Exerting tremendous strain on public finances
BY SOTIROULA CHARALAMBOUS
Minister of Labour and Social Insurance
It is widely recognized that population ageing is one of the most important challenges facing the European economies over the coming decades. Confronting this demographic challenge will be a long-term and demanding task given its multi-dimensional implications: economic, budgetary and social.
A holistic and an integrated approach is required to be taken by each country, aiming at not only achieving a long-term sustainability of the public pension system but also ensuring adequate social protection and guaranteeing social equity.
At this point, I would like to praise the Ageing Working Group committee for its excellent work in reviewing the long-term sustainability of public finances in the EU, particularly in relation to the projected demographic changes, as reflected in the 2009 Ageing Report.
I believe that there is room for further improvement in the scope of the work of the committee to include tools and options that could potentially be made available to government authorities for taking appropriate action to ensure the long-term viability of their public pension system.
In Cyprus, the overarching challenge for the public pension system is the ageing of its population. The most important components of the public pension system is the earnings-related General Social Insurance Scheme covering all gainfully occupied persons, and according to the 2009 Ageing Report, public expenditure on pensions in Cyprus is projected to rise from 6.3% in 2007 to 17.7% of GDP by 2060, exerting a tremendous strain on public finances. The fact that the bulk of pensions are basically financed on a pay-as-you-go (PAYG) basis will have serious implications for the future sustainability of pensions and for the economy and public finances, in view of the ageing of the population of Cyprus.
As of April 1, 2009, a new legislation in relation to the reform package for the long-term sustainability of the General Social Insurance Scheme came into force. The enacted legislation includes:
ï® a set of measures with immediate effect, aiming at increasing income and reducing expenditure of the Social Insurance Fund (SIF), but also
ï® a set of principles to be followed by the government concerning the upgrading of the investment framework and policy of the SIF and the effective investment management of the SIF, following the establishment of an adequate level of real reserves.
The demographic challenge is addressed mostly through a 55% scaled increase in contributions, over a period of 30 years starting in 2009 and, to a lesser extent, by imposing stricter eligibility conditions to old-age benefits. I would like to emphasize that the reform package is balanced and socially justifiable and has been developed after extensive consultation with social partners.
NEW INVESTMENT POLICY
Concerning the investments of the SIF, the government is developing a new investment framework and policy, based on internationally accepted governance and investment process standards and best practices, which includes the:
(1) Drawdown of the current national reserve invested primarily in non-tradable government debt; and,
(2) Creation of an effective reserve that can be professionally and independently managed outside the general government with the active role of social partners.
Another major challenge of the pension system in Cyprus is the very high risk of relative poverty for the population in the age group 65 and over. This government, that came into office in March 2008, is committed to improving the living standards of the low-income groups by fighting social exclusion and poverty. Particularly for the aged, the programme of the new government includes, inter alia, measures aimed at drastically reducing the at-risk-of-poverty rate by targeting income support and non-monetary benefits to those persons who live below the relative poverty threshold.
The main objective of the government’s social policy is to ensure the financial sustainability of public and private pensions schemes, bearing in mind pressures on public finances and the ageing of populations, in the context of the three-pronged strategy for tackling the budgetary implications of ageing, notably by: supporting longer working lives mainly through enhancing smoother completion of working cycle, and active ageing; by balancing contributions and benefits in an appropriate and socially fair manner; and by promoting the affordability and the security of funded and private schemes.
GOVERNMENT ACTION
We all know that the current financial and economic crisis is negatively affecting social security and in particular pension systems in various countries in different ways including lower investment returns, reduced revenues due to lower contributions, and higher expenditure such as increased unemployment. Thereby, demanding that governments take a variety of actions to reduce economic and social impacts of crisis and restore public confidence in pension systems.
In Cyprus, the global financial crisis has not had any immediate and direct impact on the General Social Insurance Scheme, which effectively operates on a pay-as-you-go basis and aims to provide adequate levels of pension. The only indirect and long-term impact that the financial crisis has on social insurance is that it could increasingly worsen the broader, long-term fiscal challenges of Cyprus.
Of course nobody can predict the duration of this financial crisis, but, if the crisis is sustained, there will obviously be a pressure on the growth of the economy which in turn could have a negative impact on employment, raising the unemployment rate. In turn, this will have negative impact on the long-term sustainability of the General Social Insurance Scheme as the number of contributors will decrease while at the same time the number of recipients of benefits will increase. To this extent, the government has adopted national policies concerning the development of the labour market.
The government intends to continue monitoring the impact of the financial crisis on social security and more importantly of the population ageing and if the need arises, it is determined to take targeted measures to cope with this challenge.
Excerpts from the address of Labour and Social Insurance Minister Sotiroula Charalambous at the meeting of the EPC Working Group on Ageing Populations and Sustainability in Limassol.
