The pension reform bill unveiled by the Ministry of Labour proposes the eventual abolition of the actuarial reduction on the basic component of pensions after 2031, while increasing the insurance requirement for early retirement at age 63 from 33 years to 38 years.
In practice, the proposed changes would provide a double boost for pensioners who have already been affected by the so-called 12% pension penalty.
The government's proposal reduces the actuarial reduction by 4.5 percentage points, from 12% to 7.5%, for the basic component of the pension. At the same time, affected pensioners would also benefit from the broader pension increases included in the reform package.
Labour Minister Marinos Mousiouttas said that, combined with the wider reform measures, pensions for those affected are expected to increase by around 6% on average.
The issue dominated Thursday's meeting of the Labour Advisory Body, where the government presented its proposal and social partners submitted their own positions.
The actuarial reduction remains one of the most sensitive aspects of the reform because it affects tens of thousands of pensioners who either chose or were forced to leave employment before reaching the retirement age of 65.
Currently, around 40,000 of the country's 120,000 pensioners are subject to some form of actuarial reduction. A further 40,000 cases are expected during the next five years, partly as a result of population ageing.
The increase
Under the government's proposal, current recipients of reduced pensions would benefit from two separate improvements.
First, the actuarial reduction on the basic pension would be cut from 12% to 7.5%, restoring part of the pension currently lost as a result of early retirement.
Second, those same pensioners would benefit from the general pension increases included in the wider reform package.
As a result, the final increase pensioners receive would reflect both the reduction of the penalty and the adjustments to basic pensions.
The cost of the measure is estimated at €24 million for current pensioners and a further €12 million cumulatively over the next five years.
The government has left open the possibility of modifying elements of the proposal, provided the overall cost of the reform does not increase.
When the penalty will be abolished
The draft legislation published for public consultation introduces a major overhaul of early retirement rules and actuarial reductions, accompanied by a five-year transitional period.
The right to retire at 63 would remain in place, provided the worker has accumulated basic insurance equivalent to at least 70% of the reference period.
From the sixth year of implementation, the requirement would gradually increase by 2.5 percentage points annually until reaching 80%, equivalent to approximately 38 years of employment, compared with 33 years today.
The most significant change concerns the structure of the penalty itself.
For new pensioners retiring after 2031, the actuarial reduction of 0.5% for every month of retirement before pension age would be completely abolished for the basic pension and retained only for the supplementary pension component for the rest of the retiree's life.
The monthly pension would be calculated using a coefficient ranging from:
- 1.1 at age 63
- 1.2 at age 64
- 1.3 at age 65
- 1.4 at age 66
- 1.5 at age 67
The coefficient would apply to each month of registered insurance, based on 12 months per year.
The statutory retirement age would remain 65.
Those who choose to continue working until 67 would be eligible for an enhanced pension, reflecting the additional contributions paid during those years.
Five-year transition period
The new system would be introduced gradually over a five-year period through annual recalculations.
The final pension would be determined through a combination of old and new provisions:
- Year 1: 70% new rules, 30% old rules
- Year 2: 60% new rules, 40% old rules
- Year 3: 70% new rules, 30% old rules
- Year 4: 80% new rules, 20% old rules
- Year 5: 100% new system
To protect pensioners from losses, the draft legislation includes a safeguard clause.
If the recalculated pension is lower than the amount already received before the reform, the pensioner would continue receiving the higher amount.
Trade union proposals
During Thursday's discussions, trade unions presented an alternative approach.
They are seeking a reduction of the actuarial penalty not only for the basic pension but also for the earnings-related component.
Such a measure would carry a higher fiscal cost.
PEO acknowledged that the government's new proposal is an improvement on previous versions but remains concerned because the reduction applies only to the basic part of the pension.
SEK, meanwhile, has submitted a costed proposal for a gradual reduction of the 12% penalty and argues that elements from the various proposals could be combined to reach a compromise.
Beyond the penalty issue, social partners are demanding a complete financial picture of the reform.
The government is expected to present detailed economic data at a future meeting with the participation of the Finance Minister, as questions remain over:
- The scale of state contributions.
- The financial impact on the Social Insurance Fund.
- Long-term financing of the pension system.
Possibility of higher contributions
The draft legislation also leaves open the possibility of increased social insurance contributions.
This would occur if an actuarial review conducted in five years concludes that additional resources are required to maintain pension benefits.
Should contribution increases become necessary, the government says the burden would be shared by all three parties involved.
For all new pensioners after the five-year transition period, meaning from 2032 onwards, the supplementary pension accrual rate would be set at 1.34% across the board.
The legislation also includes a provision allowing for future contribution increases depending on the findings of an actuarial study to be carried out before 2032.
