18 January 2008

Bank of Greece urges pension reform to protect public services

The governor of the Bank of Greece has warned the government if it fails to adopt "early and major pension reform" the increased pension expenditure could jeopardise essential public services.

The demographics of the EU27 is expected to change dramatically as life expectancy increases and fertility rates fall, however Nicholas Garganas, who is also a member of the European Central Bank's governing council, claimed the projections for Greece are "more unfavourable" than for the EU as a whole.

He highlighted figures, from the Economic Policy Committee, which showed that while the EU27 will increase public spending on pensions by around 2.2% of GDP between 2005 and 2050, Greece is predicted to increase spending by 10.2%, almost five times higher than the EU as a whole.

Greece is also expected to see an 80% increase in its elderly population over the same time period, compared to a 77% rise for the EU25, but Garganas warned although it is widely recognised the changes have "serious economic, budgetary and social implications for all European countries", there is often strong opposition to any policy changes.

He said: "This situation reflects the fact that the costs of inaction are not borne immediately, making it easy to postpone the necessary adjustment. At the same time, the longer that adjustment is postponed, the greater the costs of failing to act today will be."

At a conference focusing on ‘The Ageing of Europe’s Population: Consequences and Reforms’, Garganas suggested the impact of pension costs on the sustainability of public finances would be "particularly unfavourable" for Greece on the basis of its "initial fiscal position, as the second highest government debt/GDP ratio in the EU".

He claimed the government needs to implement a "comprehensive set of policies to change demographic prospects" including reform of the pension and healthcare systems and sustained fiscal consolidation, such as tax increases or reductions in non-pension public spending.

"In the absence of an early and major pension reform, fiscal consolidation measures by themselves would not be able to eliminate the projected budgetary imbalances without jeopardising the provision of essential public services," warned Garganas.

The pension reforms should aim to ensure the "long-term viability of the public pension system" but he suggested "the sooner the reforms are implemented, the better for both fiscal sustainability and for long-term growth".

"Many countries in the EU have already undertaken reforms that should cushion them from population ageing and its consequences. In the case of Greece, it is essential that appropriate polices be adopted," Garganas added. 

In November, the Greek Prime Minister Costas Karamanlis unveiled 11 social security reform proposals, which included the harmonisation of all pension funds and an increase to the state retirement age, however both public and private sector unions organised a 24 hour strike in December to protest against the changes.

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