Disentangling annuities and transfers: The case of Greek retirement benefits
| Date | 01 September 2020 |
| Published date | 01 September 2020 |
| DOI | 10.1177/1388262720941879 |
| Author | Manos Matsaganis,Chrysa Leventi |
| Subject Matter | Articles |
Article
Disentangling annuities
and transfers: The case of
Greek retirement benefits
Chrysa Leventi
Council of Economic Advisors, Greek Ministry of Finance, Nikis 5-7, Athens, Greece
Manos Matsaganis
Social Policy Laboratory, Polytechnic University of Milan, Piazza Leonardo da Vinci, Milan, Italy
Abstract
The aim of this paper is to estimate the relative importance of annuities and transfers in Greek
retirement benefits and to assess their impact on intergenerational and intragenerational equity.
We analyse a large sample of private sector workers retiring in 2008. Adopting a longitudinal
approach, we compute the net present value of contributions paid and benefits received by
individuals over their life course. We define the difference between the two as the implicit transfer,
which can be either positive or negative. Lifetime retirement benefits are calculated both according
to the rules in place at the time of retirement, and after the spending cuts introduced in 2010-2013.
Our findings suggest that for the vast majority of retirees pension benefits are heavily subsidized,
i.e. exceed the actuarially fair level paid for by social contributions. Austerity policies have reduced
but not eliminated this subsidy.
Keywords
Pensions, annuities, transfers, actuarial fairness, austerity
JEL classification: D31, H55, E24
1. Introduction
Until 2010, conventional wisdom had it that retirement pension benefits, once awarded, could not
realistically be cut; at least not in nominal terms (which in Europe, in an era of low inflation,
amounts to the same thing as real terms). The political obstacles are numerous: on the one hand, the
Corresponding author:
Chrysa Leventi, Council of Economic Advisors, Greek Ministry of Finance, Nikis 5-7, 10563 Athens, Greece.
E-mail: c.leventi@minfin.gr
European Journal of Social Security
2020, Vol. 22(3) 287–305
ªThe Author(s) 2020
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DOI: 10.1177/1388262720941879
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elderly make up a large and growing part of the electorate; on the other hand, younger votes are
likely to view a cut in pensions as a betrayal of the social contract (Boeri et al. 2001). As a result of
that, governments inheriting (or helping to build) pension systems that turn out to be unsustainable,
making excessive promises on future generations, find themselves with little room for maneuver.
Reforming pensions, though difficult, is still possib le, but the political imperative is to spare
current retirees from the pain of adjustment, placing the entire burden on the shoulders of workers,
current and future. In 2010-2013, under the terms of economic adjustment programmes, Greek
pension benefits were cut, and rather drastically at that. That contrasted with what occurred in
Southern European countries attempting fiscal consolidation at about the same time, like Portugal
(where cuts were significantly less severe), or Spain (where pension benefits were frozen in
nominal terms, as indexation was temporarily suspended) (Guill´en et al. forthcoming).
This paper assesses the effects of the cuts on intra- and intergenerational equity. Specifically, it
draws on a unique administrative dataset (a large sample of workers retiring in 2008) to estimate
the relative importance of annuities and transfers in Greek retirement benefits, before and after the
2010-2013 cuts.
Since one of the main objectives of a pension system is to redistribute income over the life span,
its equity effects can be best examined by adopting a longitudinal approach. This approach
compares the balance between total contributions paid and total benefits received by individuals
throughout the course of their lives. If the present value of lifetime benefits is equal to the present
value of lifetime contributions, then retirement benefits can be said to be actuarially fair, equiv-
alent to the annuities offered by private insurers. In contrast, when lifetime benefits exceed lifetime
contributions, current pensions receive an implicit transfer, i.e. a subsidy from the rest of society
and/or by future generations. That transfer can be negative, in which case it is current pensioners
who are paying a subsidy to the rest of society and/or future generations. In this research, lifetime
retirement benefits are calculated both according to the rules in place at the time of retirement, and
after the spending cuts introduced in 2010-2013, under the fiscal adjustment policies specified in
the country’s bailout agreements of 2010 and 2012.
Identifying the relative weight of annuities and transfers in Greek retirement benefits is impor-
tant. Establishing that current pension rules severely violate inter-generational equity would
strengthen the case for pension reform. On the contrary, finding that the relevant transfers are
insignificant would inevitably call into question the legitimacy of benefit cuts, suggesting that
pensioners have actually ‘‘earned’’ their pensions through contributions paid when they worked by
themselves and their employers, in which case attemp ts to cut back their entitlements would
amount to a breach of the implicit social contract.
Moreover, even when net transfers are zero on aggregate, they may still be significant for
different groups of pensioners. Departures from actuarial fairness may be entirely consistent with
stated public policy goals: this is the case when low lifetime earners are awarded pensions over and
above their lifetime contributions, since without the implicit transfer the level of benefit would fail
to keep them out of poverty. Alternatively, implicit transfers may be perverse, as when workers
with identical contribution histories end up receiving significantly different pension benefits
(which violates horizontal equity), or when the direction of redistribution runs from low to high
earners (which violates vertical equity). Hence, determining the pattern of annuities versus trans-
fers and clarifying the nature of intra-g enerational redistribution between groups is of policy
relevance.
The main findings of this research can be summarised as follows. Pre-crisis, main old-age
pensions provided by IKA (Greece’s largest social security organisation) exceeded their actuarially
288 European Journal of Social Security 22(3)
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