Spain has a critical and essential employment problem: high chronic unemployment and job insecurity. Both of these are among the key causes of an embarrassing inequality, one of the worst in Europe.
Then, to complicate the solutions, comes the problem of the high public deficit, which has increased over the last decade as an inevitability. A debt aggravated by its dependence on external financing with a bias toward instability. And at the heart of this debt is the chronic deficit accumulated over the last decade in the pension system, which widens its deficit every year. Read more “The Silent Reform of Spanish Pensions”
Pensions are at the center of Greece’s latest dispute with its creditors.
The Greek Kathimerini newspaper reports that the International Monetary Fund’s managing director, Christine Lagarde, stressed to Prime Minister Alexis Tsipras during a recent meeting at the World Economic Forum in Davos, Switzerland that his government’s proposal for pension reform was inadequate.
The IMF jointly administers Greece’s €86 billion bailout with the European Union.
But Tsipras has said Greece won’t succumb to “unreasonable and unfair demands” and reportedly told Lagarde “there is no way” he can cut pensions for current retirees.
America’s fiscal crisis looks less pressing than only a few years ago. A combination of spending restraint and tax increases that has resulted from messy compromises between President Barack Obama, a Democrat, and the Republican Congress should help push the deficit down to a manageable 2.5 percent of economic output this year.
Hopes of a last-minute deal to save Greece from bankruptcy started to evaporate again on Wednesday when it emerged that the Balkan nation’s creditors had rejected its latest proposals for pension and tax reform.
Another meeting of European finance ministers broke up without an agreement, deferring the matter — once again — to a European Council of government leaders that was due to reconvene on Thursday.
According to documents obtained by the Financial Times, the International Monetary Fund — which jointly administers Greece’s €240 billion bailout with the European Union — wanted Greece to raise the retirement age faster and phase out a “solidarity grant” for the poorest pensioners.
Originally, the far-left government that came to power in Athens earlier this year ruled out any pension cutbacks. Instead, it proposed to reinstall a thirteen month of pension payments, something it could not possibly afford.
When it became clear the creditors would not pay out the final €7.2 billion tranche of Greece’s bailout if it walked back on previous commitments to make the pension system more affordable, the country suggested raising the retirement age to 67 by 2036. It later proposed 2025. The IMF insists on 2022 as a deadline.
The fund also called for a quicker phasing out of the “solidarity grant” and rejected a Greek proposal to raise employer contributions to the main pension plan almost 4 percent, likely fearing that the added tax burden on companies would do little to lift Greece out of recession.
Greece returned to negative growth after it voted Syriza into office in January, a far-left party that campaigned on tearing up the bailout that has kept Greece from going bankrupt for the last five years.
The IMF previously raised doubts about Syriza’s commitment to economic reforms in February. But rather than submit more credible proposals, the party wasted the next four months haggling with its creditors over the terms of another loan and debt relief — both of which eurozone governments and the IMF consistently ruled out if Greece would not comply with the conditions of its original support program.
Pension reform is long overdue. In the years leading up to Greece’s near-default in 2010, government spending on pensions rose from 12 to 17 percent of annual economic output, reaching the highest rate in the eurozone.
Last year, the Greek Finance Ministry revealed that three out of four workers benefit from early retirement rules that allow them to stop working before they even reach the age of 61.
Greek prime minister Alexis Tsipras, who was elected on promises to end austerity, unexpectedly flew to Brussels for crisis talk on Wednesday after suggesting the creditors were negotiating in bad faith. “This curious stance may conceal one of two possibilities: either they don’t want an agreement or they are serving specific interest groups in Greece,” he told reporters.
The IMF also rejected Tsipras’ proposal for a one-off 12 percent tax on all corporate profits over €500 million that was supposed to raise €1.3 billion this year.
But the creditors backed down on their demand to include electricity in the highest, 23 percent sales tax rate and said they would allow Greece to create a new 6 percent discount sales tax for books and medicine.
Time is running out for Greece. Without the last bailout tranche, it could probably not pay off a €1.5 billion loan from the IMF by the end of the month. It may also have to default on €3.5 billion in bond redemptions that are due in the middle of July.
Tsipras’ insistence on relief from the austerity measures to which Greece’s financial support is tied has so far stopped the eurozone from finding a way to prevent one of its members from defaulting on its debt obligations for the first time.
The Greek leader is stuck between creditors who insist on liberal economic reforms and spending cuts and an inexperienced, radical party that is resistant to any compromise with institutions it blames for impoverishing the country.
Belgium’s incoming prime minister Charles Michel emphasized labor and pension reforms in his first speech to parliament on Tuesday as head of a coalition of right-wing parties.
Alternating between Dutch and French, Michel, whose liberal Mouvement Réformateur is the only Walloon party in the new government, called for structural reforms in order to modernize Belgium. “To do nothing is to regress,” he said. “We reject fatalism and paralysis.”
Britain’s chancellor George Osborne on Monday promised a next Conservative Party government would freeze welfare benefits for people of working age and abolish taxes on pensions. In a conference speech, he positioned his as the “party of progress” and dismissed the opposition Labour Party as living in the past.
Speaking in Birmingham, Osborne said the freeze would not include disability benefits, maternity pay and pensions but save £3 billion — money he would put toward financing three million apprenticeships for young Britons, “three million more chances for a better life so we help our citizens get jobs instead of more immigration from abroad.”
The freeze would nevertheless be “a serious contribution to reduce the deficit,” said Osborne, who argued it was also fair. “Families out of work should not get more than the average family in work.”
The pension reforms announced by the French prime minister, Jean-Marc Ayrault, on Tuesday do little to improve the retirement system’s solvability in the long term.
While the pension age remains at 62 — despite President François Hollande’s campaign promise to bring it down to sixty — the number of years of work required to collect a pension is set to rise by one and half between 2020 and 2035.
Starting next year, companies and workers will also be required to pay more into the system, which faces a €14 billion shortfall this year.
The pension fund’s deficit is projected to increase by €6 billion by 2020.
Although the higher payroll contributions should be offset by unspecified reductions in other taxes, business groups have been quick to criticize the absence of structural reform.
“In truth, it is a non-reform,” Pierre Gattaz, the new head of the country’s largest employers’ confederation, told the Financial Times.
Labor unions were dismayed by the requirement to work longer and announced a strike for next month.
Support for reforms
Although French pensions are lower on average than in the rest of Europe, they are paid almost entirely by the state.
Public spending on pensions accounts for 14.4 percent of annual French economic output. The EU average is 12.9 percent.
Surveys suggest a majority would support raising the retirement age and bringing public-sector pensions in line with those in the private sector.
Many civil servants, like bus and metro workers, are able to retire in their early fifties, a source of grievance in a country where one in five people are employed by the government.
The trouble for Hollande is that he has little political leeway in this area. Members of his Socialist Party would likely block reforms, given their reliance on support from public-sector workers and trade unions.
When the European Commission urged France to raise the pension age, Hollande responded that the body could not “dictate” policy.
“It’s up to us and us alone to decide what path to take to obtain the objective,” he said at the time.
Demographics are not on his side, The Wall Street Journal reports.
France had five people of working age for every one retiree in 1950. Today it has 1.4 and the ratio is expected to fall to 1.2 by the middle of this century.
“France’s somewhat higher birth rate might spare it from the worst of the pension crisis that threatens Germany and other European countries a few decades hence,” according to the American newspaper. “But given France’s consistent lack of economic growth, relatively favorable demographics can postpone the pension bomb’s detonation. It won’t defuse the bomb.”