Takayama, Noriyuki

English

Research Papers in Economics

Hitotsubashi University Repository
TitlePension Reform in Greece: A Discussion
Author(s) Takayama, Noriyuki
Citation
Issue Date 2011-11
Type Technical Report
Text Version publisher
URL http://hdl.handle.net/10086/19457
Right1 
 
Pension Reform in Greece: A Discussion 
 
by 
Noriyuki Takayama 
 
（to be published in Holzmann, R., Palmer, E. and Robalino, D. eds., NDC Pension 
Schemes: Progress and Frontiers in a Changing Pension World, World Bank, 2012） 
 
Political Risk 
 
The pension system of Greece was a typical example of the Mediterranean 
welfare state with extensive segmentation, concomitant contribution evasion, 
and a very low labor-force participation rate. The system also had a number 
of serious problems in regard to equity, as well as long-term financial 
sustainability. Moreover, Greece has missed many opportunities to reform its 
pension system over the last thirty years. This inaction was due largely to a 
lack of political consensus. 
 
The basic feature of recent pension reforms in developed countries has been 
to provide a specific solution to the problem of sharing an increasing cost of 
pensions among different groups and setting a limit for what is acceptable. 
This is the point at which many countries have turned to NDC. Whatever the 
solution adopted, there will inevitably be winners and losers. Usually it is 
very difficult for losers to accept any disadvantages arising from the pension 
reform proposed by policy makers. The painstaking process of pension 
reform may thereby be delayed or even rejected. Strong leadership is 
required to deal with this kind of political risk. 
 
Another driving force for pension reform has been growing pressure from 
outside. The 2010 pension reform of Greece is an example of this. Greece’s   
sovereign debt got out of hand and the Greeks were forced to adopt a hasty 
and drastic reform that substantially reduced promised pension benefits in 
order to secure their long-term borrowing requirements on the international 
financial market. The most significant measure mandated in 2010 was to 
abolish all special provisions for early retirement before age 60, while raising 
the standard pensionable age to 65. People in Greece were subjected to a 
sudden disruption of their economic/financial life planning without being 
given enough time or appropriate means to adjust to the new situation, as 
the author of this chapter explains. 2 
 
 
Since the Greeks needed a pension system under financial control, the 
reform imposed in 2010 was necessary. However, it was not sufficient, but 
only Step One in the reform process. Greece still does not seem to have given 
clear thought to the basic structure of a pension system that would be 
equitable, adequate, and financially sustainable. Generally speaking, a 
national pension system should have four basic pillars, including NDC as a 
core component. Greece is no exception, as the author of this chapter 
demonstrates. Greece needs to move on to Step Two of the reform process by 
introducing the NDC and FDC financial pillars. 
 
One difficulty with this shift to a new paradigm is that the transfer from 
general revenue would increase in the short run if the contribution rate for 
the main system were reduced from 20% to 16%, in accordance with the 
proposal suggested by the author of this chapter. Another difficulty could 
arise from the possibility that potential losers under the paradigm shift 
might persistently oppose Step Two. 
 
If we adopted a broader perspective and allowed Greece to opt out of the 
Euro currency zone, then the country could alter its exchange rate and follow 
more decisive fiscal policies. As a consequence, the fiscal strain could be 
reduced and the Greeks might have more time to implement the Step Two 
reform. This in itself can be viewed as a potential lesson from Greece. 
 
 
The plight of Greece viewed from the Japanese perspective   
 
Politicians in Japan have also been reluctant to propose painstaking pension 
reform. In 2004, however, they succeeded in making the paradigm shift 
virtually to NDC by fixing the contribution rate of the principal pension 
system at 18.3% from 2017 on. At the same time, they introduced an 
automatic balance mechanism that was free from political risk. It is a new 
formula for indexation of pension benefits that takes demographic factors 
into account1. 
 
Japan still has many challenges in pension management. The principal ones 
are as follows. 
                                                   
1  See Takayama, N., “Changes in the Pension System,” Japan Echo, October 2004, pp. 
9-12. 3 
 
1. The automatic balance mechanism has not yet been activated, since it 
was designed in its legislation not to apply during deflation, from which 
Japan has been suffering for more than ten years. The new indexation 
formula, by contrast, must be followed irrespective of inflation or deflation. 
2. The proportion of atypical    employees    has been increasing, reaching 
40% in 2010. A growing number of young employees are forced to enter the 
job market as irregulars and are given few opportunities thereafter to be 
upgraded to regular status, with higher and more stable salary. In addition, 
Japan is seriously affected by the “Bad Start, Bad Finish” problem, noted by 
Italian and other experts (cf. Gronchi and Nestico 2006, Franco and Sartor 
2006, Boeri and Galasso 2012,    and Chloń- Domińczak et al. 2012)2. 
3. The normal pensionable age is still 65 in Japan. Its automatic 
indexation to longevity is essential to the long-term financial sustainability 
of the pension system. 
4. Current provisions for full-time housewives3  are under severe attack 
from dual-income couples and single women. An income split between an 
income-earning husband and his dependent wife could be a solution to this 
problem. 
5. Employees working less than thirty hours a week are currently not 
covered by the pension program with the earnings-related component. The 
issue of extending the coverage to employees working at least twenty hours a 
week is currently under heated discussion in Japan. 
 
As any new measures like those mentioned above involve winners and losers, 
Japan will be taking a political risk if it seeks to implement another pension 
reform in the near future. In this sense, Japan has put itself much into the 
same position as Greece. The answer is to take a more definitive step 
forward under political consensus. Whether Japan is capable of doing this 
remains to be seen.  
                                                   
2  See Galasso, V. and Boeri, T., “Is Social Security Secure with NDC?” in Holzmann, R., 
Palmer, E. and Robalino, D. eds., NDC Pension Schemes: Progress and Frontiers in a 
Changing Pension World, World Bank, 2012, Chapter 15, for example. 
3  See Takayama, N., “Pension Coverage in Japan,” in Holzmann, R., Robalino, D.A. and 
Takayama, N. eds., Closing the Coverage Gap: the Role of Social Pensions and Other 
Retirement Income Transfers, Washington DC: the World Bank, 2009, pp.111-118. 

Pension Reform in Greece: A Discussion

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Pension Reform in Greece: A Discussion

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