The proposed pension reform is the most substantial effort to change the system in decades, estimates Economist Tassos J. Yiasemides, who, in an interview with InBusinessNews, recognises significant positive elements, but also critical pending issues that, as he points out, must be clarified before the new framework is finalised.
At the heart of his concerns are mainly the additional fiscal cost, the method of financing it, and the tight time frame for a reform that will affect future generations.
Among the positives, Yiasemides highlights the enhanced support for low pensions, as well as the change in philosophy regarding the coverage of insurance gaps. He also positively evaluates the maintenance of the retirement age at 65 years, in contrast to the trend of increasing age limits in other European countries.
At the same time, however, he emphasises that the landscape surrounding the cost of the reform and especially its sources of financing remains unclear. As he notes, the increased benefits that will be institutionalized constitute certain future expenses, while the additional revenues that are expected to finance them are based on forecasts.
At the same time, he believes that clearer information is needed on the real benefit of each change per category of insured persons, pointing out, among other things, that the reduction in the actuarial reduction from 12% to 7.5% concerns only the basic part of the pension.
The economist also considers the changes in the management of the Social Insurance Fund to be of decisive importance. He is in favour of ending state borrowing from the Fund and characterizes the independence of its management as perhaps the most important part of the reform.
It emphasizes, however, the need for truly independent supervision, professional management, transparency in returns and international diversification of investments, so that the Fund does not become overly dependent on the Cypriot economy.
Finally, it attaches particular importance to strengthening the second pension pillar through the Provident Funds, favoring a system of automatic registration of employees with the right to opt out and a gradual increase in contributions.
For Tassos J. Yiasemides, however, the real success of the reform will not be judged by whether it is voted on within the scheduled timeframe, but by whether it proves to be economically viable, institutionally reliable and capable of ensuring adequate pensions for future generations.
How do you evaluate the proposal? What positives and weaknesses do you identify?
It is the most substantial effort that has been made in decades regarding the reform of the pension system, if we exclude the changes that were imposed since the time of the memorandum.
The positives include (1) greater support in cases where it is most needed, in low pensions, (2) the fact that the state is changing its way of thinking and, instead of discovering at 65 that someone has insurance gaps and supplementing their pension with benefits, it will pay a contribution on their behalf at the moment the gap is created, e.g. for a mother who has been left out of work, for a caregiver, for a person with a disability. It is fairer and more transparent, because the cost is visible every year instead of being hidden, and (3) the retirement age remains at 65, at a time when the whole of Europe is raising it.
There are also issues that require further discussion and analysis. The most important thing is that we do not yet know exactly how the additional cost will be covered. We hear about €50 million per year for the first five years, but the Fiscal Council itself says that the cost and the method of financing have not been determined. The increases will be legislated and will be certain, while the revenues that are supposed to cover them are forecasts. This asymmetry should be worrying.
The second issue is the large difference between what was heard and what is included in the reform. It is important to have appropriate management and to explain in detail the parameters per group of the population affected.
The reduction from 12% to 7.5% concerns only the basic part of the pension, i.e. approximately €20 per month, while after the transitional period the years needed to retire at 63 increase from 33 to 38. It is announced as a major concession and yields little.
Furthermore, the widower's pension for men who lost their wives before 2018 is left out. It is an injustice that costs less with each passing year, because the beneficiaries are fewer. Not fixing it saves little and costs a lot in credibility.
A particularly important issue is the time frames that have been given. We are talking about a system that will determine the lives of two generations. It should not be compressed to meet a specific payment date.
Do you agree with the termination of state borrowing from the Fund?
First of all, it is important to clarify what this specific loan means, because it may give the impression that there are billions of euros deposited somewhere. The €12 billion reserve is not money in an account. It is a promise of the state to itself, a promissory note. The problem is that for decades the entire reserve was placed with a single debtor, with a return set by the debtor himself. No properly institutionalized fund in the world manages its members' money in this way.
However, it must also be made clear that the decision does not create new money. The state will simply borrow from the markets instead of from the Fund and pay interest to third parties instead of to itself. This is a real cost to the budget. However, it is worth it because it stops a transfer of burden from the current generation to the next that was happening without being seen anywhere. And the moment is right, since the public debt is on a downward trajectory and Cyprus borrows easily. Such decisions are made when you choose, not when you are forced.
It is noted that the ban on borrowing from the Fund is essentially a political commitment, with the state, in the first difficult year, once again being tempted to borrow from the Fund. And the repayment will have a specific timetable, instead of estimates of around forty years.
How do you evaluate the independence of the Fund?
It is the most important part of the reform and, at the same time, the one that has been discussed the least. The pensions of future generations depend on how this money is invested. The establishment of an independent Authority is the right direction, but success will be judged by the details.
It is important that the same entity that invests is not the one that controls. No one supervises themselves properly. There should be management based on professional criteria and not on a representational logic, clear rules on what the Fund is allowed to buy and mandatory publication of returns every year, so that everyone can judge. In addition, and most crucially for a small economy, there should be strict limits on how much can be placed within Cyprus. A fund that will collect hundreds of millions per year cannot place them in the Cypriot market without artificially raising prices and without turning, in practice, into a development bank. The model should perhaps be the Norwegian fund, with simple, cheap, internationally dispersed placements.
What should be done with Provident Funds?
The “compulsory or voluntary” debate hides the real question, which is how many workers are covered. And here the numbers leave no room. Since neither contributions nor age increase, the Social Insurance Fund can only provide what it can. Adequacy will come from the second pillar or not at all. To put it simply: a contribution of around 10% of the salary for forty years adds around 20 to 25 points to the replacement rate. That is the size that is needed.
Employers ' concerns about costs are legitimate. However, sixty-five years of voluntary operation show that the voluntary model ultimately covers those who need it least. The solution is neither a universal obligation from one day to the next nor incentives that have been tried and failed. It is automatic enrollment with the right to opt out: you automatically join, you can leave if you want. With low initial contributions that gradually increase over a decade, so that the cost is absorbed by future increases and not by the current salary.
Two things are needed. The employee should be able to transfer his fund when changing jobs. And he should be able, if he wants, to receive a monthly benefit instead of a lump sum - because a lump sum at 65 is not a pension. Also, hundreds of small funds with amateur management do not constitute a second pillar; they need to be merged and professionally managed.
The real test of this reform is not its passage in February 2027. It is whether it will endure in the long term, securing the future of future generations.
(Source: InBusinessNews)
