Talks between Greece and its creditors collapsed over the weekend with both parties appearing intransigent. The sticking point is pensions. Greece spends 16% of GDP on pensions and the IMF wants Greece to cut this. Greece. refuses. Why does the Greek state have this large pension burden in the fist place?
The answer is Greek pensions are of the “defined benefits” tax and transfer variety. The state taxes the current working generation and transfers the money to pensioners. It’s a passthrough mechanism, not an investment fund. As the economy has collapsed, tax revenues from the active economy have dropped and the pension burden is harder to bear. It’s a very similar situation to Detroit.
That might conjure up a bloated state sector with stalinist factories building tanks or a comically uncompetitive airline. OK, Greece had these two. They’re gone. For the most part though the high pension burden IS NOT indicative of a state sector that needs purging. The majority of pensioners were either private employees such as bank tellers where the state is acting as their collective insurer, or they were relatively uncontroversial state employees such as teachers and bus drivers.
Why are Greek pensions organised this way? Why aren’t they stock market investments like in the Anglo-Saxon world. For a start, the Anglo-Saxon model is a lousy deal for all income groups except the very wealthy. If you assume continuity of a sovereign state, a tax-and-transfer scheme limits downside better than market investments. The Euro ended monetary sovereignty for Greece, so for pensioners that was a miscalculation.
Secondly Greek capitalism (the portion of the economy in publicly traded companies) is too small to support pensions. Greek pension funds would have had to invest internationally. That would have been quite a leap of faith, and the pension funds did not. Another miscalculation, but understandable, I think. You have to remember people who are now pensioners put their trust on the continuity of the Greek state decades ago.
Alright, so if Greece doesn’t have the money to pay the pensions why doesn’t it cut anyway? What other outcome could one hope for? Well, if Greece left the Euro it could once again print money to partly fund pension obligations. This generates inflation, as was common before the Euro, and inflation acts as an indirect tax. It also causes currency devaluation, which makes imports expensive relative to domestic goods. Guess what: Greek pensioners consume more food and services (domestic goods) than iPhones.
A much better outcome would be for Europe to shoulder some of the social burden of these pensions. Why should they? For the same reason the US has federal food stamps that people disproportionately consume in Detroit. The “unruly” Greek government would much more readily agree to fiscal conditionality in the Euro if it wasn’t solely responsible for the welfare of its citizens. Remember these are people who bet on national sovereignty decades ago, then it was taken away with the Euro and the Europe that transpired is now unwilling to honor their benefits.
European integration would have gone much more smoothly if harmonisation of social welfare across states had been part of the project sooner (or at all). This doesn’t mean giving Swedish benefits to Greek pensioners – you get what you pay for. But it is at least arguable that Europe as a whole should not cut a nation’s pensioners out of their own modest level of benefits.