The average monthly increase in pensions will be no more than a mere €34

The social security “reform”, proposed by the Christodoulides government is inadequate, unfair and unsustainable.

This is mainly because the scope for bringing many vulnerable persons out of the risk of poverty with adequate pensions is being profoundly influenced and constrained by the strict fiscal limits being set by Finance Minister Makis Keravnos and by the self-centred objections of the Chamber of Commerce (Keve) and the Employers and Industrialists Federation (OEV) in failing to support any increases in contribution rates to the social insurance fund and in raising the retirement age.

Background

Pensions paid by the government are very low by European standards. In 2023 Cyprus government expenditure on pensions amounted to 7.6 per cent of GDP compared with 12.3 per cent for the EU and even a higher 14.0 per cent for Greece.

According to Eurostat elderly persons of 65 years and above in Cyprus, that are heavily dependent on pensions for their income, had a risk of being in poverty of 33.7 per cent. Notably, government expenditure on old-age pensions totalled 6.0 per cent of GDP in 2023 as against 9.9 per cent and 11.5 per cent of GDP, respectively, for the EU and Greece.

And an interesting study by “DataPulse” on “Will pensions cover my Retirement”, estimates that the average pretax old-age annual pension in Cyprus was €12,800 in 2023 and covered a mere 67 per cent of regular expenses of persons above 65 years, estimated to be €19,000 yearly.

Ironically for the Cyprus government, despite its relatively low payments on pensions, the current conditions for boosting pensions substantially are favourable in that it has much more fiscal space or financial resources to spend on social protection than most other euro area members. In fact, in contrast to sizable government deficits of most euro area countries averaging 3.2 per cent of GDP over the four years 2022 to 2025, Cyprus had annual surpluses averaging 3.1 per cent of GDP over this period.

In addition, Cyprus had a government debt to GDP ratio of 50.0 per cent at the end of July this year, which is significantly below the Maastricht criterion of 60 per cent.

Besides, the government surpluses and bond issues have been used unnecessarily to excessively pile up deposits amounting to €3.3 billion at the Central Bank and €2.3 billion at commercial banks by end-July 2026, that is a huge total of €5.6 billion in cash or around 15 per cent of GDP.

And, in recent years the surpluses of the general government have almost entirely been attributable to the surpluses of the social insurance fund, as shown by the figures below.

                                 General Government Balances

                                                            (In millions of euro)

                                         2022     2023     2024     2025    2026 (1st 7 months)  

 Central government      219       -614         27         -17          -4

 Local government           30            -7          -9            6           -1

 Social Insurance Fund     546       1,174    1,421     1,252     775

                                   ____________________________________

General Government    796         554     1,439      1,242     770 

In effect, the central government has been borrowing from the social insurance fund for many years in order to finance its excess expenditures and show a general government surplus on a consolidated basis, such as the surpluses of €1,242 million in 2025 and €770 million in the first seven months of 2026. 

And by end-July 2026 central government debt owed to the social insurance fund had reached €13.9 billion.

Proposed social security reform

The proposed social security reform outlined to date by Labour Minister Marinos Mousiouttas is deficient in many ways and is most unlikely to achieve the two main objectives he initially stated, namely that “low pensions would be raised to adequate levels“ and to “to ensure the sustainability of the Social Insurance Fund over the longer-term”.

But, Mousiouttas stated subsequently that it was “not feasible economically under current conditions to raise low pensions up to the poverty threshold level”. And later the minister cited figures on proposed pension increases, that confirm that many pensioners would remain at poverty risk. Notably, with 123,000 pensioners mentioned as receiving higher pensions and the cost to the government of €50 million in the first year of reform, the average monthly increase would be no more than a mere €34, hardly enough to bring many pensioners up to the Eurostat poverty threshold of €1,018 per month for households.

However, Mousiouttas has added that some 50,000 pensioners would receive monthly increases exceeding €100 in their pensions, which would mean also that many pensioners with incomes of less than say €900 per month would still run the risk of poverty.

Furthermore, with poverty risk threshold level having been estimated on the basis of data for 2025 and consumer prices having risen by 5.2 per cent over the last 12 months and expected to increase further, the risk of more pensioners becoming at risk to poverty is likely to eventuate if the proposed increases in pensions are stubbornly maintained and voted for by parliament.

Sustainability of the social insurance fund

Given the proposed social security reform where the increase in pension costs would add just a tiny 0.4 per cent to total government expenditure in 2027, the social insurance fund would continue to be sustainable over the short to medium term, even with no changes in raising social insurance contribution rates and the retirement age.

However, if pensions were boosted to adequate levels over the medium-term and the general government continues to be in deficit and borrow substantially from the social insurance fund, the latter’s sustainability and, undeniably, that of the overall government finances would be put in jeopardy.

Indeed, in view of the ageing Cyprus population and the prospect of inflation continuing to impact strongly on the cost of living and incomes Mousiouttas is engaging in amateurism and fantasy when he states that “the social security reforms would ensure that the Social Insurance Fund will be sustainable for the next 40 years”.

And surely an “adequate, fair, and sustainable” social security reform as Mousiouttas and President Nikos Christodoulides have promised requires balance between wealthy employers and lower-income employees in sharing the costs of reform with sufficient and equitable contributions to the social insurance fund. And in this context to ensure a fairer burden of the costs of reform the cap on employee incomes for contributions to the social insurance fund should be raised substantially from the currently modest level of €5,742 a month. Indeed, this income cap has remained unchanged since 2019, that is, over a period in which high incomes have surged.

Finally, the social partners should agree and insist that state pensions should be increased to levels whereby all deserving beneficiaries can experience decent standards of living without the risk of poverty. And the social partners should agree on the broad costing of social sector reform and how it should be financed by increased social security contributions, greater tax revenue, and investments of the social insurance fund over the next five years.

Of course, reaching an agreement between the social partners on the details on the first pillar on social security reform should be contingent upon obtaining a broad consensus on the second pillar on social sector reform on “provident funds”, particularly on whether such a fund should be mandatory for larger-scale employers, and on the extent to which the incomes of future pensioners are likely to be supplemented by payments from provident funds.