A welfare state is a concept where the government plays a key role in the protection and promotion of the social and economic well-being of its citizens. Retirees around the world rely heavily on this concept as they depend on the state to provide them with a sufficient pension income during their twilight years. In Cyprus, the dependence of retirees on the state pension (frequently defined as the pillar I of the pension system) is especially high. It is estimated that around 40% of the current Cyprus labour force are likely to rely solely on the state pension, as they are not enrolled in an occupational pension scheme (pillar II of the pension system) which would enhance their retirement income. With no occupational pension funds saved and a state pension averaging less than €1000 per month (for the private sector workforce), retirement years will likely be challenging for a substantial population segment in years to come.
Why are the pensions systems struggling globally?
Life Expectancy
During the last century, life expectancy has risen due to a decrease in infant mortality, rising living standards and advances in healthcare and medicine. On one hand this is one of humanity’s great accomplishments, alas, more years to live in retirement requires more pension savings.
Increasing Dependency Ratio
Age dependency ratio is the ratio of older dependents (people older than 64) to the working-age population (those ages 15-64). An ageing population and a decline in birth rates means there is an atrophy of working people to support the growing number of retirees.
Low yields
A prolonged period of low-interest rates paired with struggling economies have contributed towards lower than expected financial returns for pensions. Higher returns may not be the golden goose but are definitely part of the equation for shrinking pension deficits.
Pension reforms
Governments are called upon to face the aforementioned challenges and countries that have not implemented pension reforms or taken measures to tackle the looming crisis will need to come up with a sustainable plan very soon. In Cyprus, apart from an increased budget spending on pension that will impact its finances, the government can take certain actions that will increase the probability of the public saving for its retirement. Such actions could be:
1. Offering additional tax incentives to encourage pension savings
2. Making it mandatory for employers to offer an occupational pension scheme so that all private sector employees may enrol if they wish so, even if the employer does not contribute
3. Allowing individuals to enrol in tax deductible personal pension schemes if their employer does not offer an occupational pension plan
4. Prohibit the access to accumulated pension benefits until retirement age is reached
5. Tighten the regulation to ensure the professional and adequate management of pension schemes
It is never too late to act
So far Cyprus has fallen short of introducing any meaningful reforms in its pension system and if nothing changes, the dilemma most of us (especially in the private sector) will face in the near future is that of extending our working years beyond 65 or substantially lowering our standard of living in retirement. Undoubtedly, a welfare state is obligated to create the necessary conditions and raise the awareness that will help the public overcome this crisis, but on the other hand, it is up to all of us to acknowledge the problem and start saving more for retirement, irrespective of how difficult that may be. There are simple tools that can assist in projecting pension income as well as calculating retirement needs. Planning for retirement ought to be on everyone’s priority list. Failing to plan and remaining idle is certainly the poorest course of action.
Christis Michaelides, BA, MSBA, MCIM
Ancoria Insurance Public Ltd
