Public Pensions and Labor Force Participation: The Case of Greece
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Public Pensions and Labor Force Participation: The Case of Greece Milton Nektarios University of Piraeus, 80, Karaoli & Dimitriou St., 185 34 Piraeus, Greece. E-mail: [email protected]
The pension system of Greece is a representative case of the ‘‘Mediterranean welfare state’’, which is characterized by extensive segmentation, very high payroll tax rates, and yet inadequate pension benefits. In order to explain this paradox we construct an economic–demographic model. We show that in the period 1980–2000, the segmentation of the system and the very low labor force participation rates of the Greek economy have resulted in very high payroll tax rates in relation to the current level of benefits. On top of these problems, the expected adverse demographic developments in the period 2005–2050 will render the pension system completely unsustainable. Major reform proposals are suggested to remedy this situation, which threatens the public finances of the country. The Geneva Papers (2007) 32, 553–569. doi:10.1057/palgrave.gpp.2510144 Keywords: demographic changes; pension system in Greece; economic unsustainability; need for reform
Introduction On top of the demographic problem, public pension systems in some countries have to face the consequences of low labor force participation rates. This phenomenon proceeds from the demographic developments and exacerbates the adverse financial effects of the latter. With widespread pension rights for the retired population, many public pension systems suffer severe financial problems currently because of very low labor force participation rates, which worsen substantially the ‘‘economic dependency ratios’’ (retired/employed labor force), even though the demographic factors have not affected yet the ‘‘dependency ratios’’ (retired/active population). Greece has a public pension system that operates on a pay-as-you-go (PAYG) basis, and its finances have suffered during the post-war period from relatively low labor force participation rates. Greece still has the lowest labor force participation rates in the EU-15. The problem is exacerbated by the extreme segmentation of the pension system and the concomitant extensive contribution evasion. All these have led to the creation of substantial deficits in the pension system since the late 1980s. Still worse, the country has not undertaken so far any serious initiatives to reform the pension system in view of the adverse demographic problems that will prevail in the coming decades.
The Geneva Papers on Risk and Insurance — Issues and Practice
554 Table 1 Main pension funds in Greece, 1998 Employment group
Private sector wage earners Farmers Non-agricultural self-employed Civil servants Employees in public corporations
Number of insured (thousands)
Number of pensioner (thousands)
1.900 1.135 897 423 81
872 759 239 350 57
Source: Government of Greece (2001a, b).
Greece is a representative case of the ‘‘Mediterranean welfare state’’.1 The basic characteristics of its pension system are: (a) extensive segmentation, (b) high payroll tax r
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