## 1. The Greek Pension System Prior to 2015–16 Reforms

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### Background: early pension reforms and outcomes
- Pension spending rose during 2000–10 from close to 11 percent of GDP to almost 15 percent of GDP; the euro-area average was 12 percent in 2000.
- The system’s deficit reached an estimated 7.3 percent of GDP by 2010, contributing to an overall general government deficit of close to 11 percent.
- The OECD projected pension spending was expected to double by 2050, driven by rapid population aging and a doubling of the old-age dependency ratio.
- The 2010 comprehensive reform aimed to contain future pension spending by:
  - setting early and statutory retirement age at 60/65 for all insured and increasing required years of contributing from 35 to 40;
  - tightening early retirement rules by introducing a comprehensive penalty for early retirement and streamlining hazardous-professions lists;
  - redesigning the benefit formula by introducing a basic pension component of €360 per month plus an earnings-related pension with accrual rates ranging from 0.8 to 1.5 percent of earnings (compared to 2–3 percent before the reform), introduced uniformly for all main pension funds (except the farmers’ fund OGA);
  - linking pensionable earnings to lifetime earnings rather than the best five of the last ten years.
- The 2010 reform flattened the benefit schedule and weakened contribution-benefit links by introducing the non-contributory basic pension, and the reform was undermined by extensive grandfathering of previous early retirement options that triggered a massive wave of early retirements.
- Further reforms during 2011–13 included:
  - a zero-deficit rule for auxiliary pension funds (not implemented);
  - increases in early and statutory retirement ages by two years to 62 and 67, respectively;
  - freezing indexation of pensions until 2016;
  - reducing benefits of current retirees, including reducing and subsequently eliminating the 13th and 14th pension payments and introducing progressive cuts above certain limits.
- Implementation problems and legal setbacks included the non‑implementation of the zero‑deficit rule, extensive grandfathering that reduced the effectiveness of retirement‑age increases, and a CoS ruling in 2015 that found the 2012–13 pension cuts unconstitutional (cuts had been expected to yield 2¼ percent of GDP in gross fiscal savings).

### Fiscal and distributional outcomes prior to the 2015–16 reforms
- Pension spending increased from 14.8 to 17.7 percent of GDP during 2010–2015.
- The average pension declined by about 8 percent during 2010–2015, while GDP declined by around 25 percent over the same period, resulting in higher pension spending relative to output.
- Adjusting for potential output reduces the measured increase since 2010 to 2.0 percent of GDP, yet Greece’s pension spending remained the highest in the euro-zone.
- Contribution arrangements and revenues:
  - Pension contribution rates for employers and employees stood at 26 percent pre-May 2016 reforms (including main and supplementary pensions), above the euro-area average of 21 percent.
  - Pension contribution revenues were 6½ percent of GDP compared to a euro-area average of about 8 percent in 2015.
- Labor market and compliance context:
  - Employment declined by 19 percent since 2009.
  - Unemployment rate was 25 percent at end-2015.
  - Wages fell by more than 20 percent during 2010–15.
  - Ministry of Labor reported about 9 percent of audited employees and 18 percent of audited companies were not formally declared in late 2014.
  - Collection rates varied across funds: about 30–50 percent in the farmers’ fund, 55 percent in the fund for self-employed, and about 80 percent in the fund for doctors, lawyers and engineers; arrears among the self-employed were 4.5 times annual revenue collected.
- State financing and fund deficits:
  - State transfers to the pension system rose from 7.3 percent of GDP in 2010 (excluding lump-sum funds) to more than 10½ percent of GDP by end-2016.
  - In many funds contributions covered less than half of benefit spending; the state was mandated to cover deficits and to subsidize OGA where insured paid only the employees’ contribution of 7 percent.
- Fragmentation and benefit layering:
  - By end-2014 the mandatory main pension system was differentiated into seven occupational funds; the unified benefit rule set to take effect in 2015 was never applied.
  - Auxiliary funds were merged under ETEA in 2012 and transformed into an NDC in 2014 (pro‑rated for pre‑2014 periods) that included a sustainability factor; the zero‑deficit rule was not implemented.
  - Multiple benefit layers coexisted (basic, contributory, minimum, auxiliary, lump-sum, dividend, targeted); about half of pensioners received one pension, 35 percent two, and 15 percent three or more.
- Benefit generosity and fairness indicators:
  - Average old-age pension at end-2015 was estimated at €978 (IDIKA, 2015).
  - Gross replacement rate at end-2013 was about 81 percent (the highest in the euro-area).
  - Economic benefit rate was 54 percent in Greece versus a euro-area average of 43 percent.
  - Cohort analysis indicates cohorts who retired around this time received lifetime benefits that in present value terms exceeded lifetime contributions by more than four‑fold.
  - Comparative examples (selected):
    - Standard Pension ("Eckpension") in 2014: Germany 1,287; Greece 1,152.
    - Average pension (comparable data) in 2015: Germany 1,285; Greece 971.
    - GDP per capita (2015): Germany 3,108; Greece 1,358.
    - Ratio of standard pension to average wage: Germany 41%; Greece 81%.
    - Effective retirement age (new old age pension): Germany 64; Greece 59.
    - Average contributory period (new pensions, 2010): Germany 36.3; Greece 29.3.

### Distributional outcomes, poverty, and labor incentives
- Poverty and ownership:
  - Poverty rate for retirees declined by more than 9 percentage points since 2010 to 9.7 percent at end-2016.
  - Euro area average poverty rate: 13.0 percent.
  - Poverty rate for the working-age population increased to 23.5 percent at end-2015 (euro-area average 18.2 percent).
  - Share of home ownership of the elderly: 84 percent in Greece versus 53 percent in Germany.
- Minimum and targeted pensions; incentives:
  - Minimum pension amounted to €5,844-€8,400 annually, exceeding the standard poverty threshold of €4,500 (EU-SILC, 2016).
  - EKAS eligibility: income below €9,200 per annum.
  - Minimum wage cited: €7,963.
  - A minimum wage earner contributing for 15 years could receive a pension similar to someone who worked and contributed for 31 years, weakening incentives to contribute beyond 15 years.
  - Greece had the highest ratio of the elderly receiving minimum pensions in the euro area.
- Retirement ages and contribution histories:
  - Despite statutory ages of 62 (early) and 67 (standard), the average retirement age of old-age retirees fell to 59 years.
  - Distribution of retirement applications at end-2015: spike at 15 years of contributions (14 percent); about half of applications by 26 years; only about ¼ after 35 years; a small fraction after the post-2010 requirement of 40 years.
- Self-employed incentives:
  - Contributions for the self-employed remained based on assessed (notional) earnings with 14 notional income classes for OAEE; ¼ qualified for the lowest class (€763 per month); ⅔ in the four lower classes (up to €1,213 per month).
  - Minimum notional income scales in other funds ranged from €487 to €693 per month.
  - Share of social contributions paid by self-employed: 16 percent; share of self-employed in total employment: 35 percent.

### Objectives and fiscal target of the 2015–16 reforms
- Structural goals:
  - (i) tightening early retirement rules;
  - (ii) harmonizing main pension benefit rules, including addressing the CoS ruling;
  - (iii) phasing out EKAS;
  - (iv) putting auxiliary, dividend, and lump-sum funds on a more sustainable footing;
  - (v) harmonizing contribution rules; and
  - (vi) consolidating main pension funds.
- Fiscal target: achieve fiscal savings of about 1½ percent of GDP by 2018 (IMF, 2017a,b).

### Key reform measures and mechanics
- Early retirement:
  - Gradual convergence by 2022 of grandfathered retirement ages toward 67 (or 62 with 40 years of contributions).
  - Increased benefit discount for each year of early retirement from 6 to 16 percent for affected individuals.
  - Abolished mandatory retirement of civil servants; vesting protections left eligibility unchanged for many (exempting up to ¾ of civil servants with a short period of service).
- Harmonized benefit rule:
  - Single uniform benefit rule with basic and contributory components.
  - Basic pension increased from €360 to €384 per month at 20 years of insurance.
  - New contributory formula with marginal accrual rates of 0.77 to 2 percent depending on years of insurance.
  - For new retirees the new rule applied without pro‑rating; existing main pensions frozen at end-2014 levels (about 1.4 million current pensioners affected where formula-implied pensions are below end-2014 levels).
  - Positive differences to be eliminated over 5 years in equal steps starting from 2019.
- Basic, minimum guaranteed, and targeted pensions:
  - With a higher basic pension, minimum guaranteed pension limits were eliminated for all retirees (except work‑related disabilities).
  - EKAS phase-out by end-2019 initiated; fragmented compensation provided in 2016 and a “bonus” for 2017 to retirees with pensions below €850 per month.
- Pensionable earnings and valorization:
  - Principle retained to relate pensions to lifetime earnings; electronic records predominantly available since 2002.
  - Valorization changed from inflation to nominal wages; move to wage valorization postponed until 2021.
- Supplementary pensions:
  - Selective cuts for pensioners with total benefits above €1,300 per month (about 200,000 current retirees); supplementary pensions frozen while funds are in deficit.
  - Cuts based on a unified 0.45 percent accrual rate on pensionable earnings up to end-2014; NDC applies beyond that.
  - Supplementary funds deficit was about 0.4 percent of GDP at end-2015.
  - Authorities temporarily increased supplementary social security contribution rates by 1 percentage point until May 2019 (to be phased out thereafter) and pledged to use assets of the supplementary fund to cover remaining deficits.
- Other harmonization and eligibility changes:
  - Accrual rates in dividend funds reduced to 0.215 percent with automatic adjustment to eliminate annual deficits.
  - Lump-sum funds replacement rates harmonized and reduced to 60 percent with full earnings valorization up to 2013 and NDC beyond.
  - Child and spouse bonuses abolished for new retirees.
  - Survivor pension age requirement of 55 for permanent entitlement introduced; below 55 survivor pensions limited to 3 years with a possible 2‑year contribution subsidy.
  - Disability pensions shielded from cuts pending introduction of revised unified rules.
  - Preretirement pensions abolished for new retirees; multiple basic pensions abolished.
- Contributions and self-employed:
  - Main pension contributions harmonized at 20 percent for all employees (implying an increase for farmers by 13 percentage points over five years).
  - Health contribution rates for retirees increased to 6 percent.
  - Ceiling for monthly earnings to calculate contributions increased to €5,860.8 (10 times the minimum wage) and harmonized.
  - Social security contribution base for self-employed transformed to actual earnings with a minimum income limit equal to the minimum salary for an unmarried employee above 25 years (€586 per month at the time of reforms).
  - Exemptions for certain vested groups (lawyers, doctors, engineers, farmers) remained, including reduced rates and a 30 percent discount on the minimum earnings limit.
- Administrative merger and digitalization:
  - Creation of a single unified pension fund (EFKA) with single management and administrative functions; abolition of other funds’ governance arrangements (with some exceptions).
  - Electronic records to be created for new and existing retirees to facilitate recalibration, minimize errors, speed processing, and eliminate backlog of unpaid pension obligations.

### Medium‑run and long‑run implications
- Medium run:
  - Reform aimed to achieve savings of 1½ percent of GDP by 2018.
  - Reform still left a significant pension system deficit of 7-8 percent of GDP over the medium term after the output gap closes.
- Long run:
  - 2018 Ageing Report projects Greek pension expenditure to decline to 13 percent of GDP by 2040 and to 11½ percent of GDP by 2060.
  - Introduction of the new national pension increased the benefit rate by more than 1½ percentage points on average (3½ percentage points for a minimum wage earner) compared to the pre-reform regime.
  - The 2015–17 reforms are expected to reduce steady‑state replacement rates by about 4.4 percentage points.
  - Moving from price to wage valorization in the steady state can add 5-6 percentage points to gross replacement rates of an average earner around 33-36 years of full service just before retirement.
  - Even with full implementation as captured in the 2018 Ageing Report, the long‑run steady state would still:
    - require about 4 percent of GDP in state transfers; and
    - provide lifetime benefits that exceed lifetime contributions by about 1.5–1.7 times.
  - Long‑run savings therefore depend crucially on eligibility restrictions and cleanup of other pension components.

### Incentives, fairness, and legal/fiscal risks
- Incentives to contribute:
  - A higher national pension plus lower accrual rates flattens benefit profiles and weakens contribution‑benefit links, with adverse implications for labor force participation.
  - Combined national and contributory benefit at 15 years of insurance provides a minimum pension guarantee around 115 percent of the poverty threshold, reinforcing incentives to retire after short careers.
- Fairness:
  - Fiscal adjustment was largely borne by new generations of retirees with longer careers; individuals with shorter careers (around 20 years) may see future replacement rates and average pensions increase.
  - Main pensions of current retirees were protected through the pension freeze, exacerbating inter-generational imbalances.
  - Special interest groups continue to receive exemptions and special treatment; the system remains actuarially unfair.
- Legal and fiscal risks:
  - CoS ruling in 2015 found 2012 cuts unconstitutional; ongoing court procedures could result in large retroactive payments.
  - Government ordered retroactive payments in July 2020 covering an 11‑month period amounting to almost 1 percent of GDP (excluding holiday bonuses and supplementary pensions); new claims cannot be ruled out.
  - An October 2019 CoS ruling favored EFKA merger and recalculation of benefits but requested adjustments that will raise longer‑run costs and adjust contributions for the self-employed.
  - The annual cost of the court ruling was initially estimated around 0.2 percent of GDP and is projected to rise to 0.5 percent of GDP in the late 2040s and eventually reach 0.7 percent of GDP in 2070.
  - The 2017 reform package (pre‑legislated, scheduled for January 1, 2019) was not implemented; its non‑implementation was a lost opportunity to deliver net savings of 1 percent of GDP by extending 2016 rules to existing retirees and recalibrating pensions without transitional arrangements.

### Post‑program developments, rollbacks, and outlook
- Rollbacks after program exit:
  - In 2018 pension contributions were reduced (by ca ⅓) to 13.33 percent for the self-employed and professionals, and to 12 percent for farmers (in some cases retroactively for 2017).
  - Temporary 50 percent subsidy on employers' contributions for youth introduced.
  - Survivors’ pension reforms reversed in 2019 (reinstated previous benefit level of 70 percent and relaxed age criteria).
  - An “Easter” pension bonus was reintroduced in May 2019 for about 2.5 million pensioners at an approximate cost of €900 million or 0.5 percent of GDP annually.
- February 2020 law adjustments:
  - Applied higher accrual rates for workers with longer contributory periods.
  - Restored supplementary pension levels mandated by the court.
  - Modified self-employed social security contributions by de‑linking from income and offering a menu of contribution and benefit scales (reintroducing fragmentation).
  - The Easter bonus restored earlier was abolished to partially finance higher main and supplementary pensions resulting from the ruling.
- Outlook and additional risks:
  - The 2021 Ageing Report projects both annual pension spending and contributions to increase by about 1 percent of GDP in the long run (versus the 2018 Ageing Report), leaving the annual deficit around 4 percent of GDP.
  - Transitional costs would increase if a three‑pillar system is introduced that transforms supplementary funds for the newly insured into fully‑funded schemes and introduces private insurance.
  - Government commitment to a gradual reduction in social security contributions by 5 percentage points during 2020‑2023: 0.9 percentage points in effect as of June 2020, plus a legislated 3 percentage point reduction for 2021 and announced for 2022 (reductions thus far do not concern pension contributions).
  - Legal risks have decreased but remain; the pilot trial decision on the 2015 reform was pending at the time of assessment and new challenges continue to emerge.

### Policy assessment and recommendations
- System diagnosis:
  - The Greek pension system "has been complex and unaffordable."
  - Generous benefits, nontransparent contribution rules, favorable treatment of special groups, and favorable early retirement options produced an unaffordable system requiring large state transfers.
- Assessment of 2015–17 reforms:
  - The 2015–2017 reforms "have many desirable features" and "constitute an impressive effort by any standards"; they would consolidate institutional structures and harmonize rules if fully implemented.
  - Nevertheless, the system remained costly and contribution‑benefit links weak, with lifetime benefits exceeding lifetime contributions "about 1.5–1.7 times."
- Implementation risks and needed actions:
  - The publication highlights "lingering legal risks and rollbacks amid reform fatigue" and calls for more prudent actuarial assumptions underlying projections.
  - Remaining pension system parameters should be clearly defined (for example, disability pensions, contributory welfare benefits).
  - Political ownership and legal uncertainties "should be decisively resolved."
  - Reform design should "appeal on shared principles of equity and fairer burden sharing" to foster acceptability and durability.
- Medium‑term priorities:
  - Immediate recalibration of existing pensions would deliver savings to allow for growth‑enhancing fiscal rebalancing and improve inter‑ and intra‑generational fairness by imposing larger cuts on high‑income retirees with shorter contribution years and slightly increasing benefits for lower‑end pensioners with higher contribution years.
  - The permanent non‑implementation of the 2017 reform "is thus a lost opportunity."
- Efficiency and administrative reforms:
  - Strive for efficiency gains, reduce administrative costs, and enhance transparency.
  - Use NGEU funds to upgrade digital infrastructure and expedite completion of electronic records to enable recalibration and clearance of unpaid pensions.
  - Abolish conflicting legislation to clarify reform principles (for example, calculate pension benefits only for periods during which contributions are actually paid).
- Medium‑ to long‑term reform options:
  - Further strengthen contribution‑benefit links and incentives to work and contribute.
  - Review the level of the national pension in light of international trends.
  - Eliminate preferential social contribution exemptions and modernize the contribution base for self‑employed to reflect actual earnings.
  - Pursue more equitable burden sharing across generations and lower the tax wedge "as fiscal space allows" to strengthen work and contribution incentives.

*Source: IMF staff.*

### 1. The Greek Pension System Prior to 2015–16 Reforms ..................................................... 8

### 1. The Greek Pension System Prior to 2015–16 Reforms

### I. Background: early pension reforms and outcomes
- Pension spending rose during 2000–10 from close to 11 percent of GDP to almost 15 percent of GDP; the euro-area average was 12 percent in 2000.  
- The system’s deficit (the difference between pension benefits and contributions) reached an estimated 7.3 percent of GDP by 2010, contributing to an overall general government deficit of close to 11 percent.  
- The OECD described the Greek pension system as “a fiscal time bomb,” projecting pension spending was expected to double by 2050, driven by rapid population aging and a doubling of the old-age dependency ratio (OECD, 2007; EC 2009).  
- The 2010 comprehensive reform aimed to contain future pension spending by:
  - setting early and statutory retirement age at 60/65 for all insured and increasing required years of contributing from 35 to 40;
  - tightening early retirement rules by introducing a comprehensive penalty for early retirement and streamlining hazardous-professions lists;
  - redesigning the benefit formula by introducing a basic pension component of €360 per month plus an earnings-related pension with accrual rates ranging from 0.8 to 1.5 percent of earnings (compared to 2–3 percent before the reform), introduced uniformly for all main pension funds (except the farmers’ fund OGA);
  - linking pensionable earnings to lifetime earnings rather than the best five of the last ten years.
- The 2010 reform also flattened the benefit schedule and weakened contribution-benefit links by introducing the non-contributory basic pension, and it was undermined by extensive grandfathering of previous early retirement options, which triggered a massive wave of early retirements.  
- Further reforms during 2011–13 aimed to contain medium-term costs by:
  - introducing a zero-deficit rule for auxiliary pension funds;
  - increasing early and statutory retirement ages by a further two years to 62 and 67, respectively;
  - freezing indexation of pensions until 2016;
  - reducing benefits of current retirees, including reducing and subsequently eliminating the 13th and 14th pension payments (“holiday bonuses”) and introducing progressive cuts of main and supplementary pensions above certain limits.
- Implementation problems and legal setbacks included:
  - the zero-deficit rule was not implemented, so deficits persisted and were financed from the general budget or asset drawdowns;
  - the increase in retirement age lacked effectiveness due to extensive grandfathering;
  - the 2012–13 pension cuts (expected to yield 2¼ percent of GDP in gross fiscal savings) were ruled unconstitutional by a supreme court (Council of State, CoS) decision in 2015.

### II. Fiscal and distributional outcomes prior to the 2015–16 reforms
- Pension spending increased from 14.8 to 17.7 percent of GDP during 2010–2015.
- The average pension (total nominal pension spending divided by number of retirees) declined by about 8 percent during 2010–2015, but GDP declined by around 25 percent over the same period, resulting in higher pension spending relative to output.
- Adjusting for potential output (cyclical effects) reduces the measured increase since 2010 to 2.0 percent of GDP, yet Greece’s pension spending remained the highest in the euro-zone.
- Pension contribution arrangements and revenues:
  - Pension contribution rates for employers and employees (including main and supplementary pensions) stood at 26 percent in the run-up to May 2016 reforms, above the euro-area average of 21 percent.
  - Pension contribution revenues were relatively low at 6½ percent of GDP compared to a euro-area average of about 8 percent in 2015.
  - High contribution rates combined with high income taxes produced relatively high marginal and average tax wedges in Greece.
- Labor market and compliance context:
  - Employment declined by 19 percent since 2009.
  - Unemployment rate was 25 percent at end-2015.
  - Wages fell by more than 20 percent during 2010–15.
  - Informality and non-compliance reduced contribution bases (e.g., Ministry of Labor reported about 9 percent of audited employees and 18 percent of audited companies were not formally declared in late 2014).
  - Collection rates varied widely across funds: about 30–50 percent in the farmers’ fund, 55 percent in the fund for self-employed, and about 80 percent in the fund for doctors, lawyers and engineers; arrears were especially large among the self-employed (arrears 4.5 times annual revenue collected).
- State financing and fund deficits:
  - State transfers to the pension system rose from 7.3 percent of GDP in 2010 (excluding lump-sum funds) to more than 10½ percent of GDP by end-2016.
  - All main funds experienced large deficits; in many cases contributions covered less than half of benefit spending, notably in funds for energy and communications, the navy, public administration, journalists, and ETAA (doctors, lawyers, engineers).
  - The state was mandated to cover deficits and to subsidize the farmers’ fund (OGA), where insured paid only the employees’ contribution of 7 percent (less than 10 percent of benefits).
- System fragmentation and benefit layering (Box 1 summary):
  - By end-2014 the mandatory main pension system was differentiated into seven occupational funds; the unified benefit rule set to take effect in 2015 was never applied, so funds retained distinct rules.
  - Auxiliary pension funds were merged under a single umbrella (ETEA) in 2012 and transformed into a Notional Defined Contribution (NDC) system in 2014, pro-rated over defined benefit rules for pre-2014 periods; the NDC included a sustainability factor but the zero-deficit rule was not implemented.
  - Multiple benefit layers existed: basic, contributory, minimum pensions, supplemented by auxiliary, lump-sum, dividend, and targeted pensions (e.g., EKAS).
  - About half of pensioners received one pension, 35 percent two, and 15 percent three or more pensions.
  - The fragmentation contributed to intragenerational unfairness and weakened contribution-benefit links.
- Benefit generosity and fairness indicators:
  - The average old-age pension at end-2015 was estimated at €978 (IDIKA, 2015) (ratio of total monthly pension spending to total number of retirees).
  - Comparable PPP-adjusted average pensions in 2015 were similar to the euro-area average, despite Greece’s lower productivity and earlier retirement ages.
  - Examples comparing Greece and Germany:
    - Standard Pension ("Eckpension") in 2014: Germany 1,287; Greece 1,152.
    - Average pension (comparable data) in 2015: Germany 1,285; Greece 971.
    - Average pension (comparable in PPS terms) in 2015: Germany 1,282; Greece 1,200.
    - GDP per capita (2015): Germany 3,108; Greece 1,358.
    - Average wage (2015): Germany 3,131; Greece 1,429.
    - Ratio of standard pension to average wage: Germany 41%; Greece 81%.
    - Effective retirement age (new old age pension): Germany 64; Greece 59.
    - Average contributory period (new pensions, 2010): Germany 36.3; Greece 29.3.
  - Cohort analysis (Fouejieu and others, 2021) indicates cohorts who retired around this time received lifetime benefits that in present value terms exceeded lifetime contributions by more than four-fold.
  - Gross replacement rate (average pension of new retirees to average wage at retirement) was about 81 percent at end-2013, the highest in the euro-area and almost 30 percentage points higher than the euro-area average.
  - Economic benefit rate (pension spending per individual aged 65 and older relative to GDP per working age population) was 54 percent in Greece versus a euro-area average of 43 percent.

*From "REFORMING THE GREEK PENSION SYSTEM", IMF.*

### 10. A corollary of generous pensions relative to wages is that the poverty rate among

### 10–22. Pension outcomes, incentives, and the 2015–16 reform

### Distributional outcomes and poverty
- A corollary of generous pensions relative to wages is that the poverty rate among pensioners has declined, while that for the working-age individuals has increased, pointing to an unequal distribution of the adjustment burden.
- Key figures:
  - Poverty rate for retirees declined by more than 9 percentage points since 2010 to 9.7 percent at end-2016.
  - Euro area average poverty rate: 13.0 percent.
  - Poverty rate in Germany cited: 18 percent.
  - Share of home ownership of the elderly population: 84 percent in Greece compared to 53 percent in Germany.
  - Poverty rate for the working-age population increased to 23.5 percent at end-2015.
  - Euro-area average for working-age poverty: 18.2 percent.

### Minimum and targeted pensions; labor market incentives
- Minimum pensions in Greece remained generous by international standards, curtailing incentives to work and contribute.
- Key figures and thresholds:
  - Minimum pension amounted to €5,844-€8,400 annually, exceeding the standard poverty threshold of €4,500 (EU-SILC, 2016).
  - Means-tested solidarity top-up benefit EKAS eligibility: income below €9,200 per annum.
  - Minimum wage cited: €7,963.
  - In Germany, the income eligibility threshold for means-tested pensions was about ¾ of the 2013 poverty level of €11,749.
- Distributional and incentive implications noted:
  - A minimum wage earner in Greece contributing for 15 years would have received a guaranteed pension similar to a retiree who worked and contributed for 31 years, producing weak incentives to contribute beyond 15 years.
  - Greece had the highest ratio of the elderly receiving minimum pensions in the euro area.

### Retirement ages, contribution histories, and self-employed incentives
- Retirement behavior and contribution patterns:
  - Despite increases in statutory retirement ages to 62 (early) and 67 (standard), the average retirement age of old-age retirees fell to 59 years.
  - Distribution of retirement applications at end-2015:
    - Spike at 15 years of contributions: 14 percent of total applications.
    - About half of retirement applications made by 26 years of contributions.
    - Only about ¼ of applications were made after 35 years of contributions.
    - A small fraction were made after the post-2010 requirement of 40 years.
- Self-employed contribution base and incentives:
  - Even after 2010–12 reforms, contributions of the self-employed continued to be based on assessed earnings (notional income based on number of years of experience) instead of on actual earnings.
  - Notional income classes for OAEE: 14 classes; ¼ qualified for the lowest notional income class (€763 per month); ⅔ in the four lower income classes (up to €1,213 per month).
  - Minimum notional income scales in other funds for self-employed ranged from €487 to €693 per month.
  - Consequences:
    - Young self-employed faced pension bases similar to the minimum wage, implying pension rights much below minimum pensions at 15 years of insurance.
    - Incentives existed to minimize contribution payments and histories and to underreport income or operate in the shadow economy.
    - Share of social contributions paid by self-employed: 16 percent.
    - Share of self-employed in total employment: 35 percent.
    - Result: one of the lowest “revenue productivities” of self-employed in the euro zone.

### Objectives of the 2015–16 pension reforms
- The 2015–16 reforms aimed to address structural deficiencies and reduce medium- and long-term pension costs.
- Main structural goals included:
  - (i) tightening early retirement rules;
  - (ii) harmonizing the main pension benefit rules, including to address the CoS ruling;
  - (iii) phasing out the solidarity grant EKAS;
  - (iv) putting auxiliary, dividend, and lump-sum funds on more sustainable footing;
  - (v) harmonizing contribution rules; and
  - (vi) consolidating the main pension funds.
- Reform fiscal target:
  - The reforms aimed to achieve fiscal savings of about 1½ percent of GDP by 2018 (IMF, 2017a,b).

### Key reform measures and their mechanics
- Early retirement rules:
  - Required gradual convergence by 2022 of all existing grandfathered retirement ages toward 67 years (or 62 years with 40 years of contributions).
  - Increased benefit discount for each year of early retirement from 6 to 16 percent for those affected by the reform.
  - Abolished mandatory retirement of civil servants.
  - Vesting protections meant eligibility to retire earlier for those who by 2015 had reached both required age and years of insurance remained unchanged, exempting a large number (up to ¾) of civil servants with a short period of service.
- Harmonized benefit rule:
  - Introduced a single uniform benefit rule consisting of basic and contributory components.
  - Basic pension component increased from €360 to €384 per month at 20 years of insurance (corresponding to the 2014 poverty level).
  - New contributory formula based on lower marginal accrual rates in the range of 0.77 to 2 percent, depending on years of insurance.
  - For new retirees the new rule applied without pro-rating; for existing retirees main pensions were frozen at end-2014 levels (about 1.4 million current pensioners fall into the category where formula-implied pensions are below end-2014 levels).
  - Positive differences where formula-implied pensions would be higher than end-2014 levels were set to be eliminated over 5 years in equal steps starting from 2019.
- Transformation of basic, minimum guaranteed, and targeted pensions:
  - With a higher basic pension, minimum guaranteed pension limits were eliminated for all retirees across all funds, except those with work-related disabilities.
  - Phase-out of EKAS by end-2019 was initiated; authorities provided fragmented compensation to those who lost EKAS in 2016 and distributed a “bonus” for 2017 to retirees with pension benefit below €850 per month.
- Pensionable earnings and valorization:
  - Reforms retained principle to relate pensions to lifetime earnings, acknowledging electronic records predominantly available since 2002 implying gradual achievement.
  - Valorization of pensionable earnings was changed from inflation to nominal wages.
  - Move from inflation to wage valorization was postponed until 2021.
- Supplementary pensions:
  - Selective cuts of supplementary pensions for pensioners with total benefits above €1,300 per month, affecting about 200,000 current retirees; supplementary pensions frozen as long as funds remain in deficit.
  - Cuts calculated based on a unified 0.45 percent accrual rate applied on pensionable earnings up to end-2014; beyond that the NDC formulae apply.
  - Supplementary funds deficit amounted to about 0.4 percent of GDP at end-2015.
  - Authorities temporarily increased supplementary social security contribution rates by 1 percentage point until May 2019, when this increase will be phased out, and pledged to use assets of the supplementary fund to cover remaining deficits.
  - Note: the increase in contribution rates generates additional pension entitlements under the NDC regime.
- Other pension components harmonization:
  - Accrual rates in dividend funds reduced to 0.215 percent for all retirees with automatic adjustment to eliminate annual deficits.
  - Replacement rates harmonized and reduced across lump-sum funds to 60 percent with full earnings valorization for insurance years up to 2013 and NDC beyond that.
  - Child and spouse bonuses abolished for new retirees.
  - Age requirement of 55 years introduced for surviving spouse to be entitled to a permanent survivor pension; below that age survivor pensions limited to 3 years (with allowance for 2-year contribution subsidy within 5 years from temporary survivor pension).
  - Disability pensions shielded from cuts with a requirement to introduce revised unified benefit rules.
  - Preretirement pensions abolished for new retirees and recalibrated for existing retirees; multiple basic pensions abolished; spending ceilings abolished for new retirees and temporarily lowered for pensions in payment until end-2018.
- Contribution rates and bases, and self-employed:
  - Main pension contributions harmonized at 20 percent for all employees (implying an increase for farmers by 13 percentage points over five years).
  - Health contribution rates for retirees increased to 6 percent (from 4 percent in the main funds and 0 percent in the supplementary funds).
  - Ceilings for monthly earnings to calculate contributions increased to €5,860.8 (10 times the minimum wage) and harmonized for all insured.
  - Social security contribution base for self-employed transformed from notional to actual earnings, subject to a minimum income limit equal to the minimum salary of an unmarried employee above 25 years of age, which at the time of reforms amounted to €586 per month.
  - Eliminated third-party charges previously used to predominantly finance deficits of pension funds for the self-employed.
  - However, exemptions for vested interest groups (e.g. lawyers, doctors, engineers) remained, including reduced rates and a 30 percent discount on the minimum earnings limit (also applying to farmers); the contributions base for self-employed was initially set lower compared to salaried workers net of social contributions (later changed to gross of social contributions for 2018 and 2019); pension benefits for the self-employed accrue even if they do not stay current with contribution obligations.
- Administrative merger, digitalization, and transparency:
  - A single unified pension fund (EFKA) was created for all retirees with single management and administrative functions; other funds (except non-pension activities of OGA and NAT and dividend funds for civil servants) and their governance arrangements were to be abolished.
  - Electronic records were to be created for both new retirees and existing retirees to facilitate recalibration, minimize errors, speed processing, and eliminate backlog of unpaid pension obligations.

*Source: IMF staff.*

### 23.      These measures, if fully implemented, would lower the pension expenditure toward

### 23.      These measures, if fully implemented, would lower the pension expenditure toward

### Medium‑run implications
- Reform aimed to achieve savings of 1½ percent of GDP by 2018.
- Despite that, the reform still left a significant pension system deficit of 7-8 percent of GDP over the medium-term, after the output gap closes.
- The remaining deficit will continue to consume resources from the general budget, preventing reallocation to priorities such as public investment, targeted social welfare, and health care.

### Long‑run implications
- The 2018 Ageing Report (EC, 2018) projects Greek pension expenditure to decline to 13 percent of GDP by 2040 and further to 11½ percent of GDP by 2060 (Box 2).
- Introduction of the new (higher) national pension led to an increase in the benefit rate—the ratio of average pension benefits to average wages—by more than 1½ percentage points on average (3½ percentage points for a minimum wage earner) compared to the pre-reform regime.
- The overall impact of the 2015–17 reforms is expected to reduce steady-state replacement rates (average pensions relative to pensionable wages) by about 4.4 percentage points.
- Moving from price to wage valorization in the steady-state, under staff long-term economic projections, can add 5-6 percentage points to gross replacement rates of an average earner around 33-36 years of full service immediately before retirement.
- Even if all reforms were fully implemented as captured in the 2018 Ageing Report, the long-run steady state Greek pension system would still:
  - require about 4 percent of GDP in state transfers, and
  - provide lifetime benefits that exceed lifetime contributions by about 1.5–1.7 times, falling short of sustainability (Fouejieu and others, 2021).
- Long-run savings therefore crucially depend on restrictions on eligibility and clean-up of other components of the pension system.

### Incentives to contribute
- The combination of a higher national pension and lower accrual rates implies a much flatter pension benefit profile and a worsening of contribution‑benefit links, with adverse implications for labor force participation.
- The combined national and contributory benefit at 15 years of insurance still provides a generous minimum pension guarantee, estimated at around 115 percent of the poverty threshold (compared to a euro-area average of around 70 percent as noted in EC‑SPC 2015a, b), reinforcing incentives to retire after short careers.

### Fairness
- The fiscal adjustment delivered by the main pension recalibration and supplementary benefit reductions is largely borne by new generations of retirees with longer careers.
- Individuals with shorter careers (for example, around 20 years) can see their future replacement rates and average pensions even increasing.
- Main pensions of current retirees were protected through the pension freeze, exacerbating large inter-generational imbalances.
- Specific interest groups continue to benefit from exemptions and special treatment; the system remains actuarially unfair.

### Legal and fiscal risks
- In 2015 the Council of State (CoS) ruled the 2012 cuts in pension benefits unconstitutional; ongoing court procedures and new challenges could result in large retroactive payments.
- A CoS “pilot” trial was expected to clarify unresolved issues regarding retroactive payments related to the 2015 decision.
- Following its issuance in July 2020, the government ordered retroactive payments covering an 11-month period to all pensioners (private and public sector) amounting to almost 1 percent of GDP. These payments exclude holiday bonuses and supplementary pensions and may not fully comply with the court’s verdict; new claims cannot be ruled out.
- A CoS ruling issued in October 2019 ruled in favor of the merger of social security funds into EFKA and the recalculation of pension benefits foreseen in the 2016 reform, but requested adjustments to contribution and pension benefit levels that will result in higher costs over the longer run and adjustments to contributions for the self-employed.

### The 2017 reforms (pre‑legislated, not implemented)
- The 2017 reform package, which aimed to rebalance the fiscal policy mix and included further permanent pension reforms scheduled to take effect from January 1, 2019, was not implemented; relevant provisions were abolished in December 2018.
- The 2017 pension reform would have delivered net savings of 1 percent of GDP by extending the 2016 main and supplementary pension benefit rules to all existing retirees and recalibrating current pensions without transitional arrangements.
- Cuts would have been capped at 18 percent for reductions in main or supplementary pension benefits; for main pensions cuts would have affected about 1.4 million pensioners (about 70 percent of the pensioners in 2015), and the average decline for those with “negative” differences would have been around 14 percent.
- The reform would have improved fairness by imposing larger cuts on high‑income retirees with shorter contribution years and slightly increasing benefits for lower-end pensioners with higher contribution years; the 18 percent cap reduced redistributional impact.
- The reform would have:
  - eliminated negative differences upfront, freeing up fiscal space cumulating to about 10 percent of GDP over 20 years during the transition period, and
  - had little impact on long-run pension expenditure compared with paths with the 4-year indexation freeze in both cases.

### Post‑program developments and rollbacks
- After program exit several pension‑related reforms were rolled back:
  - In 2018 pension contributions were reduced (by ca ⅓) to 13.33 percent for the self-employed and professionals, and 12 percent for farmers, in some cases retroactively for 2017.
  - A temporary 50 percent subsidy on employers' contributions to pensions for the youth was introduced.
  - Earlier reforms to survivors’ pensions were reversed in 2019 by reinstating the previous benefit level (70 percent of the deceased’s pension instead of 50 percent) and relaxing age‑related eligibility criteria.
  - An “Easter” pension bonus (13th month payment) was reintroduced as a permanent measure in May 2019 for about 2.5 million pensioners at an approximate cost of €900 million or 0.5 percent of GDP annually.
- A new pension law adopted in February 2020 adjusted elements of the 2016 reform to address the October 2019 CoS ruling by:
  - applying higher accrual rates for workers with longer contributory periods,
  - restoring the level of supplementary pensions mandated by the court, and
  - modifying the social security contribution system for the self-employed by de‑linking it from income and offering a menu of contribution and benefit scales (reintroducing fragmentation).
- The Easter bonus restored earlier was abolished to partially finance the higher main and supplementary pensions resulting from the ruling.
- The annual cost of the court ruling, initially estimated around 0.2 percent of GDP, will rise gradually over time, hitting 0.5 percent of GDP in the late 2040s and eventually reaching 0.7 percent of GDP in 2070.

### Medium‑ and long‑term outlook and additional risks
- The 2021 Ageing Report (EC, 2021), which incorporates post-program developments, projects both annual pension spending as well as contributions to increase by about 1 percent of GDP in the long run (vis‑à‑vis the 2018 Ageing Report projections), leaving the annual deficit on the order of 4 percent of GDP.
- Transitional costs would increase if the government proceeds with plans to introduce a three‑pillar system, transforming supplementary pension funds for the newly insured from pay‑as‑you‑go into a fully‑funded scheme and introducing private insurance.
- The government committed to a gradual reduction in social security contributions by 5 percentage points during 2020-2023; out of the announced 5 percentage point reduction, 0.9 percentage points has been in effect as of June 2020, and an additional 3 percentage point reduction was legislated for 2021 and announced for 2022. These reductions thus far do not concern pension contributions.
- Legal risks have decreased but remain, as the pilot trial decision on the 2015 reform was still pending and new challenges continuously emerge.

### Box 2 — Long‑Term Pension Spending Projections (summarized findings)
- The 2015–2017 pension reforms have the potential to significantly improve affordability, with gross replacement rates of old‑age main pensions remaining broadly comparable to those under the 2010 reform due to offsetting factors.
- Implementation risks include:
  - Reversals (abolishing pre-legislated recalibration of pensions, non‑implementation of harmonization of contribution rules, increased accrual rates) that would increase expected spending.
  - Indexation rule for the national pension (indexed to inflation and last year’s real GDP growth in equal proportions though cannot exceed the rate of inflation) which in long‑term projections leads to about 1½ percent of GDP in savings until 2060; a more prudent actuarial assumption would be wage indexation.
  - Labor market exit age projected to increase from 62 in 2017 to about 68 years under the projections, potentially reducing pension spending by close to 5 percent of GDP in the long run if realized.
  - Fragmented discretionary social supports to retirees and other age‑related spending pressures (health and education) that on net are likely to add in excess of ½ percent of GDP to public sector spending needs.
  - Legal risks: the government paid 1.4 billion euros in retroactive payments in 2020; a pilot trial expected to clarify unresolved issues took place in January 2021 but its outcome was not yet known.

*Source: IMF staff assessment drawing on EC Ageing Reports, Greek Authorities, Council of State rulings, and cited IMF and academic analyses within the content.*

### 32. The Greek pension system has been complex and unaffordable, and earlier efforts to

### The Greek pension system: assessment and reform recommendations

### System diagnosis and past reforms
- The publication states that the Greek pension system "has been complex and unaffordable."
- Generous benefits, nontransparent contribution rules, favorable treatment of special groups, and favorable early retirement options resulted in an unaffordable pension system.
- After two major attempts to reform the system and bring down medium- and long-term costs, pension spending in Greece at end-2015 "remained the highest in the euro-area," requiring state transfers that are several times larger than the euro-area average.
- The prolonged economic downturn exacerbated the pension system’s imbalance, although the key driver remained the structure of the system, based on overly generous benefits and a narrow contribution base.
- The 2015–2016 reform "has many desirable features," and the reforms legislated between 2015 and 2017 "constitute an impressive effort by any standards."
- If fully implemented, the 2015–2017 reform "will consolidate the pension system’s institutional structures and largely harmonize benefit and contribution rules."
- Nevertheless, "the overall pension system remained costly," with the system deficit over the medium term "an outlier compared to euro-area peers."
- Even in the long run, retirees would receive lifetime benefits that exceed their lifetime contributions "about 1.5–1.7 times."
- Contribution-benefit links "remain weak," limiting incentives to participate in the labor force, and the system is unfair with regard to the treatment of current and future retirees, as well as special interest groups.

### Implementation risks and outstanding issues
- The publication highlights "lingering legal risks and rollbacks amid reform fatigue" that give rise to significant implementation risks.
- Several structural measures "have been reversed" and the projections remain subject to implementation risks.
- The publication calls for more prudent assumptions underlying the pension projections and that remaining pension system parameters should be clearly defined (for example, disability pensions, contributory welfare benefits).
- The publication recommends that political ownership and legal uncertainties "should be decisively resolved."
- It recommends reform design "that would appeal on shared principles of equity and fairer burden sharing" to foster greater acceptability and durability of reforms.

### Medium-term policy priorities and fiscal implications
- The 2017 reforms "were a crucial step towards medium-term affordability and creating space for growth-enhancing fiscal rebalancing."
- Immediate recalibration of existing pensions would deliver the needed savings to allow for growth-enhancing measures beyond achieving the primary balance targets.
- Recalibration would also improve inter- and intra-generational fairness by:
  - achieving more equitable burden-sharing across generations;
  - imposing larger cuts for high-income retirees at shorter years of contributions;
  - slightly increasing pension benefits for lower-end pensioners with higher years of contributions.
- The publication states that the permanent non-implementation of the 2017 reform "is thus a lost opportunity."

### Efficiency, transparency, and administrative reforms
- The publication emphasizes that "striving for efficiency gains, reducing administrative costs, and enhancing transparency should remain high on the reform agenda."
- NGEU funds "provide an ideal opportunity to upgrade the digital infrastructure of pension funds."
- The publication calls to expedite completion of electronic records for:
  - efficient recalibration of pensions; and
  - clearance of the stock of unpaid pensions to allow for realistic account of all obligations.
- Conflicting legislation should be abolished to allow full clarity on reform principles (for example, calculating pension benefits only for periods during which contributions are actually paid).

### Medium- to long-term reform options
- To improve sustainability and incentives for longer contributions, the publication recommends considering additional reforms over the medium to long run:
  - further strengthen contribution-benefit links and resulting incentives to work and contribute;
  - review the level of national pension in light of international trends;
  - eliminate preferential treatments in terms of social contribution exemptions;
  - modernize the contributions base for self-employed to reflect actual earnings to strengthen fairness and sustainability;
  - pursue more equitable burden sharing across generations to create space for growth-enhancing fiscal rebalancing;
  - lower the tax wedge "as fiscal space allows" to help strengthen work and contribution incentives.

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021188-print-pdf.pdf_