According to the most likely scenario, the pension reform is expected to be implemented with 60% of the total pension increase paid out within the first two years, Labor Minister Marinos Mousiouttas said in an interview with CNA.

As he explained, the most likely scenario calls for 30% of the increase to be granted in the first year, another 30% in the second, 10% in the third and fourth years, and the remaining 20% in the fifth. He noted, however, that the distribution is still under review, and they are examining whether there is room to modify the model or even shorten the implementation period.

“We’re leaning toward a 30% increase in the first year, 30% in the second year, 10% in the third, 10% in the fourth, and 20% in the fifth,” he said, noting that under this model, retirees would receive a total of 60% of the increase during the first two years.

The minister said that it would be ideal if the full increase could be paid out starting in the first year, but the sustainability of the Social Security Fund and the impact on economic indicators must be taken into account. He noted that the Fund’s additional expenditures have an impact on the economy, which is why the increases were planned to be phased in over a five-year period.

He clarified that the phased implementation applies to pension increases and not to the low-pensioner allowance—commonly known as the “small check”—which will be paid immediately to beneficiaries.

The “small check” takes center stage

Regarding the next steps following the submission of the draft bill to the social partners, Mr. Mousiouttas stated that its presentation and analysis will continue on August 28, first at a meeting of the Technical Committee and then at the Labor Advisory Council, with particular emphasis on the zero pillar and the low-pensioner allowance.

Since the social partners have now had the draft bill at their disposal for about 8–10 days, as he said, substantive discussion on specific points and proposals is expected to begin.

The government, he noted, remains open to proposals and changes, provided that they do not alter the philosophy of the reform or jeopardize the sustainability of the Social Security Fund.

“Any proposal to increase expenditures must be accompanied by a corresponding proposal for an equivalent reduction,” he said.

At the same time, he noted that the relevant Technical Committee will begin regular meetings on September 1 regarding the second pillar, which concerns the Provident Funds. Discussions will continue throughout September, with the goal, if possible, of reaching a comprehensive conclusion by mid-October.

Bill to Be Introduced Regardless of Progress

The Minister clarified that discussions on the three pillars of the reform will proceed in parallel; however, the completion of the discussion on the Provident Funds is not a prerequisite for the submission of the bill to Parliament.

“The goal is for the bill to be submitted to Parliament in September,” he said, noting that it would be ideal if a final agreement on the second pillar had been reached by then.

If that is not possible, he added, the government’s intention is to proceed with the submission of the bill concerning the first pillar while continuing the dialogue on the Provident Funds in parallel.

The second pillar will not be included in this bill, Mr. Mousiouttas said, noting that it is a long-term undertaking that may take about four years, as it requires new legislation and the creation of the necessary structures, including a supervisory authority for the management and investment policy of the Pension Funds. This approach, he added, is also in line with recommendations from the European Pension Funds Authority.

The Minister reiterated that the goal is to reach an agreement in parallel with the advancement of the bill on the first pillar. Submission to Parliament in September, he said, is necessary to meet the target of implementing the reform as of January 1, 2027, and to ensure that retirees see increases in their pensions starting with the February payment.

Higher Pensions, Lower “Small Check”

Mr. Mousiouttas noted that approximately 50,000 retirees are expected to receive an increase of more than €100 per month, while for approximately 7,000 to 8,000 low-income pensioners, the increase will exceed €200.

As he explained, the largest percentage increases will mainly affect the lowest-paid, as the reform places greater emphasis on the basic pension and years of service. As a typical example, he cited a retiree who worked for 47 years at a low wage and currently receives a pension of €504, which will increase by €250 to €754 under the reform.

The “small check” will continue to be paid to those who still meet the relevant criteria. However, as the pension increases, he noted, the amount of the government subsidy may decrease, as the need for additional support diminishes.

The Minister cited the example of a retiree who currently receives €504 in pension benefits and an additional €220–€230 from the “small check,” for a total monthly income of €720–€730. Under the reform, their pension will increase to €754, while the “small check” will be reduced to approximately €80–€90. The total amount, however, will increase to €820–€830 per month.

He assured that no retiree will receive a lower total amount than what they receive today, even if the pension increase results in a reduction of the supplement.

“The combination of a pension plus a small check today, and under the reform, a pension plus a small check, will, in total, be greater for everyone than it is today,” he said.

He noted that the “small check” will continue to exist, as there remains a need for social support for certain retirees. However, as retirees’ income improves and the main pension increases, the need for government subsidies will diminish.

Changes to the Housewife’s Pension

Regarding the homemaker’s pension, Mr. Mousiouttas said that current beneficiaries, as well as those who will become eligible over the next five years, will be integrated into the Social Insurance Fund system.

Subsequently, over a period of five to 15 years and based on specific criteria, beneficiaries will be enrolled in the Fund, provided they meet, among other things, the requirements regarding years of residence in Cyprus.

Increases for these beneficiaries will be determined using a formula similar to the one that will apply to low-income pensioners.

Social Security Credits

Mr. Mousiouttas also referred to the new social security credits for segments of the population who, for reasons not always of their own choosing, find it difficult to work or are unable to hold full-time employment.

As he explained, the government will pay social insurance contributions for three years for each child, for the benefit of a parent who stops working or reduces their working hours to care for the child.

For people with disabilities who are unable to work, the government will pay social security contributions throughout their lives to help them build up pension benefits for the future.

A similar provision is in place for informal caregivers who do not work because they are caring for relatives, with their social security contributions counting toward their future pension.

At the same time, a one-year social security subsidy is provided for young people entering the labor market, as well as for students for one year after graduation, provided they remain unemployed and are seeking work. The related costs will be covered by the state and paid to the Social Security Fund for the benefit of the beneficiaries.

Contributions from taxpayers on income up to €11,500 per year

Regarding the proposal to require contributions on income derived from rent, stocks, and dividends, the Minister stated that the regulation applies to individuals who do not have a social security account because they have never paid social security contributions but who receive a social pension upon retirement.

The new category applies to income up to €11,500 per year, an amount corresponding to the minimum insurable income required to earn a social security unit.

For this amount, a contribution of approximately 15% is required from the taxpayer, along with an additional 5% government contribution, so that a social security account is gradually built up and the right to a pension is acquired based on the contributions paid.

He clarified that the provision does not apply to all income or to individuals who are employed and already have a social security account but also have income from rent or other sources.

Mr. Mousiouttas estimated that the new category will provide a significant additional source of revenue for the Social Insurance Fund.

Goal: Launch of a New Investment Fund

Mr. Mousiouttas said that the government aims to launch, as of January 1, 2028, a new investment fund for Social Security, into which the €12 billion in public debt repayments to the Social Security Fund, as well as future surpluses, will be gradually channeled.

The Ministry of Finance is preparing to commission a study from a specialized international firm, which will advise the government on the structure, operation, and investment policy of the new fund.

The goal, as stated, is for the investment policy to be based on European standards and characterized by low investment risk, with the aim of gradually increasing the fund’s capital without jeopardizing the savings of the insured.

The new fund will receive the annual installments paid by the government to repay the €12 billion debt, as well as the Fund’s surpluses, which have been used by the government to date. Interest will also be paid on the amounts the government continues to owe, with these funds being gradually invested.

The Minister noted that there are plans for the new fund to follow a model similar to that of the Hydrocarbons Fund, which has already been approved by Parliament.

“We need the expertise of specialists to determine how the fund will operate,” he said, adding that this is a fund expected to accumulate billions of euros in capital and, therefore, strict standards are required for its management.

The intention, he noted, is to avoid an aggressive, high-risk investment policy and to select safer investments that will yield lower but more stable returns. Options may include, among other things, investments in real estate or government securities, with appropriate diversification.

Mr. Mousiouttas stated that, for the first time, a decision has been made to end the government’s borrowing from the Social Security Fund, noting that the exact timeline will be determined in the near future.

He explained that the government cannot immediately repay the entire amount of approximately €12 billion and that repayment is expected to take place over a period of 40 years, based on a formula being developed by the Ministry of Finance. The annual installments, along with the surpluses that will no longer be transferred to the government and the interest on the amounts owed, will feed into the new investment fund.

The current reform scenario is sustainable for 40 years

The Minister stated that, based on the actuarial studies underpinning the scenario presented to the social partners, the sustainability of the Social Insurance Fund is ensured for a period of 40 years.

The studies were conducted by a team of actuaries from the International Labour Organization, with which Cypriot governments have long collaborated.

“Based on the current data and the existing assumptions, the Fund’s sustainability is ensured for the period I mentioned,” he said.

Mr. Mousiouttas added that various scenarios had been examined, including one that called for a 5% reduction for the highest earners, which was ultimately not included in the proposal presented to the social partners.

“Differentiation can be achieved without increasing costs,” he said, adding that an increase in costs, based on actuarial estimates, could jeopardize the Fund’s sustainability.

He clarified that the figures presented to the social partners are based on 2024 data, as these were the most recent audited figures available at the time the calculations were made. When the reform is implemented in 2027, however, the most recent data from 2026 will be used, which is expected to result in higher amounts, given that wages and salaries will have increased in the meantime.

New Formula for Early Retirement

A new formula, different from the current actuarial reduction, will be used to calculate pensions for those who retire before or after age 65 following the completion of the five-year transition period.

According to Mr. Mousioutta, for current retirees and those who retire during the first five years of the new legislation’s implementation, the actuarial reduction in the basic pension will be capped at 7.5%, down from 12%.

Starting in the sixth year, this method of calculation will be replaced by a new formula that links the pension amount to the retirement age. The balance in the pension account will be multiplied by a factor of 1.1 for retirement at age 63, 1.2 at age 64, 1.3 at age 65, 1.4 at age 66, and 1.5 at age 67.

This will provide greater incentives to remain in the workforce after age 65, provided this is done voluntarily and by agreement with the employer. For those working until age 67, Social Security contributions from the employee, employer, and government will continue, resulting in higher pensions for those who remain in the workforce for more years.

The Minister clarified that the reduction in the actuarial deduction from 12% to 7.5% will apply uniformly to all those who retired or will retire between the ages of 63 and 65 during the five-year transition period. Regarding the 12% cut, he noted that actuarial studies have shown that, based on the overall reform package, the reduction can be limited to 4.5 percentage points.

The measure will also apply to current retirees who took early retirement, who will benefit from a reduction to 7.5% on the base portion of their pension. The change will take effect in the first year and will not be phased in over a five-year period, as is the case with more general increases.

The issue of mandatory enrollment in Provident Funds remains open

Regarding the second pillar, Mr. Mousiouttas said that whether participation in Provident Funds will become mandatory for all employees remains a matter of discussion.

Employers’ organizations favor maintaining the current voluntary system, while labor unions argue that participation should be made mandatory so that all employees can benefit.

Currently, according to the Minister, the Provident Fund covers approximately 25%–27% of workers, mainly in sectors where coverage has been agreed upon through collective bargaining agreements or is offered by companies on a voluntary basis. The government is seeking a “middle ground” between the two approaches.

“Yes, there is a need for the second pillar, because it complements the first pillar for retirement. Let’s be honest: since, given the fund’s and the economy’s capabilities, we cannot provide pensions high enough to eliminate the need for a supplement, any supplement that is provided is helpful,”he said.

At the same time, he noted that key issues regarding the operation of the Provident Funds remain unresolved, such as whether benefits will be transferred from one employer to another when an employee changes jobs, whether it will be permitted to withdraw or borrow a portion of the savings during one’s working life, and whether the final amount will be paid as a lump sum or in installments upon retirement.

If mandatory participation is ultimately decided upon, the Minister said that statutory Provident Funds should be established, which self-employed workers and small businesses could join on their own, rather than requiring every business to establish and manage its own fund.

The government already has positions on these issues, he said, but is also awaiting the comprehensive positions of the social partners, with the aim of moving discussions on the second pillar forward by October.

Mr. Mousiouttas emphasized that the reform must be examined “holistically” and not solely in terms of pension increases. As he noted, the last major reform took place in 1980, and the new one takes into account current socioeconomic conditions and the needs of the next 40 years.

Finally, he expressed optimism that, despite differences in the views of the social partners, common ground will be found, as employers, employees, and unions all want, as he said, to move the reform forward.

(CYPE)