2.5 Sustainable social welfare
2.5.1 Pensions
As a prior action, the Authorities will adopt a comprehensive reform of the pension system, to strengthen long-term sustainability while targeting savings of around [1/2 percent] of GDP in [2016] and around [1 percent] of GDP by [2018], on top of the full compensation of the impact of the implementation of the Court ruling on the pension measures of 2012, [2 percent] of GDP, with legislative provisions to:
i. Establish a closer link between contributions and benefits, through specific design and parametric changes (see details in TMU). Introduce a national pension of 345 euros with 15 years of contribution that increases to 384 euros with 20 years of contributions, in order to replace the minimum pension that will be abolished; adopt a more progressive marginal scale of accrual rates starting at 0.77 percent and ending at 2.00 percent,which will help strengthen incentives to work and contribute, to maintain replacement rates below those deriving from the current law (reformed in 2010); for new retirees, the new uniform rules will be applied immediately, without pro-rating of previous benefit rules.
ii. Recalibrate pension benefits. In order to achieve intra- and inter-generational equity and address the costs of the Constitutional Court ruling, recalibrate all the existing pensions on the basis of the new parameters of the uniform pension rule and by using the last 10 years of pensionable earnings {what will happen to the current pensions is still unclear, particularly since the Government assures everyone that there will be no cuts in any pension. On the other hand it is hard to see what else rather than cuts can be done}.
iii. Freeze the current pensions in payment until their value become equivalent to the one calculated under the new uniform rules. In the cases data availability prevent from the individual recalculation of the pension benefit, temporary pensions will be computed based on imputation. Temporary pensions must be converted to final recalibrated pensions by [end-December 2017].
iv. Eliminate EKAS and harmonize contributions rules. Phase out gradually the solidarity grant (EKAS) for all pensioners by end-December 2019 [(0.5 percent of GDP)], starting with the top 20 percent of beneficiaries in April 2016; broaden and modernize the contribution and pension base for all self-employed, including by switching from notional to actual income, subject to minimum required contribution rules; phase out within three years state financed exemptions and harmonize contributions rules for all pension funds with the structure of contributions of the main social security fund for employees (IKA); abolish immediately all nuisance charges financing pensions and offset these by increasing contributions or cutting benefit in line with the new single rule in specific funds; gradually harmonize pension benefit rules of the agricultural fund (OGA) with the rest of the pension system in a pro rata manner; unify disability and contributory welfare benefit rules by end-December 2016; make the provision of survivor pensions more restrictive by including an eligibility requirement of [57] years of age for the survivor spouse to be entitled to a permanent survivor pension and limit temporary survivor pension of the spouse aged below [57] to 3 years; abolish from 1 January 2017 child bonuses provided through the pension system.
v. Address the deficit in auxiliary and dividend funds. Implement the sustainability factor as provided by the 2012 reform of the supplementary pension [or find mutually agreeable alternative measures in the pension system] so as to achieve balance in the auxiliary funds in 2016 and the medium term; adjust spending in all dividend funds (i.e. MTPY) in a way that automatically eliminates any annual deficit.
vi. Ensure the compliance of the reform with Constitutional Court principles. To address legal risks, the authorities will accompany the pension reform with detailed explanatory notes and a specific economic study detailing the compliance of the reform with Constitutional Court principles and will seek ex ante opinions from the Court of Auditors and the Scientific Council of the Parliament.
Concerning the governance of social security, as a prior action the authorities will (a) legislate to fully harmonize contribution and benefit payment procedures across all funds; (b) establish a single entity (EFKA) to be operational from [July] 2016 and (c) legislate that by end 2016 all social security funds [with the exception of the functions XX of fund YY] will be eliminated and all insured individual will be transferred into the new single entity and all existing governance and management arrangements of such funds will be abolished by that date.
The authorities will by [June] 2016 define a strategy and work plan to consolidate the single register and service history of all insured persons, and ensure data consistency before migrating the data of all insured persons to the operation platform of the new organization.
2.5.1 Pensions
The 2010 and 2012 pension reforms, if fully implemented, would substantially improve the longer-term sustainability of the overall pension system. However the pension system is still fragmented and costly and requires significant annual transfers from the State budget. Hence much more ambitious steps are required to address the underlying structural challenges, as well as the additional strains on the system caused by the economic crisis. Contributions have fallen due to high levels of unemployment at the same time as spending pressures mounted as many people opted to retire early.
To address these challenges, the authorities commit to implement fully the existing reforms and will also proceed with further reforms to strengthen long-term sustainability targeting savings of around ¼% of GDP in 2015 and around 1% of GDP by 2016. The package inter alia aims to create strong disincentives for early retirement through increasing early retirement penalties and by the gradual elimination of the grandfathering of rights to retire before the statutory retirement age.
The authorities have already increased health contributions of pensioners to 6% on their main pensions and applied health contributions of 6% also to supplementary pensions from 1 July 2015; will integrate into ETEA by 1st September 2015 all supplementary pension funds and ensure that all supplementary pension funds will be only financed by own contributions from 1 January 2015; will freeze monthly guaranteed contributory pension limits in nominal terms until 2021; and ensured that people retiring after 30 June 2015 will have access to the basic, guaranteed contributory, and means- tested pensions only at the attainment of the statutory normal retirement age of currently 67 years.
i. As a prior action, the authorities will: a) clarify the rules for eligibility for the minimum guaranteed pensions after 67 years; b) issue all circulars to ensure the 14 implementation of the 2010 law; c) correct law 4334/2015 to among others correctly apply the freeze on monthly guaranteed benefits (instead of contributions state subsidy) and to extend to the public sector; d) eliminate gradually the grandfathering to statutory retirement age and early retirement pathways, progressively adapting to the limit of statutory retirement age of 67 years at the latest by 2022, or to the age of 62 and 40 years of contributions, applicable for all those retiring (except arduous professions and mothers with children with disability) with immediate application.
ii. The authorities will by October 2015 (key deliverable) legislate further reforms to take effect from 1 January 2016: a) specific design and parametric improvements to establish a closer link between contributions and benefits; b) broaden and modernize the contribution and pension base for all self-employed, including by switching from notional to actual income, subject to minimum required contribution rules; c) revise and rationalize all different systems of basic, guaranteed contributory and means tested pension components, taking into account the incentives to work and contribute; d) the main elements of a comprehensive consolidation of social security funds, including the remaining harmonization of contribution and benefit payment procedures across all funds; e) phase out within three years state financed exemptions and harmonise contributions rules for all pension funds with the structure of contributions of the main social security fund for employees (IKA) ; f) the abolition from 31 October 2015 of all nuisance charges financing pensions to be offset by reducing benefits or increasing contributions in specific funds; g) gradually harmonize pension benefit rules of the agricultural fund (OGA) with the rest of the pension system in a pro rata manner; h) that early retirements will incur a penalty, for those affected by the extension of the retirement age period, equivalent to 10 percent on top of the current annual penalty of 6 percent; i) better targeting social pensions by increasing OGA uninsured pension; j) the gradual phasing out of the solidarity grant (EKAS) for all pensioners by end-December 2019, starting with the top 20% of beneficiaries in March 2016; k) restore the sustainability factor of the 2012 reform or find mutually agreeable alternative measures in the pension system; i) the Greek government will identify and legislate by October 2015 equivalent measures to fully compensate the impact of the implementation of the Court ruling on the pension measures of 2012; and repeal the amendments to the pension system introduced in Laws 4325/2015 and 4331/2015 in agreement with the institutions.
iii. The Government will by December 2015 (key deliverable) integrate all social security funds under a single entity, abolish all existing governance and management arrangements, establish a new board and management team utilizing IKA infrastructure and organization, implement a central registry of contributors and establish common services, as well as adopting a program to create a common pool of funds that will be fully operational by end-December 2016. The authorities will move towards the integration of social security contribution filing, payment and collection into the tax administration by the end of 2017.
The institutions are prepared to take into account other parametric structural measures within the pension system of equivalent effect to replace some of the measures mentioned above, taking into account their impact on growth, and provided that such measures are 15 presented to the institutions during the design phase and are sufficiently concrete and quantifiable, and in the absence of this the default option is what is specified above.