Tsipras on the Topic of Greek Pensions
Greek prime minister Alexis Tsipras has published an interesting open letter in German newspaper “Der Tagesspiegel” on the question of Greek pensions, which we reproduce below. He evidently feels the need to specifically address the German public, because he believes the issue is misunderstood in Germany. In the letter, he explains why the Syriza-led government continues to refuse to make any concessions regarding the pension cuts demanded by creditors:
Cartoon by Arend
“During a negotiation, an exchange of arguments is legitimate so long as there is sincerity and good faith between the parties. Otherwise, when the dialogue is ongoing with no end in sight then the methods used are akin to those described by the great German philosopher Schopenhauer in “The Art of Always Being Right”!
For example, it is unfair to selectively use statistical indexes — even if they are endowed with the prestige of distinguished economists, such as Olivier Blanchard– to produce unsupported generalizations that obscure reality. As such, I’d like address a popular myth that the average German taxpayer has been led to believe. Namely, that he is paying for the wages and pensions of the Greek people. This is absolutely false.
I don’t deny that our social security system has problems. But it’s important to point out the root of the problem and how it can be resolved. There were many cutbacks in recent years that only served to further the recession and make the problem even worse.
It may sound somewhat suspect that 75% of the primary expenditure is used to pay for salaries and pensions. If it sounds unbelievable—that’s because it is: only 30% of the primary expenditure concerns pensions. Moreover, it’s important to note that wages and pensions are not the same thing, and assessing them together is a serious methodological error.
The comparison with Germany’s pensions is also rather misleading. According to the Aging Reports (2009, 2015), pension expenditure in Greece rose from 11.7% of GDP in 2007 (slightly higher than the 10.4% in Germany) and reached 16.2% in 2013 (while in Germany the numbers remained almost stable).
What caused this increase? Was it due to an increase in pensioners or an increase in pension amounts? The answer is: Neither. The number of pensioners has essentially remained unchanged and pensions have shrunk dramatically due to the implemented policies. Simple arithmetic is sufficient to reach the conclusion that the increase in pension expenditure as a percentage of GDP is entirely due to a decline in GDP (denominator), and not to an increase in expenditure (the numerator). In other words, GDP declined faster than the pensions.
Concerning retirement ages, could it be that in Greece employees retire much younger?The truth is that the retirement age in Greece is 67 years for men and women, i.e. two years more than in Germany. The average exit age from the labor market for men in Greece is 64.4 years, i.e. eight months earlier than the 65.1 years in Germany, while Greek women retire at 64.5 years, about 3.5 months later than German women who retire at 64.2 years.
I wanted to highlight the above –again, not to deny the ailments of our social security system- but to prove that the problem is not one of supposed generous pensions. The most significant disruption to the pension funds is due to dramatically lower revenues in recent years. These were caused by the loss of assets due to the PSI (haircut of Greek bonds held by the Pension Funds, totally approximately 25 billion euro) as well as – and most importantly – by the sharp drop in contributions that resulted from soaring unemployment, and the reduction in wages.
In particular, during the period 2010 – 2014, approximately 13 billion euro were removed from our social security system through a series of measures with a corresponding reduction in pensions and allowances at a rate of about 50%, a fact which has exhausted any margin for further reductions without undermining the operational core of the system. Moreover, we must understand that the system is being mainly pressed on the revenue side and less so on expenditures, as is often implied.
I would also like to call attention a matter that is unique to the Greek crisis. The social security system is the institutionalized mechanism of intergenerational solidarity, and its sustainability is a main concern for society as a whole. Traditionally, this solidarity has meant that young people, through their contributions, fund the pensions of their parents. But during the Greek crisis, we’ve witnessed this solidarity being reversed as the parents’ pensions fund the survival of their children. The pensions of the elderly are often the last refuge for entire families that have only one or no member working in a country with 25% unemployment in the general population, and 50% among young people.
Faced with such a situation we cannot adopt the logic of blind and horizontal cuts, as some have asked us to do, which would result in dramatic social consequences. On the other hand, we are not indifferent to the present condition of our social security system, and we are determined to ensure its sustainability.
The Greek government submitted specific proposals concerning the social security system’s reorganization. We agreed to the immediate abolition of the early retirement option that increases the average retirement age, and we are committed to moving forward immediately with the consolidation of the pension funds, thus reducing their operating expenses and restricting special arrangements.
As we analyzed in detail during our discussions with the institutions, these reforms function decisively in favor of the sustainability of the system. And like all reforms, their results will not be apparent from one day to another. Sustainability requires a long-term perspective and cannot be subject to narrow, short-term fiscal criteria (e.g. reducing expenditure by 1% of GDP in 2016).
Benjamin Disraeli used to say that there are three kinds of lies: lies, damned lies and statistics. Let us not allow an obsessive-compulsive use of indices to destroy the comprehensive agreement that we prepared over the previous period of intensive negotiations. The duty rests on all of our shoulders.”
Tsipras is undoubtedly correct about the fact that statistics have to be seen in proper context and are often prone to being abused to support narratives that are not exactly truthful. Indeed, aggregated statistics are certainly unable to properly convey the plight of many of Greece’s citizens.
Cartoon bySteve Bell
However, he himself omits statistics that would undermine his arguments, such as those we have recently discussed in these pages (see: “Greek Court Suspends Gravity” for details). Fair enough – he wants the focus to be on the here and now after all. Thus, he doesn’t mention that there have been a number of increases in Greek pensions well above the official consumer price inflation rate prior to the cuts of 2012, while German pensioners had to make do without pension increases on these occasions. For most pensioners the official inflation rate is of course totally bogus, since they aren’t buying a new PC or tablet computer every year.
He does however have a point about the catastrophic socioeconomic situation in which many Greek citizens find themselves in – as he points out, retirees these days often have to support those who would normally be expected to support them. Moreover, the failure of the EU/IMF style austerity policy to bring about a lasting economic turnaround in Greece seems damningly obvious by now. However, in this context he also never mentions the fact that Greece’s economic data were in the process of beginning to improve just before the election that swept his party to power, and that this improvement was cut short by the outcome of the election and what has happened since. On the other hand, Syriza has always had a point with respect to the incompetence and corruption of most of its predecessor governments. At the same time, it has yet to prove that it can do better. Talk, as they say, is cheap.
Alexis Tsipras after winning the election earlier this year.
Deficit Spending – An Exercise in Futility
We agree with Mr. Tsipras that a different tack is called for, but what should it consist of? The left generally believes that the best way to revive an economy is by indulging in Keynesian deficit spending and monetary pumping. The ECB is already pumping, but Greece is essentially untouched by that, as a result of massive deposit flight. The Greek portion of the euro area’s money supply is undoubtedly declining sharply. In a way, this could be seen as a blessing in disguise, as the only things that can be achieved by monetary pumping are asset bubbles and the associated reverse redistribution of wealth, as well as a general distortion of the price system, which may bring about a brief sugar high, but will invariably lead to capital consumption and even greater impoverishment (on the other hand, outright monetary deflation is harsh medicine when it happens in a hampered market economy in which prices and wages are not free to adjust quickly; but that is a problem of economic policy).
A massive inflation of the euro area’s money supply – but none of it is arriving in Greece – click to enlarge.
Deficit spending is likewise futile – in fact, similar to monetary pumping, it is worse than futile. Governments don’t possess a magic wand or any resources of their own. Here are a few pertinent quotes by Ludwig von Mises on the topic of deficit spending:
“What the government spends more, the public spends less. Public works are not accomplished by the miraculous power of a magic wand. They are paid for by funds taken away from the citizens.” (Human Action, p.655)
“No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion.” (Planning for Freedom, p.63)
“What the doctrine of balancing budgets over a period of many years really means is this: As long as our own party is in office, we will enhance our popularity by reckless spending. We do not want to annoy our friends by cutting down expenditure. We want the voters to feel happy under the artificial short-lived prosperity which the easy money policy and rich supply of additional money generate. Later, when our adversaries will be in office, the inevitable consequence of our expansionist policy, viz., depression, will appear. Then we shall blame them for the disaster and assail them for their failure to balance the budget properly” (Planning for Freedom, p. 87)
Every cent the government spends has to be taken from someone else. Regardless of whether this is done by taxation, borrowing or inflation, what the government is spending is exactly equal to the amount that will no longer be available to the private sector. This is a truism, and yet, one must always stress it, as many people appear to be ignorant of this fact. On the face of it, the only difference is that in one case, government bureaucrats decide how the funds should be spent, while in the other case, those who actually earned the money would make the decision.
This in turn is the reason why deficit spending by governments is not merely a wash, but as we noted above, is actually worse that futile. As long as people are free to spend/invest/save their own money as they wish, the outcome will be an economic structure that is aligned with their wishes. How can planners and bureaucrats possibly improve on these voluntary decisions? It should be obvious that this is not possible.
Just as credit expansion and the associated manipulation of interest rates disturbs the inter-temporal arrangement of the production structure, so does government spending disturb it on an intra-temporal level. Its spending will primarily enrich a handful of favored cronies, and it definitely won’t be based on rational economic calculation. Investments will be undertaken that no-one would touch if not for government interference. Often such spending will almost immediately prove to have been a complete waste (example: Solyndra), but often this won’t be noticed right away, or may even not be noticed at all (this is to say, cause and effect may not be obvious once a certain time period has passed).
Greece: government spending represents nearly 60% of economic output. While the latter has declined sharply, this indicates that government spending has not declined all that much – certainly in no way that is commensurate with the actual size of the economy. Government spending continues to be infused by the bloat of the preceding boom.
What is to be Done?
We don’t have the time to fact-check all the assertions Tsipras makes, but we do know that probably not one of the pension systems in the Western world, such as they are now constituted, is even remotely “sustainable”. This is a pipe dream. Demographic factors alone pose an insurmountable problem to the “pay-as-you-go” systems that are in operation everywhere today. The promises of past governments won’t be kept, because they cannot be kept.
However, Tsipras is no doubt correct when he points to the problems the Greek system has specifically on the revenue side. With unemployment at depression type levels, and pension funds having lost a large part of their assets in the first Greek bankruptcy (the so-called “private sector initiative”, in which once again, the private sector had to bear the burden of decisions made by the political class), it is no wonder the system is tottering.
The problem is though that we have only the vaguest of indications of what the current Greek government intends to do in terms of economic reform to alter the situation – beyond the not unreasonable idea of a debt haircut to liquidate debt which everybody knows it unsound and can never be repaid. Given that Syriza houses an eclectic mixture of leftist groups, ranging from environmentalists to hard-core Marxists, we strongly doubt it plans to liberalize the economy. Greece’s economy continues to be severely hampered by a sclerotic, oversized and reportedly extremely corrupt bureaucracy. If you think this is an exaggeration, here is a reminder – the passage below is from an article in Der Spiegel, which refers to a 2011 OECD report:
“The need for deep structural reforms in Greece is well-known. But a new OECD report indicates that Athens may be incapable of such far-reaching changes. Ministries don’t communicate, officials don’t keep records and oversight is virtually nonexistent. The only thing that might help, it says, is a “big bang.”
Going by the rather bland title “Greece: Review of the Central Administration,” the 127-page report can be quickly summed up: The government apparatus in Athens is virtually unable to implement reform.
“It is not clear how existing and new entities of (the government) will work together in order to secure the leadership needed for reform, including the necessary strategic vision, accountability, strategic planning, policy coherence and collective commitment, and communication,” reads the damning report.”
“It found that communication among the country’s 14 ministries was appallingly paltry. Furthermore, the huge number of departments within ministries — many of them consisting solely of a department head and others with just one or two subordinates — results in widespread inefficiency and lack of oversight.
“Administrative work is fragmented and compartmentalized within ministries,” the report writes. “Ministries are not able to prioritize … and are handicapped by coordination problems. In cases where coordination does happen, it is ad hoc, based on personal initiative and knowledge, and not supported by structures.”
Were such coordination even to take place, the report indicates that administrators do not have access to the necessary data, nor does such data exist in many cases. “The administration does not have the habit of keeping records or the ability to extract information from data (where available), nor generally of managing organizational knowledge,” the report found.
The problems found in Greece’s central administration, says the OECD, are the result of decades of clientelism and the sheer volume of the laws and regulations that govern competencies within the ministries. The report found 17,000 such laws, decrees and edicts.”
The impenetrable jungle of the Greek bureaucratic apparatus
Has anyone in the meantime heard even word one that any of this has changed? We haven’t. We can only assume that some changes must have taken place as thousands of civil servants have lost their jobs in the course of the austerity program (the numbers are not as big as they appear, given how enormous the bureaucracy was to begin with). However, we are not quite sure that the “17,000 laws, decrees and edicts” have been altered in any way or abandoned, or that communication within the administrative apparatus has improved. In fact, we would expect that the decrees remain very much in force and that any improvements that may have occurred other areas are marginal at best (we would be happy to be corrected if anyone has countervailing information).
Readers may recall the Greek online business that received all its operational permits in the US within just 24 hours, but had to struggle with Greek bureaucrats for 10 months to receive the exact same permits (see our excerpt here, as the original article has disappeared into the internet memory hole. Scroll down to “The Nightmare of Opening an Online Business in Greece”). As Aristides Hatzis remarked in his op-ed in the FT:
“The Greek government is trying to avoid the bitter pill of pro-market structural reforms and the restructuring of its rickety retirement system. This is one of the most rigid and least open economies in the EU, yet some Greek ministers consider it a neoliberal paradise.”
And this is ultimately the crux of the matter. Mr. Tsipras insists that “German taxpayers won’t have to pay for Greek pensions”, but he doesn’t explain who will, or how he intends to go about improving the revenues of Greece’s stricken pension funds. Not that we want to take away anything from the reform efforts he does propose, namely:
“We agreed to the immediate abolition of the early retirement option that increases the average retirement age, and we are committed to moving forward immediately with the consolidation of the pension funds, thus reducing their operating expenses and restricting special arrangements.”
One really has to wonder though: why hasn’t this been done ages ago? What has kept the Tsipras government from implementing these reforms in, say, March or April? Why has the previous government not already done this? Being “committed” to something and actually doing it is obviously not the same thing. Why should such an essential and obvious reform of the system even be part of the Greek government’s negotiations with creditors?
Cartoon by Paresh
And we have to come back to the first question: how will the revenue side be improved? Obviously, this will require economic growth. We do agree with the Greek government that hiking taxes in the current situation so as to pretend-service an unpayable debtberg is utterly absurd. However, sparing the private sector further tax hikes is hardly enough. If powerful politicians within Syriza are mistaking Greece for a “neoliberal paradise”, what hope is there that market forces will ever be given free rein in the country?
As so often, Mr. Tsipras makes a number of fair points. However, it seems to us that everybody is skirting the main issues. Greece cannot become a “socialist Utopia”, unless its citizens are happy with being condemned to a hand-to-mouth existence for a long, long time indeed. Whether or not Greece defaults, the one thing the government will be unable to fund is the very socialism that is its basic ideology. It would be interesting if Greece were to be pushed out of the euro system of central banks, but keep the euro as its medium of exchange anyway. In that case, the Greek banking system would have to almost fully reserve demand deposits, and fund credit with savings, bond sales and its own capital. Credit expansion would be a thing of the past, and the same fate would await budget deficits. In such a situation, the ideology of the party in government may not matter: it would be forced to live within its means, no matter what. That would provide a strong incentive to implement pro-market reform. Alas, which leftist government is going to voluntarily eschew the possibilities offered by the printing press?
Shall it be bread and water, or something better? Greece’s politicians should look at the crisis as an opportunity to adopt a laissez faire economy. Unfortunately, we don’t believe they will.