Though exacerbated by short-term external factors, the system itself and low incomes, pensions are at the root of the problem

Impressionistic evidence and recent opinion surveys indicate that the affordability crisis is the most pressing concern for Cyprus households. Indeed, many persons state their inability to cope with daily cost-of-living pressures and doubt that they will be able to maintain their current standard of living once they stop working.

Many younger persons say that they are increasingly unable to afford decent accommodation in the face of surging housing costs.

Moreover, with prices and costs accelerating since February owing to the war with Iran, the affordability crisis in Cyprus and most other countries has intensified. Notably, a recent IMF report on Cyprus states that the projected “rise in consumer prices by 3.5 per cent in 2026 will weigh on real incomes”.

Policy makers need to know which groups of the population are being hit hardest by higher prices and housing costs so as to devise remedial measures and reforms. Indeed, what is the situation for Cyprus with regard to levels of income, net wealth and regular expenses for the different categories of the household population?

Base data

Importantly, the ECB’s recent Household Finance and Consumption Survey (HCFS) for 2023 provides valuable base data on the net wealth, incomes and expenses of households in euro area member countries and Hungary and the Czech Republic.

This HFCS reveals that, while Cyprus households on average have greater net wealth than most of their counterparts in the euro area, the levels of incomes of Cyprus households on average are considerably below that of households in many countries of the euro area. 

Indeed, the median annual gross income per Cyprus household was €30,900 in 2023, whereas the median for euro area households was €37,100.  

Most notably, this ECB survey shows that the bottom 20 per cent of Cyprus households according to income were experiencing difficulties in meeting regular expenses, including debt servicing, and in their ability to save in 2023.

The median annual gross income of the bottom 20 per cent of Cyprus households was estimated at €10,300 in 2023, with only a lowly 9.8 per cent of these households estimated as having the ability to save.

The median debt service to income ratio of this lower income group of Cyprus households was estimated at a very high 56.7 per cent in 2023 compared with an average of 19.2 per cent for similar euro area households.

What is striking as well is that the middle-income quintile of Cyprus households had a median gross annual income of €29,700 in 2023, which was 20 per cent lower than the average for the corresponding income of euro area households.

And after taking account of their regular expenses only 15.1 per cent of this middle group of households in Cyprus had the ability to save compared with a much higher 42.5 per cent for the corresponding quintile of euro area households.

Furthermore, households of young persons in Cyprus of 16 to 34 years recorded a median annual gross annual income of €24,000 in 2023, which was over 30 per cent below that of the incomes of corresponding households in the euro area.

Most importantly only a mere 18.2 per cent of these younger households had the ability to save so as to, among other things, have the means to purchase housing and raise a family. In marked contrast, around 50 per cent of the younger households in the euro area had the ability to save.

Although the concerning data for Cyprus on the inability of numerous lower and middle-income households to meet their regular expenses, including many with overwhelming debt servicing payments, refers to 2023, the rise of household real incomes over the last two years and the impact of inflation on real debt has not lessened the affordability crisis for numerous families.

Even the Cyprus government, which has tended to downplay the financial needs of low-income employees and pensioners, has since early 2025 reduced taxes and provided subsidies to try to make the cost of living more affordable for the population.

Furthermore, the government has promised more measures to deal with the affordability and housing crises in the run-up to the presidential election of February 2028.

And the IMF in its recent report on Cyprus, despite being critical of the short-term horizontal policy actions extended by the government to address the cost-of-living pressures on households, calls for temporary, well-targeted measures to assist persons most adversely affected by the affordability crisis.

Need for substantive measures and reforms

The Cyprus government and international institutions appear to act as though the affordability crisis is temporary and is attributable to short-term external factors.

They don’t acknowledge that the relatively low level of incomes and pensions paid to the majority of the population in Cyprus reflect persistent system, structural, and institutional weaknesses, that require fixing with substantive measures and reforms.

Employee incomes

The main source of the incomes of households is the compensation paid for the work of private sector employees, many of which are employed in the low-productivity sectors of the economy.

It is estimated that the median income of workers in the leading retail trade, construction and accommodation and food and beverage service sectors, averaged approximately a lowly €1,400 per month in 2024 and that these workers received no more than a 5 per cent increase in their wages in 2025.

While raising social benefits and the minimum wage can be used to increase the incomes of the households of lowly paid workers and pensioners any substantial and sustained increases in the remuneration of the much larger group of middle-income employees will need to be supported by sustained increases in productivity.

Traditionally, the questionable systems of Cyprus enable many employers to make easy profits by eliciting favourable contracts and treatment from the government, evading taxes and not complying with labour, building and other regulations including in the exploitation of labour in the payment of incomes, rather than taking action to raise productivity.

Accordingly, the government needs to take a “stick and carrot approach” using strict and even-handed enforcement of laws and regulations, including combatting prolific tax evasion to iron out the irregularities and corruption of many businesses, and in employing taxation and spending policies to give incentives to employers to take measures to raise the productivity of their businesses.

More specifically, the government along with employers can play a role in boosting business productivity by, among other things, empowering employees through facilitating investments and training in upgrading their skills and in ensuring worker rights, and by encouraging innovation and the application of advanced technologies, including efficient use of AI, with tax incentives and expenditure grants.

Housing

In addition, while young persons should benefit from the offering of better jobs associated with efforts to raise productivity, there are a number of policy measures that the government and banks could take to support the ability of local citizens, particularly younger persons, to afford the purchase of a house.

Surely, the government can rearrange tax incentives much more in favour of the building and buying of lower-cost social housing as against giving generous tax treatment to developers and purchasers, including especially foreign companies, of “more up-market” properties.

Also, banks should devise schemes to offer higher deposit rates to younger persons saving in order to purchase a house, while the government should consider subsidising mortgage loans to lower-income households, with possible financing from the proceeds of an extraordinary tax on high bank profits and the use of part of the capital of the Social Security Fund.

Pensions

Against the background of an aging population, Minister of Labour and Social Affairs Marinos Mousiouttas sees pension reform as the government’s top social priority, aiming at balancing the social security system’s sustainability with the provision of decent, adequate pensions, while expressing no intention of increasing the retirement threshold beyond the age of 65 years.

However, the sketchy details released so far on the proposed Social Security reform, and the statements of the minister don’t give any assurance that minimum pensions will be raised in a timely manner to adequate levels so that that pensioners can eke out a decent standard of living.

Indeed, with 33 per cent of Cyprus pensioners receiving incomes below the poverty line, Mousiouttas has said that “raising low pensions to the poverty threshold level was not economically feasible under current conditions” and added that “any further expenditure resulting from changes to benefits must be offset by savings in expenditure elsewhere”.

But, as the government has ample financial resources from continually generating surpluses and piling-up bank deposits of €4.9 billion at end-May 2026, the statement of the minister is anti-social and even ignorant and appears to reflect the priority of the government of focusing on the 2028 presidential election with promised “reforms” rather than supporting the living standards of existing pensioners and future generations with substantive and timely reforms.

Undoubtedly, serious and urgent reform of the pension system should be a priority of the government and not just be an election ploy.

In concluding, as implied above, it is extremely important that measures and initiatives to raise productivity and make housing costs more affordable take place in a fundamentally changed and less corrupt business environment that provides for genuine competition between enterprises and priority given to skilled and qualified persons in securing jobs in the labour market.

These environmental changes and measures should enable sustained increases in productivity and better and higher-paying jobs, that along with elevated pensions resulting from serious social security reform, would contribute significantly to improving the incomes and the standard of living of households over the coming years and leave behind the affordability crisis.