers’ credibility and the reinforcement of the administration of EU-level pension policy.

Despite the fact that the Commission presents the sustainability of pensions as a topic to be discussed within the next four months (up until November, after which the final version will be decided), it nevertheless provides guidance principles for the member-states regarding the modernisation of their pension systems based on the EU 2020 Strategy to increase employment and improve the function of the common market.

According to this “Green Paper”, in the last 50 years the expectancy of life in Europe was raised by an average of 5 years; by 2060 it will have been raised by 7 years. While in 2008 there were four people aged 15-64 for every senior EU citizen over 65 (4:1), this ratio is expected to be lowered to 2:1 by 2060. By providing this data, the European Commission underlines that ageing population in all of the member-states exercises pressure on pension systems, while the financial crisis has stressed this pressure. At the same time, the debt crisis in the EU and the huge deficits of many member-states has put stress on European governments for reforming their security and pension systems.

In a press conference, Commissioner L. Andor said that «today’s situation is not sustainable; the result is poorer pensioners and bigger contributions or more people working more and for longer». With this seemingly simple «dilemma» the Hungarian Commissioner for Employment, Social Affairs and Inclusion Contribution of EU, sets as “necessary” way the extension of working life.

A clear characteristic of the intentions of the “Green Paper” draft is the attached lists which include scenarios with retirement ages ranging from 67 to 70.

Of course, in the same text, it is mentioned word-by-word that «some member-states have proved that a hopeful choice of policy for the sustainability of pension systems is the automatic raise of the retirement age in accordance with the increase of life expectancy in the future». This is, if nothing else, an encouragement to the rest of the countries to follow down the same path. Given that by 2060 life expectancy will have raised by 7 years, then, according to this logic, the gradual increase of retirement age will reach almost 70 years of age!

As it was previously mentioned, the «Green Paper» does not provide suggestions; however, in the way in which the data, the trends, and the changes made by some countries are presented, the direction the members-states should follow is defined. This is clearly reflected in the paragraph for the changes in pension systems.

The Green Paper mentions that «despite the fact that the systems of the member-states are clearly different, most of them have readjusted in the last decades, with the basic principles being the following:

(1) Encouragement of more people working more and for longer, so as to get the same rights they had had before. Increase of age requirements for retirement, «rewarding» those who retire at a later age and «punishing» those who do so earlier, calculation of pension bonuses based on the average income of the entire working life instead of the «incomes of the best years», abolition or limiting of the possibilities for early retirement, measures to encourage older workers to stay in the labour market and promotion of the equality of the sexes in the workplace.

(2) Transition from predominately unilateral to multilateral systems. This is due to the trend evident in most member-states -not all though- to reduce the share of public distributive pensions in the total cost, giving an advanced role to supplementary (auxiliary), pre-funded private systems that often have the character of defined contribution systems (emphasis added).

(3) Measures to deal with efficiency issues, i.e. through efforts to broaden the support cover of the foundation of rights, the facilitation of the access of vulnerable groups to pensions and the increase of financial support for poorer pensioners.

(4) Discordance of the sexes: Usually the largest percentage of people with informal work agreements are women who generally receive less money than men and more frequently stop their careers to take on care responsibilities. Their pensions are, therefore, generally lower, whereas the danger for poverty is bigger, due to the fact that they live longer. While the care periods are recognised in certain distributive systems, this is not always the case in the capitalisation pension systems where the issue lies in the way in which this solidarity can be funded.

Of course, in a recent announcement, the European Commission attempts to ease the tensions, by saying that the increase of the retirement age, the contributions and the taxes are not defined by the EU, but rather these are choices of the member-states, at the same time labelling the Green Paper as “proposition” for the sustainability of pensions. It also claims that the taking of certain measures is the responsibility of the member-states, with the EU merely providing the general direction.


The ageing of the population is a fact in the European Union. According to the estimations of Eurostat, the population of senior citizens over 65 in the 27 member-states will rise from 75 million people in 2005 to 135 million in 2050. Their percentage in the total population of the member-states is expected to reach 30% with Spain leading with 36%, Italy trailing with 35%, while the lowest percentages will be in Luxembourg (22%) and Holland (23%).

The factors that define the ageing of the population are numerous: the slowing down of the birth rate, the continuous increase in life expectancy, the gradual withdrawal of the war generation from active financial life etc.

The ageing of the population greatly affects the socio-economical circumstances of the countries and calls for a modernisation of financial policies as well as of the policies for social welfare and pension-related issues.

In the years to come, pension systems should be able to ensure future generations a dignified ageing. The problem of the effects of ageing population to pension systems cannot be solved solely by providing motives aiming at supplementary or private pensions, as that is a dangerous simplification of the problem.

In many countries, the crisis of the pension systems is not solely due to the ageing of the population but to the decrease of contributions, without the simultaneous reclaim of resources from another source (i.e. from fighting tax evasion and contribution-avoidance), while the claims for pensions on behalf of the citizens is continuously rising.

This phenomenon is becoming increasingly more severe, as new generations come into the labour market in a later age, are poorly paid and work under temporary agreements, consequently paying less than their parents when they were their age.

The sustainability problem of pension systems cannot, therefore, be analysed and solved as an isolated issue; there has to be a clear picture of what causes it, which cannot be limited to a generalised ageing population, an endogenous problem of European societies to begin with, as it is connected to the various realities of labour markets, economic growth and social protection systems of the various countries of the EU.

The goals that should be set for dealing with the problem of the sustainability of pension systems should go beyond a mere increase of retirement age. Indeed, this could prove to be totally ineffective if it is implemented without certain criteria, while it can go so far as to become harmful for the quality of life of European citizens.

Given the differences between various types of labour, including repeated, laborious and tiring types of work, the solution for the ageing of the population cannot simply be the increase of the retirement age: the phrase «work for more years» does not carry the same meaning for all professions. Moreover, the differences between the legal retirement age and the actual exit age from labour market should be taken into consideration.

We have to underline at this point that countries should move towards fighting non-insured and “black” employment, supporting wage policies, a healthier distribution of wealth and a more effective social cohesion.

Sustainability of the Social Insurance Fund in Cyprus

In 2005 an actuary report asked for by the government was given to the Trade Unions, regarding the situation of the Social Insurance Scheme (2000-2003).
In the Report its problems were highlighted, while recommendations were made to deal with them. In his report, the actuary provided estimations and predictions regarding the demographic data until the year 2050, based on which he formulated his suggestions.

According to these predictions:

• The birth rate from 1,45 in 2002 will go down to 1,3 in 2017 and will be stabilised until the year 2050
• As far as death rate is concerned, the life expectancy will rise from 76,4 years in men and 81,3 for women in 2002, to 79,3 and 84,2 respectively in 2050
• The population of Cyprus will increase from 705.539 in 2002 to 843.485 in 2030 and reduce to 816.406 in 2050.
In 2050, 28,1% of the population will be 65 years of age or older (today this percentage is 11,7%). At the same time, 10,8% of the population will be 14 years of age or younger (compared to 21,5% today).

The proportion of pensioners to contributors will increase from 30% in 2004 to 78% in 2050. This effectively means that while in 2004 there were 3,37 contributors for every pensioner, in 2050 there will only be 1,28 contributors per pensioner.

Based on the predictions until 2011 the reserve fund of the Scheme, given today’s contribution percentage, will be equal to a year’s expenses. After 2011, the reserve fund will start decreasing.

The proportion of pensioners-contributors in the supplementary part will increase from 27% in 2004 to 75% in 2050. This means that in 2004 there were 3,7 contributors for every pensioners; this number will be reduced to 1,33 in 2050. Based on the predictions until 2020, the reserve fund in the supplementary part of the Scheme will be equal to 9 years’ worth of expenses, based on today’s contribution percentage. After 2020, the reserve fund will start decreasing.

In his suggestions, the actuary suggested among other things:

• The increase of the contribution percentage by 1%
• The gradual increase of retirement age from 63 to 65
• The re-evaluation of pensions to the lowest section based on the consumers’ prices index, instead on the wages’ raises
• The increase of the contribution years necessary for being entitled to receive pension
• The abolition of unemployment allowance for employees who already enjoy pension fund’s allowances (public, semi-public sector)
• The review of the investing policy of the reserve fund.
The two biggest trade unions in Cyprus (PEO and SEK), having studied the actuary’s report, assigned to Greek actuaries the task of studying the situation of the Social Insurance System in Cyprus, examining the propositions of the government’s actuary and providing their own suggestions for the long-term sustainability of the Social Security Fund.

The Greek actuaries came to roughly the same conclusions with the government’s actuaries but they had somewhat different suggestions regarding the increase of contributions and the retirement age. As their report showed, the increase of retirement age would have negligible advantages towards the sustainability of the Social Insurance Fund.

Based on these actuaries’ reports, a dialogue between the government and its social partners was initiated, which came to more or less unanimous decisions. These decisions are reflected in the proposition of the Ministry of Labour which was presented to the Parliament which then voted in favour, in March 2009.

It is particularly important to note that these are balanced measures that do now shrink or reduce pensions, do not extend retirement ages, while keeping the increase in contribution on the basis of current proportions. With the implementation of this legislation the sustainability of the Fund is ensured until the year 2050!

According to this legislation, while in 2008 the percentage of contributions in relation to the employee was equal to 16,6% of his/her insured salary, since 1.4.2009 this was raised to 17,9%, gradually reaching 25,7% in 2039.
The gradual increase of 1,3% is allocated to 0,5% for the employer, 0,5% for the employee and 0,3% for the government.

Apart from that, the law states that

• In order to get a pension, 15 years of insurance will be required, from which at least 10 are paid insurances (today only 10 years of insurance are needed, of which at least 3 are paid).
• For the payment of a lump sum at the age of 68 for those who are not entitled to pension, 6 years of paid insurances must be completed instead of 3 which is the case today
• The maximum number of regular education credits that will be taken into consideration for pension is limited to 6 (based on the legislation today, there is no limitation).
• The right to unemployment allowance for those who retire normally or prematurely and are the beneficiaries of a professional pension scheme to which they have not contributed, is abolished.
• The non-recurring contribution for Defence is reduced from 10% of the interests received by the Fund to 3%.
• The government has to present legislation propositions within one year from the implementation of the law, aiming at the upgrading of the Fund’s investing policy.
The government has already presented to its social partners a proposition for the upgrading of the institutional context of the Social Insurance Fund’s investing policy. It was the first time since the creation of the Fund that this issue was discussed in depth, alongside the role of the social partners in such mechanisms. It is also the first time that the debt of the Government towards the Fund which sums up to 7 billion euros is discussed. In the proposition, a gradual creation of an actual reserve fund is discussed, under the presupposition that the investments will be carried out within the context of low and measured investment risk.

For the creation of this reserve fund there will be an initial funding from the Government (this was done last year with a sum of 200 million euros, while only recently it was decided in a meeting between the social partners and the government that the 2nd instalment will also be 200 million euros).

Andreas Pavlikkas

Nicosia 27.10.2010