At first glance, the decisions announced regarding pension reform are a step in the right direction, Andreas Charalambous, Chairman of the Cyprus Fiscal Council (CFS), noting, however, that the issue of the reform’s cost and how it will be financed remains open.
Mr. Charalambous stated that the Council had received some draft versions of the reform in the past and had only just received the draft submitted to the social partners. “We are not yet in a position to go into detail,” he said, noting, however, that in principle, some aspects are moving in the right direction.
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He noted that in early September, the Council will publish its interim report, which will place particular emphasis on the issue of pension reform.
“The issue of costs and financing remains open; as far as we can tell from the information available, these details have not yet been fully determined. Both the cost and the financing are important factors,” he noted.
Regarding the developments he sees moving in the right direction, the President of the DSK noted that the Council agrees that the retirement age should remain at 65. “Given current conditions and based on global and Cypriot demographic data, it is not feasible to lower the retirement age. We will, without a doubt, affect the adequacy of pensions,” he said, adding that the incentives offered for voluntarily extending the retirement age are also appropriate, in principle.
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“It is also appropriate that support is being provided to low-income retirees and the basic pension, and that the proportional component is being adjusted. There is a slight redistribution in favor of low-income pensioners, which is a step in the right direction,” he noted.
He reiterated, however, that what matters is having an actuarial study, “so that we know exactly how it affects the long-term sustainability of the Social Security Fund and how it is financed. There are some references in the accompanying documents; we’ll have to look at them in detail to form a more informed opinion,” he said.
When asked to comment on the actuary’s estimates of an annual burden on public finances of €50 million over the first five years, he noted that what matters is how the funding will be arranged. “This is something that will be studied in detail,” he said, noting that if this is the cost, and provided that long-term adequacy and sustainability are ensured, this “could be considered, subject to a detailed review of the provisions.”
Mr. Charalambous emphasized that the DSK agrees that the second pillar and the Provident Funds must be developed. “Demographic trends, both in Cyprus and in Europe, are such that Social Security Funds alone cannot ensure adequate pensions. That is why it is very important to gradually launch a major initiative, to be implemented as soon as possible, to provide supplementary support for retirees, primarily to ensure long-term sustainability,” he said.
The same, he added, applies to the third pillar, which provides incentives for individuals to make their own arrangements. “All three pillars, based on demographic data, need to be developed to ensure the long-term adequacy of pensions,” he said.
Regarding the decision to end government borrowing from the TKA, Mr. Charalambous initially said that the decision is correct, because it is not right for the Fund’s entire reserves to be invested in government borrowing, especially in the manner in which it is currently done. “This, however, cannot be done overnight; it must be done gradually,” he said, adding that it is also extremely important to establish the conditions for proper management of the reserves.
In any case, he noted, there must be professional and prudent management—that is, low-risk investments must be made, which, by their very nature, yield lower returns. “We must not embark on risky ventures that would jeopardize the TKA’s reserve,” but “we must set realistic expectations regarding what the return on such a fund might be, given that it must be low-risk,” he said.
When asked whether the decision not to borrow from the TKA poses risks to public finances in the event of future crises, he said that for this reason, the cessation of borrowing and the repayment of the amount already borrowed by the state must be carried out gradually. For example, he said, as a first step, there could be no additional borrowing. In practice, this would mean that instead of running the 2–3% surpluses projected for the coming years, the government would balance its budget.
Beyond that, he noted, the return of the reserve must be carried out very gradually so as not to impact the state’s public finances and to allow for prudent management, because “it is not easy,” as he said, “to manage such large sums, especially for a small economy like Cyprus’s, which does not offer—at least domestically—many options.”
SOURCE: CNA
