Yiannis Korkovelos argues that a strategy of containing welfare costs regardless of the social costs has proven to be a difficult balancing act. While Greece has been getting to grips with its public finances, developments in healthcare and pensions have exposed a critical need for genuine structural reform
Four years on from the March 2010 bailout package, Greek society has experienced several major events – ranging from the positive return to the markets, the stay in the euro and the failure of the “grexit” scenario, the successful performance by the national football team in the Brazil World Cup, the arrest of one of the country’s most wanted terrorists Nikos Maziotis, to the abhorrent establishment of far-right populist Golden Dawn party as the third biggest political voice.
I am not going to address any of these events… Instead, I will assess changes arising from the bailout in two areas which matter to present and future generations of Greeks: healthcare and pensions.
My view is that adopting cost-containment policies in order to deal with unaddressed legacies of incomplete reforms over the last thirty years, while at the same time protecting the weakest, has proven to be difficult. By highlighting the ambivalent relationship between the crisis and the country’s welfare system, the aim of this article is to argue that cost containment without significant structural reforms cannot address welfare problems.
My argument is organised into three parts. In the first, I examine changes to the pensions and health care system. The second part looks at the impact of these on Greece’s public finances and the third gauges their impact on poverty and inequality.
Overall, I argue that Greece’s main concern for the near future is whether the political elites, trade unions, entrepreneurs and the electorate will adopt a mentality of consensus for needed, but hopefully, much fairer cost-containment policies accompanied this time with courageous structural reforms.
The welfare changes:
Pension system
In July 2010, the Hellenic Parliament approved Law 3863, with preamble L3863/10 noting: “the objective is to change the system radically”. Surely, important steps have been taken aiming at replacing the fragmented public social insurance with a unified, multi-tier system.[1] Cost containment is achieved by abolishing on average over 25 % of annual pension income.
Healthcare
As announced in the Greek National Reform Programme 2011-2014[2], the objective of the changes in healthcare is: cost-containment in parallel with policies enhancing efficiency. In 2011, the four largest sickness funds merged into the National Organisation of Health Service Provision (ΕΟΠΥ) in an attempt to reduce public expenditure. Additionally, reforms in pharmaceutical policy regarding pricing and reimbursement of prescription drugs were introduced.
The deficit: A positive stance
In 2009, Greece’s public deficit was over 13% of GDP while the public debt was standing at 115% of GDP. Since the changes, Greece has achieved an annual rate of fiscal consolidation of 4.4 p.p. of GDP on average. As proudly pointed out on numerous occasions by Government officials this is the fastest fiscal consolidation ever achieved in the developed world (Greek Ministry of Finance, 2013).
Source: Hellenic Republic Ministry of Finance (2013)
Pensions
Prior to the changes, fiscal sustainability problems were evident in the pension system. As of 2009, pension expenditure was projected to rise across the EU to 12.5% of GDP by 2060 (EC, 2009). Whilst Member States that have suffered mostly from the financial crisis are expected to experience a slightly larger rise, Greece’s projected spending is significantly higher (24.1%) highlighting the budgetary pressures exerted on a country whose pension system represents almost one-quarter of national income.
Source: European Commission (2009)
The Greek pension system also suffered from an institutional fragmentation: according to the 2006 Social Budget the earnings-related retirement benefits were paid out through more than 175 social insurance agencies each being subject to different rules which in turn favoured five particular categories of citizens over others[3].
Overall, changes in the pension system have had a positive impact with regards to the country’s fiscal problems. Whilst the 2009 projections of pension spending suggested that it would reach 24.1% of GDP in 2060, a more recent report estimated that it would rise to 14.6% (EC 2012).
Healthcare
From 2000 till 2009 total health spending rose from 8.0% of GDP to 10.2%, growing in per capita terms by an average annual rate of 5.7% (OECD 2013). Furthermore, as of 2010, Greece had the highest number of doctors per capita in the EU whilst also the highest pharmaceutical expenditure (ibid). Strikingly, much of this was paid for privately: in 2008 the share of public expenditure on health remained one of the lowest in Europe, while the share of out-of-pocket payments was one of the highest (ibid).
The recent changes have had a positive impact with regards to the sectors’ fiscal problem. As of 2011, total expenditure on pharmaceuticals had fallen to 2.6% of GDP whilst total health expenditure decreased from 10.2% of GDP in 2009 to about 6% in 2013[4] (Graph 3).
Source: CROP Poverty Briefs, Petmesidou (2013)
A more obscure stance:
Pensions
I will make four brief observations coming, from a slightly more pessimistic point of view. First, whilst the introduction of a multi-tiered system is expected to have positive fiscal effects, one should also consider the distributional impact. For instance, a number of powerful pension schemes have succeeded in keeping their independent insurance status (journalists doctors, engineers, lawyers, and Bank of Greece employees) allowing for a potential aggravation of income disparities in society.
Second, the across-the board drastic cuts in pensions create unequal access to private insurance. This enables for inequality to emerge amongst different socio-economic groups, creating an exacerbating income polarization among future retirees. Third, the indiscriminate reductions in pensions increase the risk for elderly people of being more affected by poverty. This is of particular importance as poverty among the elderly was substantially high even prior to 2008.[5] In addition, social transfers in Greece do not seem to be very effective with regards to reducing poverty (Graph 3). Hence, one has to highlight the redistributive effect of pensions (Annual National Report, p14 2011).
Source: Annual National Report 2011, European Commission
Fourth, one should not ignore problems regarding social insurance budgeting given the dramatic fall in contributions; unemployment rates have increased dramatically and wages decreased coupled with a rise in benefit demand.
Healthcare
Whilst the decline in health expenditures could have perhaps been explained by efficiency savings evidence suggests that access to healthcare has recently worsened (Petmesidou 2013). In January 2013, the Centre for Health Services Research concluded that one in two Greek citizens are unable to cope with the rising cost of pharmaceuticals.[6] These worrying developments are followed by 20% of NHS hospitals being closed in 2013 due to the EOPPY’s inability to cover hospital fees (Venieris, p24, 2013). Overall, whilst current demand for public health services is rapidly escalating, drastic cuts are threatening the capability of health services to deal with the situation with new problems emerging across a number of dimensions: access, equity, and service quality.
Source: Petmesidou (2013) “Crisis and austerity: a painful watershed for the Greek welfare state?”
Conclusion
Four years on, Greek reforms are advancing. Nevertheless, progress is still short of victory over the forces of lethargy and the ever present underlying political interests. Indeed, a myriad of bureaucratic problems combined with political and trade union interests have combined to impair ‘real’ change.
Surely, important positive signs have emerged as a result of policy responses imposed in return for the current €172bn bailout: as of April 2014 Greece has returned to international capital markets, budget figures for the first five months indicate that revenues will match targets of this years’ primary surplus of 1.5% of GDP (before interest payments), and growth is projected to be positive this year with further optimism for 2015.
However, my brief analysis highlights the following: cost containment without significant structural reforms cannot address welfare problems. On one hand, spiralling debts and the fragmentation of the welfare state have had a significant impact on the country’s sovereign debt crisis, requiring change and legitimising efforts for cost containment. On the other hand, the crisis and the policies adopted to counter it deprive the welfare state from its essential mechanisms, which are crucial during times of recession. In short, welfare changes did produce some improvements, but most changes include cuts which were indiscriminate and had an impact on poverty and inequality, coupled with a timid presence of structural reforms.
This serves as a reminder that Greece’s main concern for the near future is not necessarily whether its foreign creditors will agree to another debt relief or whether the beautiful Greek islands of Syros and Santorini will enjoy record number of tourists this summer. Instead, it is whether the political elites, trade unions, entrepreneurs and the electorate will adopt a mentality of consensus for needed, but hopefully, much fairer cost-containment policies accompanied this time with courageous structural reforms.
I am optimistic and hope that the country which according to ancient Greek mythology gave genesis to Ευρωπη (Europa) will recover soon. Hope, on its own though, is not enough, courageous structural reform is what it needed.
Yiannis Korkovelos is a MSc student in the Political Economy of Europe at the European Institute of the LSE
[1]http://www.psa.ac.uk/insight-plus/blog/crisis-and-austerity-painful-watershed-greek-welfare-state
[2] For more detail see: http://ec.europa.eu/europe2020/pdf/nrp/nrp_greece_en.pdf
[3] Matsaganis (2002) ‘Social policy and the family in Greece. In: Families and the welfare state in Greece: developments and challenges in the 21st century’
[4]See Petmesidou (2012) : http://www.psa.ac.uk/insight-plus/blog/crisis-and-austerity-painful-watershed-greek-welfare-state
[5]In 2008 the poverty rate for the population over 65 years of age was 22.3% while for those over 75 the rate was 28% (Annual National Report 2011, European Commission)
Mr Korkovelos,
Thank you for the article – it was quite enlightening for a non-Greek, but fellow European, to read. From your text, it was quite refreshing to see that you refuse to adopt the disconsolate rhetoric that many Greeks voice, to instead pose your own conditional optimism for the future.
The welfare system is a proud focal point of the EU and it seems Greek welfare is in quite a state of peril. As for your reform suggestions, I have a few qualms that I hoped you could clarify:
1) Your primary statement “cost containment without significant structural reforms cannot address welfare problems” somewhat confuses me. Is not the goal of cost-containment one of a throttling/reduction of costs? The text seems to read that cost-containment has the goal of addressing greater welfare concerns. To sum up, what exactly was the intention of the cost-containment: fixing “legacies of incomplete reforms” or a cutting of costs (which would fall in line with the cutting seen across the Greek public sector)?
2) Structural reforms seem to be the be-all and end-all solution to the Greek welfare system crisis. I was just pondering, what structural reforms would be sufficiently effective to allow for a reduction for the Greek cuts, which have been apparently necessary across the board to reign in fiscal expenditures?
3) The comment about “political elites” seems to be one that could have been lifted verbatim from a speech by Nigel Frage. Why use this specific phrase? Surely in a representative democracy, the electorate have put these “elite” in power to determine the course of the Greek state? Now, I am no expert in Greek politics and am certain that its inner workings have been tainted by misuses of power. But how would the electorate play a further role in this scenario? Hold new elections, or perhaps a popular referendum? I am somewhat skeptical that an outcome from one of these options would alleviate the current concerns.
Thank you for your article once again, I thoroughly enjoyed it. Hopefully improvements in the welfare system will arrive sooner than later.
Alexander Havekost
Nice overview! If I may – what are genuine structural reforms of the pension and healthcare systems? Do you think that a particular country could be a model for Greece?
And with regards to the speed and scope of fiscal consolidation – the Baltics have consolidated quicker and more. Latvia’s fiscal consolidation between 2009-2012 amounted to 17% GDP with 11.2% GDP in 2009 alone: https://www.imf.org/external/pubs/ft/wp/2010/wp10213.pdf
Tell that to the Greek officials (though maybe they don’t consider the Baltic states to be developed countries)
Dear Dan,
Thank you for your comments.
Let me try to answer your questions/remarks.
1) What are genuine structural reforms of the pension and healthcare systems?
Your question is certainly at the core of the debate. I tend to believe that whilst Greece has outperformed (refer to the data in the article) in terms of fiscal measures by achieving a primary budget surplus before debt repayments, the Government has been more timid with regards to implementing structural reforms. I have to admit that the aim of my article is not to identify the precise reforms needed, but instead, present evidence that: on one hand, cost-containment policies with regards to pensions and healthcare (a) have brought positive effects in terms of deficit reduction and (b) have caused poverty and inequality. On the other hand, argue that these cost-containment policies are not enough if not supported by important structural reforms which will help reshape the areas of the fragmented welfare state. To put it simply, by cutting, the deficit is indeed reduced but a path to sustainable institution building and modernization can only be achieved when courageous structural reforms occur. Let me give you a (very) simple example which will help demonstrate that reforms which modernize the system should be at the core of recent changes.
For instance, many hospitals in Greece are still operating with old and inefficient management systems. A structural reform would be improving hospital management in the form of introducing new IT systems for example. The introduction of electronic files, will not only save time and reduce costs, but patients will be given better treatment. In this case it will be easier for hospitals to compare data with the records of other hospitals allowing for economic efficiency, which would be translated into a better service for the patients.
Overall, I am slightly sceptical of the “cutting, cutting, cutting” mentality and argue for a more socially just and fair approach which takes into account poverty and inequality, whilst at the same time modernizing the state with structural reforms.
I do acknowledge that some structural reforms are taking place.
With regards to pensions, for instance here are four examples:
i) increasing the legal and/or minimum retirement ages and lengthening the contribution periods required for a full pension
ii) reducing the generosity of pension benefits
iii) reducing early retirement via reducing benefits and revising the list of arduous occupations
iv) introducing a mechanism to index the retirement age to life expectancy
However, these reforms have often been timid being overshadowed by indiscriminate cuts in all directions.
2) Do you think that a particular country could be a model for Greece?
I tend to disagree with commentators arguing that “Greece should adopt the…Swedish model” for instance. I think that Greece should finally develop its own model emphasising on a key word: “sustainability”.
This is something that has been ignored over the last thirty years.
So, no, I do not believe that there is a particular country which could be Greece’s model. Instead, Greece should develop its own sustainable model by adjusting to the country’s needs but at the same time perhaps collecting experiences from other countries which have successfully developed their own education systems, e-Governance systems, tax-collection management etc.
After all, the beauty of the EU is that we are “United in diversity”…
Thanks for your reply! I gather from the first section of your response that ‘courageous’ reforms are largely co-coterminous with state-modernization. I think that the example with hospitals is indeed a good one. Would you go the extra step and claim that by harnessing the potential of the technology at its disposal (and perhaps introducing sound corporate governance practices – though I see those as an extension of technology), the Greek government can cut costs, increase efficiency and even upgrade the quality of services in healthcare all at the same time?
With regards to the example of reforms in the pension system that you offer – do you refer to them as ‘timid’ because you believe that they didn’t go far enough? Or because you think that the government could reform the pension system to be more redistribute? Or both?
I applaud your ‘going it alone’ attitude with regards to the much needed reforms, although I am, and I sense that you are too, rather skeptical of its prospects for success.
Finally, although it is great that the Greek state has recorded a primary budget surplus, unfortunately, the true deficit for last year after paying down interest comes up at more than 10% of GDP. That is the figure that really matters. What also matters is that almost all of the debt is now held by the Eurozone taxpayers (some of it even by the least developed countries through the IMF). I don’t want to get boggled down in a discussions of the past and who is to blame and who screwed over who, but rather consider the future prospects. And I see two solutions 1) Eurozone taxpayers (and the world’s poorest) take a loss 2) Greek government squeezes its taxpayers (perhaps while tackling the widespread tax evasion) and pays down the debt. As a person who is socially aware, while also committed to the European project, which option do you find more preferable?
Korkovelos,
Thank you for your article. Sadly, most of the news ignores the fundamental structural problems in Greece.
You did a great job clarifying the Welfare problem there. I wish someone would do the same for the US.
Regards,
Wayne
Luvsiesous