It’s looking more and more like Greece will not be able to reach an agreement with its creditors by the end of this month. That’s when more than $1.8 billion in debt comes due.
A last-minute deal is always a possibility. After all, a so-called “Grexit” event would have huge implications … especially for bond markets.
But even if negotiators suddenly come up with a grand bargain, there’s something every single U.S. citizen should take away from this ongoing crisis …
I’m talking about the fact that Greece’s unsustainable pension system is one of the biggest sticking points between Athens and its creditors.
Essentially, the International Monetary Fund is asking Greece to:
• Cut its pension promises by the equivalent of 1% of the country’s GDP
• Quickly address the fact that loads of Greeks are taking early retirement, and
• Enact other cuts to things like state-funded supplementary pensions.
Meanwhile, Athens says it’s unwilling to take any of these steps.
According to an article from the BBC yesterday:
“[Prime Minister] Tsipras rejected demands for pension cuts, citing his country’s dignity.”
And Mr. Tispras himself was quoted as telling a Greek newspaper,
“Further cuts to pensions after five years of looting under the bailouts can only be viewed as serving political expediency.”
Wait — a country preserves its dignity by defaulting on its debts? And making budget cuts to stave off bankruptcy is considered looting?
What we have here is a classic impasse caused by political promises that don’t jibe with financial reality.
Sound familiar? We’ll get deeper into that in a minute.
First, Let’s Talk About Some Aspects of the Greek Pension System …
In Greece, government-funded pensions are a way of life.
About 30% of the country’s labor force works for Athens or some other public agency. As such, they receive retirement benefits directly from government coffers.
As many experts quickly point out, a large portion of these jobs were awarded as favors from various politicians winning elections throughout the years.
And because of unique legal protections afforded by the Greek system, most existing government employees essentially get locked into their positions for life so it isn’t like one new regime replaces another.
The end result has been a bloated, poorly allocated government workforce.
On top of that, Greek politicians have been generous with benefit increases over the years.
For example, they increased pension payments 3% in 2004 … another 4% in 2005 … and still an additional 4% in 2006.
Over those same three years, Germany kept its pension benefits the same!
In Greece, about 75% of public-sector pensioners also take early retirement.
Here are some numbers that Greek Labor Minister Yiannis Vroutsis reported in December 2014 …
In the public sector:
7.91% of Greek pensioners retire between 26 and 50
23.64% retire between 51 and 55
And 43.53% retire between 56 and 61
Meanwhile, when it comes to the country’s Social Security Fund (the IKA):
4.4% of recipients retire between 26 and 50
12.83% retire between 51 and 55
And 58.61% retire between 56 and 61
This trend has only accelerated as Greece’s financial woes have mounted and more cuts have been put on the bargaining table.
It is reported that there are currently 400,000 applications for new government-provided retirement benefits in the queue, and a large portion of them are early retirement requests.
All told, Greece already has about 2.9 million pensioners. That’s 25% of the country’s population. And one million of those pensioners — a full third — are below the age of 65.
Putting aside countless examples of outright fraudulent benefit claims, there are also lots of strange loopholes, exceptions and program inefficiencies to consider.
For example, before overhauls began in 2008, there were about 133 different publicly administered pension funds — with about 15,000 employees of their own.
It has also been widely-reported that special pension provisions have been created for various special-interest groups.
One Economist story cited deals for Olympic Airlines employees, farmers, farmers’ wives, National Bank of Greece employees … and even hairdressers.
Another news outlet said protections that were supposed to apply to workers in hazardous fields also ended up covering radio broadcasters and certain musicians!
As one Greek finance professor pointed out, an age-50-something mother with underage children is currently able to retire on a full pension after working just 20 years.
And keep in mind that pensions are often 80% of a person’s full salary.
Plus, there’s the combination of an aging population and a weak economy that can’t produce the money needed to fund all the benefit promises that have already been made.
Greece, Detroit, U.S. Social Security …
Is There Really That Much of a Difference?
I have been writing about our own country’s retirement system problems for many years now — citing everything from struggling state pension plans to the underfunded (and only worsening) Social Security program.
And while I wouldn’t say we’re exactly like Greece, there are plenty of parallels.
We have our own unfavorable demographic issues to contend with.
We have our own convoluted systems full of exemptions, loopholes and workarounds.
And we have the same types of promises and administrative decisions that are fueled by politics rather than math or common business sense.
So whatever happens in Greece over the next couple weeks, our leaders would be wise to sit up and take notice.
Because if they don’t start addressing our own issues soon, they will end up creating a tragedy bigger than anything Sophocles ever imagined.