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CYPRUS: Social insurance hikes still mean pensioners get a raw deal

06 January, 2019

Increases in social insurance contributions applied to the premium paid by employers and employees as of January was met with mixed reactions from the social partners who argue over their impact.


Both sides feel that the increase designed to save the Social Insurance Fund (SIF) will not lead to pensioners receiving adequate allowances and will put a strain on the economy.

Although the increase to the social insurance premium is just 0.5% for each side, and 0.3% for the state, it comes just three months before the introduction of the contribution to the national health service (aka General Healthcare System), which will be 1.85% for employers and 1.7% for employees.

Total contribution to the fund from employee and employer is 8.3% from 7.8% and 4.9% (from 4.6%)  by the state.

Social partners feel that countermeasures and incentives should be introduced while the state’s policy on pensions should be revisited.

A Ministry of Labour official told the Financial Mirror that the government regards the current increase and the one to follow in 2023 as imperative for the sustainability of the fund until the year 2080.

She said that employees or employers are not burdened with a significant cost as it is just 0.5% for each side, reminding that the increase was approved in 2009.

Union representatives and the main opposition party AKEL feel although necessary for the viability of the SIF, the increased premium will not solve the real issue which is that pensions given to employees once they’ve reached retirement age are far from adequate.

Representing more than 12,000 members of the Cyprus Hotel Employees Provident Fund,  CEO Marinos Gialeli told the Financial Mirror that pensions given out at the end of an employee’s career cannot sustain the pensioner’s way of life they were accustomed to during their active years.

“Based on calculations, pensions that will be given out over the coming years will be equal to 40% or 45% of employees’ last paycheque. That is to say, increasing the total contribution by 1% will no effect on the pensions given,” said Gialeli.

He said in order for a pensioner to be able to maintain the quality of life they had before retirement, a monthly income equal to 75% of the last paycheque is heeded.

“As things stand, he added, an employee earning EUR 2,000 will have a pension of EUR 800. Also, any plans made today cannot take into consideration inflation over the coming decades,” Gialeli said.

“Furthermore, the social insurance system is based on a pay as you go mentality, that is the current active workforce is paying for the pensioners of today.”

He explained that this is a problem as currently, it takes the contributions of 2.5 employees to cover one pension.

Head of the Hotel employees Provident Fund said that people tend to get married and start families later in life, usually in their 30s, in some cases late 30s.

“That would mean that some pensioners may still have children dependent on them when they reach retirement.”

Gialeli feels that one way out would be the institutionalization of provident funds which would guarantee employees with an additional income of a minimum of EUR 700 per month, according to the employee’s wage and contributions.

He also advises that workers should consider making a private insurance policy which would guarantee them another source of income in their golden years.

AKEL MP and chair of the House’s Labour and Social Insurances Committee, Andreas Fakontis said providing pensioners with a suitable income should be the social insurance fund’s goal.

“Indeed, the increase of the premium is necessary if the Fund is to be viable over the coming decades, and for citizens to enjoy benefits in the meanwhile such as unemployment benefits,” said Fakontis.

He said that coupled with the contribution to the country’s GHS, it will be a significant burden on the shoulders of people, stressing that free healthcare is also important for Cypriots to have a good standard of living.

He added that the fund is under strain due to the financial crisis when wages dropped bringing down contributions.

“That is one of the reasons why people retiring now or in the near future are expected to get low pensions. Cyprus’ ageing population is also adding strain to the Fund,” Fakontis said.

The AKEL MP said that one way in which the state can ensure that its citizens receive an adequate pension is to institutionalise provident funds. That way he said, every pensioner will have a supplementary income to their state pension.

“The state should also think about ways of returning the EUR 7.5 bln it has borrowed over time from the SIF. Furthermore, one of the suggestions that have been on the table for some years now, is the creation of a steering committee for the SIF which will be tasked with designing an investment policy utilizing available funds,” said Fakontis.

A burden on businesses

Employers are concerned about the impact on businesses and the economy from the increase of the SIF premium which will be coupled with the introduction of the GHS contribution.

Michalis Antoniou, Director General of the Cyprus Employers and Industrialists’ Federation (OEB) said concerns were voiced on the consequences from the contribution increase to the SIF.

“Businesses are just beginning to come out of the tight spot they had found themselves during the crisis. They did so with the contribution of their employees who had to take on a heavier workload as businesses were forced to proceed with fewer employees,” said Antoniou.

“The workforce that contributed to companies regaining lost GDP need to be rewarded but the increase of the SIF premium and the introduction of the NHS contribution will make this virtually impossible,” he added.

He explained that the 0.5% SIF increase alone doesn’t change much but coupled with the 1.85% contribution it presents a higher cost for employers.

“Employees will also feel the difference as they will see their salaries shrink by a total of 2.2%. This may not seem like a lot, but this comes at a time where employees need to see their hard work paying off, not their income shrinking.”

Antoniou expects businesses to be more constrained when it comes to development plans because of the increased cost of the workforce.

“There are no indications that businesses will be laying off people, but they will certainly think twice before going ahead with new openings.”

Antoniou explained that most businesses are already paying for private healthcare coverage for their staff which entails the cost of an average 1% of the total payroll.

He stressed that OEB is not against the GHS and expressed the hope that it will proceed smoothly.

“If all goes well, we can consider removing the private healthcare schemes we have. However, we are still talking about a significant difference in the cost of the two schemes.”

OEB’s boss added that the federation has forwarded a series of suggestions to the government, which could take the load off businesses and help the economy continue on its growth path.

Businesses propose the abolition of the coherence fund contribution which amounts to 2% and the reduction of their contribution to the redundancy fund from 1.2% to 0.6%.

“Cyprus’ economy could also benefit from the reduction of the corporate tax from 12.5% to 10%. These measures will generate more income for the state, assist the business world active in Cyprus and draw in more investors,” said Antoniou.

“The aim is not to hinder the GHS or the SIF, but to find ways to facilitate the transition to a reliable health system and support the social insurance fund, with minimal turbulence to the economy as possible,” he added.