THE REST OF THE TRUTH ABOUT GREEK PENSIONS

Much has been made of the role of pensions reform in the last stretch of our negotiations with the troika institutions.Yet amazingly, the discussion has focused on negotiating tactics over substance - namely the viability of the Greek social security funds. In this post, partly a translation of my 22 May post on the same topic, I will attempt to shed some light on the less transparent aspects of this debate.

UPDATE 5/1/2016: Despite its name, this post has always been focused on Greek pension funds. It's important to remember, however, that about EUR7bn of pensions and other benefits are additionally paid to Greek state employees past and present, directly by central government. These are of course unfunded.

Introduction

I have to start with the following graph, based on Eurostat data, which depicts all sources of income for Greek social security funds from 2006 to 2014. Each rectangle's area is proportionate to the amount of money it represents, providing an intuitive overview of the dependencies in our pension and benefits system. I am indebted for this idea to veteran blog reader @dalagiorgos.

The key takeaway from this graph is the enormous dependence of social security funds on subsidies, whether in the form of tax revenue ring-fenced for the funds or direct top-ups from the government budget. You see, the sum of workers' and employers' contributions into the funds and the funds' own investment income (including capital gains, interest on bonds and deposits and rents on property) came up to just 57% of the funds' income in 2014. You might dismiss this as a crisis-era aberration - after all employment is probably near all-time lows. But this share peaked at a mere 65% in the growth years (2007). Put simply, the Greek social security funds were never self-financing and social security as we know it (even in the austerity era) would cease to exist without the Government's top-up.

This life-saving subsidy to the funds amounts to EUR13bn per annum - equal to 14-15% of all Greek government revenue. A legal obligation of the state, it was, as of 2014, still up by 6% compared to the 2006-8 average, in order to compensate for a 23% drop in contributions, a 74% drop in tax revenue ring-fenced for the funds, and a 81% drop in the funds' investment income. Total flows into the funds fell by 18%.

So are the funds viable?

It might sound a little redundant to ask the question when funds are dependent on a government top-up for close to half of their income, but it is a matter of some debate whether Greek social security funds are viable. Our new government rubbished the past few years' worth of actuarial studies recently, claiming that they did not take into account the funds' non-financial portfolios. For once they are actually right; the methodology of these reports does not involve making any assumptions on returns on (non-financial) assets. It merely compares the present value of predicted in-flows and out-flows. But as I shall demonstrate, taking into account these assets would make next to no difference.

There's reasonably good data out there on the assets of social security funds, so you can test this for yourselves.

You can see the funds' financial balance sheet here. At a total of ca. EUR21bn, these assets would barely cover nine months' worth of pensions and benefits if they could somehow be liquidated under non-fire-sale conditions. Even had the funds not taken PSI losses of ca. EUR10bn in 2012 (more here), the total would still only come up to a year's worth of spending. The funds could never hope to live off the returns on this.

Estimates of the value of non-financial assets aren't as forthcoming, however a first census has been taken in 2013 as part of the implementation of the 'Hestia' database and the results can be seen here. Unfortunately, these are mark-to-algorithm values based on the Greek system of 'objective values' - which are nothing of the sort. Still, the objective values algorithm had just been rebased  to approximate market values when the Hestia census was taken in July 2013, and the Census estimate of funds' non-financial assets ran to barely EUR1.4bn. This means that the value of the funds' entire property portfolio would cover just over two weeks' worth of pensions and benefits. Nor would it be possible to close the gap merely by sweating the assets and increasing returns.

Barely 31% of the properties making up the funds' real estate empire by value were being rented out in mid-2013, and those that were yielded just 3.3% of their 'objective' values. A tenth by value were vacant, and the rest (58% by value) were reserved by the funds and wider public sector for own use. Rental income was a mere EUR20m - not one thousandth of a year's worth of fund expenditures.

As for the funds' financial assets, it's plain to see here that three quarters are made up of government bonds, cash and deposits, yielding next to nothing. This distribution is dictated by law and cost them 2-3 percentage points worth of returns per year in the good times. One sixth of the funds' financial balance sheets are made up of debtors - overdue contributions, the returns on which after defaults are presumably negative.

To cut a long story short, the total assets of the greek social security funds would not pay for ten months' worth of pensions and benefits, even if we could somehow liquidate them all without causing a fire sale. I have nothing but respect for the actuarial profession, but an actuary's work right now would not be to discuss what pensions are affordable or what the pensionable age ought to be; it would be to discuss how much of the Greek public sector's wealth would need to be injected into the funds to make them halfway viable while targeting modest outcomes.

Couldn't employers pay more? 

One of my readers objects that Greek pension funds might be more viable if employers would pay more by way of contributions. After all, at 4%-5% of GDP their contributions have consistently been slightly smaller than household contributions, and way lower than the EU average (almost half). 

I think it's a great idea to better enforce mandatory employer contributions, as a matter of principle. However, as I explain here, Greeks are much less likely to have an employer than other Europeans. We are more than twice as likely to be self-employed and three times as likely to be 'contributing family workers', some of whom are unpaid. Account for this and the fact that employer contributions in Greece are proportionately lower than in Europe becomes a matter of labour market structure as opposed to unscrupulous employers. In fact, the latest available data (2008 and 2012) suggest that social security contributions were not a low share of the total payroll cost of Greek employers by EU standards (higher than in Germany, for one) and their share of labour costs grew during the crisis. 

So increasing the headline or effective rate of employer contributions would make little financial difference, unless we could also a) increase real wages without reducing employment and/or b) restructure the Greek economy away from small and family businesses and further towards larger businesses. 

The welfare parastate

When I first posted this article, I got a very astute response from a Facebook user, which I reproduce below:

One might say that this pension top-up compensates for (typically insufficent or nonexistent) housing, unemployment and subsistence benefits for relatives (first, second or higher degree,  perhaps even friends). This social spending is instead delegated to the old and wise to distribute as they see fit among their extended family - a means, however unusual of supporting the family. 

This is 100% accurate. As I explain here, family income is more likely to be pooled in Greece than elsewhere in Europe. In the good years, the people sought, and governments gave, pension benefits in order to make up for other shortcomings of the welfare state - effectively outsourcing welfare to the pensioners. In auterity-era Greece, the heart-wrenching stereotype is of grandparents hanging their heads in shame as they find themselves unable to buy their grandkids a chocolate bar. But in reality, pension income was supporting a wider range of more basic needs, from education all the way to food.

Did Greece's welfare-delegation experiment ever work, though? This post (and the graphs to the right) summarises the outcomes using a wide range of inequality statistics for working-age and pensionable-age Greeks. In terms of narrowing or restraining inequality, the Greek welfare state only ever seemed to work for pensioners; it still did in the early crisis years.

As I keep saying, the latest data, and older data too, show that Greece’s welfare state has for years been the worst in the OECD at tackling poverty – in terms of how much it manages to reduce the risk of poverty per Euro spent. The misdirection of the pension top-up from welfare to pensions is at the heart of this weakness.

Generous or treacherous?

Famously, Greek pensions are not overly generous - at least not on a per capita basis. Greece has a lot more people of pensionable age (the WSJ takes that to mean 65+) and therefore the higher expense to match. The FT has recently reported Government claims that the average pension is EUR750 per month - which are true enough of the primary pension, but overlook the fact that one in two Greek pensioners receives more than one pension (p 6 here).

But [update 11/5/2016] pensions don't have to be generous to be unsustainable. Matsagganis and Leventi (2015) calculate that, from the first time they became insured to the moment of their death, the average member of Greece's IKA fund (the default private sector social security fund) was subsidised to the tune of ca EUR115k pre-crisis and ca 35k even post crisis. For some perspective one this, multiply the first number by ca 3m, a reasonable adjusted estimate of the number of people who have passed through all stages of the system over the last 40 years, and then by 35% (the typical share of pension funds' income that was provided directly by the state pre-crisis), and you get EUR121bn - that's almost half our pre-crisis debt burden.  

As I've explained here, Greeks on average don't retire much earlier than other Europeans, but they tend to have had shorter working lives when they do. Worse, a sizeable chunk of our labour force in major state-owned organisations have historically tended to retire very early, leaving the self-employed to lift the average retirement age.

How can we test this claim? Well, Eurostat provides detailed estimates of the share of EU countries' inactive population that are retired, by sex and age group, here. It also provides estimates of the share of the population that is inactive here. By multiplying the two, you can figure out the percentage of the population at each age group that is retired and thus entitled to some kind of pension. Run these figures and the result is astounding. Just under one in six Greeks between the ages of 50 and 59 is retired - more than 4 times the Eurozone average, and lagging only Turkey, Croatia and Slovenia. The total value of the pensions of people in their fifties comes up to almost 300m per month, and they draw the largest pensions out of any age group (p. 7 here). 

The problem isn't just that these guys (and very often ladies) will be drawing for years on benefits they can't possibly have earned. It's also that they are trapped into inactivity. Once you've retired from an office job at 50, or 55, it's fair to say you won't work again even if you wish to. 

Is this a real priority?

Back in February 2015, Yanis Varoufakis publicly stated that reforming pensions was not a priority area for reform; our efforts, he claimed, would be better spent battling corruption, e.g. in public procurement. But there's a catch. The pension fund top-up (EUR13bn per annum as already established, plus another EUR7bn in public sector pensions and benefits), is way, way larger than the entire Greek public procurement bill, right down to the last paperclip, which came up to a mere EUR8bn as of 2014. It has been larger as far back as the data go. And while not all procurement spending is unnecessary or corrupt, the pension top-up is going almost entirely to the wrong people, since it's generally not means-tested and inaccessible to, e.g., the young unemployed. The result is that Greece could be lifting more people out of poverty than it currently is through social spending, but we choose not to. Why wouldn't a left-wing government care about that? 

Where next?

Clearly, this system needs radical reform, the kind that would take years to achieve. In my view, pensions need to be cut down eventually to what the funds can pay for without further subsidy (i.e. almost cut in half). Their social policy functions should be moved instead to where they properly belong - the state budget, in the form of a means-tested guaranteed minimum income scheme. Greece piloted one such scheme, at the insistence of the Troika, in 2014. The IMF proposed this in March 2012, and Syriza - today's government - endorsed this as a matter of urgency in June 2012, before dismissing the 2014 pilot as 'crumbs of state charity', only to then reintroduce a nominal reference to a 'basic income' to its rhetoric in February 2015.

The second part of the necessary reform is to give pension funds a proper source of investment income. Syriza's Thessaloniki programme proposed to cede some of the government's real estate portfolio over to the funds. That's definitely a welcome idea. But at ca. EUR100bn on last count (2012), and even assuming every last asset can be rented out at the same nominal yield of 3.3%  as the funds' existing assets, the entire non-financial wealth of the Greek government would only give social security funds a 3.3bn lifeline per year - a fifth of what is needed to replace the current state budget top-up.

Thus, with interest rates predicted to stay low for some time, some discussion needs to be had about allowing funds to invest more of their assets in assets other than Greek bonds and bank deposits. Greek stocks are volatile and pension fund allocations would move the market excessively; but overseas stocks and emerging market bonds other asset classes, including foreign assets, might provide returns while also breaking the feedback loop between the state of the Greek economy and the returns on social security fund assets, which in a perfect world I'd hope would be counter-cyclical.

(Update 5/1/2015: I've been accused of proposing that Greek pension funds take on risk in a 'search for yield'. I think there's definitely a health warning there and I might have spoken too soon. But Greek pension funds have, as the analysis of returns on assets above shows, been ignoring yield for decades. In any case, even if yield is bad, diversification surely is good?)

The third part of the reform would be to realign the Greek welfare state to formally acknowledge pooled (extended) family budgets and balance sheets, thus applying tax free thresholds to family as opposed to individual income, or acknowledging shared use of property and shared debt in wealth taxation. This might allow families to, for instance, set bank and utility arrears off against property tax due but would not favour better-off pensioners against young people as our current system does. 

The final part is to make some provision for the people trapped into financial inactivity by early retirement. While I do not believe these are true victims of the system, they were nonetheless often lured into retirement by financial incentives, as a matter of government policy; and in any case they will not be able to earn a living again, so they are the burden of the state unless we decide to just shoot them. A means-tested guaranteed minimum income would address part of the financial problem of these individuals, but this may not be the only problem on the table.

None of this can be done quickly, or painlessly. The institutions ought to be willing to wait, and ideally to subsidise some of the transition costs, including actuarial studies, systems design and implementation. But our current predicament is such that no one trusts the Greek government with time or money unless they're bound by the conditionalities of a bailout programme. I don't trust them either.  A long-term programme, with a debt relief carrot at the end of it, just might do the trick; but things are not heading in that direction.

Either way, pensions will always be toxic as they involve a cross-subsidy from the active to the inactive, and sometimes from the poorer young to the better-off old. Within a nation state, we justify these things by appealing to people's sense of self-interest and (extended) family values and by glamorising the struggles of past generations. Across borders, none of this works.

(Update 5/1/2015: I will reiterate here what I've said in comments below: pension spending that cannot be supported by the funds' contributions and investment income needs to be treated as what it is: welfare. It's acceptable even to (my kind of) libertarians for the state to take on an unfunded welfare liability, but the public needs to know they are paying for this essentially through taxes; and benefits need to be means-tested. Failing to make the distinction only provides political cover for rentiers.)

Περί ταμείων και συντάξεων: από ένα απλό infographic στο κοινωνικό παρακράτος

Το γράφημα που ακολουθεί βασίζεται σε στοιχεία της Eurostat και απεικονίζει όλα τα έσοδα των Ελληνικών ασφαλιστκών ταμείων από το 2006 ως και το 2014.  Κάθε παραλληλόγραμο έχει εμβαδό ανάλογο με το ποσό των χρημάτων που απεικονίζει, ούτως ώστε να απεικονίζεται με απλό τρόπο πόσο εξαρτώνται τα ταμεία από κάθε πηγή εσόδων. Την ιδέα τη χρωστάω στον παλιό φίλο του ιστολογίου, τον @dalagiorgos.

Είναι σημαντικό να καταλάβει κανείς πόσο μεγάλο ποσοστό των συντάξεων στην Ελλάδα χρηματοδοτείται από το δημόσιο είτε μέσω φόρων είτε απευθείας. Οι εισφορές και οι αποδόσεις των επενδύσεών τους αποδίδουν στα ταμεία μόλις το 42% των εσόδων τους - προ κρίσεως μάλιστα, το ίδιο ποσοστό κυμαινόταν στο 34% με 37%. Αν βασιζόμασταν σε αυτές μόνο, το κοινωνικό κράτος όπως το ξέρουμε θα έπαυε να υπάρχει.

Πόσα χρήματα μπαίνουν κάθε χρόνο στα ασφαλιστικά ταμεία και από πού; | Create infographics

Η απευθείας επιδότηση από τον προϋπολογισμό είναι γύρω στα 13δις το χρόνο - το 14-15% των συνολικών δαπανών του κράτους - και ως το 2014 παρέμενε αυξημένη (6%) σε σχέση με τη μέση αντίστοιχη των ετών 2006-8, καθώς στο μεταξύ οι εισφορές είχαν μειωθεί κατά 23%, τα έσοδα από φόρους υπέρ τρίτων κατά 74% και τα έσοδα από επενδύσεις κατά 81% - ενώ ταυτόχρονα οι συνολικές εισροές στα ταμεία μειώθηκαν κατά 18%.

Την παλεύουν τα ταμεία;

Εκ των πραγμάτων για να αναγκάζεται να τσοντάρει διαχρονικά το κράτος τα ταμεία δεν μπορεί να είναι και τόσο βιώσιμα. Εντούτοις διαβάζοντας περισσότερα περί συντάξεων τις τελευταίες μέρες βλέπω ότι η νέα κυβέρνηση έσπευσε να καταδικάσει τις αναλογιστικές μελέτες των παρελθόντων ετών για τα ασφαλιστικά ταμεία, με βασικό επιχείρημα το ότι δεν λαμβάνουν υπόψιν 'την περιουσία' των ταμείων. Πράγμα που ισχύει, υπό την έννοια ότι δεν κάνουν υποθέσεις για την αξιοποίησή της. Είναι επίσης εντελώς αδιάφορο, όπως θα εξηγήσω αμέσως.

Την περιουσία των ταμείων ως ένα βαθμό τη γνωρίζουμε - τα χρηματοοικονομικά στοιχεία του ενεργητικού τους (ρευστό, καταθέσεις, ομόλογα, μετοχές) μπορείτε να τα δείτε εδώ. Με αγοραία τιμή τα 21δις περίπου, αν πωλούνταν όλα μαζί δεν θα κάλυπταν τα έξοδα των ταμείων ούτε για εννέα μήνες. Για τα υπόλοιπα στοιχεία του ενεργητικού των ταμείων δεν είναι εύκολο να βρει κανείς υπολογισμούς, έχει ωστόσο γίνει μια πρώτη απογραφή για το ηλεκτρονικό σύστημα 'Εστία' ( και μπορείτε να τη δείτε εδώ. Δυστυχώς η απογραφή γίνεται με βάση αντικειμενικές αξίες - και ο όρος αυτός όπως ξέρουμε δεν έχει το νόημα που θα υπέθετε κανείς.

Δεδομένου πάντως ότι οι αντικειμενικές αξίες αναπροσαρμόστηκαν αμέσως πριν την απογραφή της Εστίας και ότι τον Ιούλιο του 2013 τα ακίνητα των ταμείων είχαν συνολική αντικειμενική αξία 1.4δις Ευρώ, στο σύνολό της η περιουσία των ταμείων μάλλον αξίζει λιγότερο από ένα έτος εξόδων τους. Ούτε είναι δυνατόν να αυξηθούν κατακόρυφα οι αποδόσεις επί αυτής της περιουσίας.

Από τα ακίνητα αυτά μόνο το 31% (σε όρους αντ. αξίας) εκμισθώνονταν σε τρίτους, και αυτά απέδιδαν ετησίως ενοίκια ίσα (κατά μέσο όρο) με το 3.3% της αντικειμενικής τους αξίας. Το ένα δέκατο δεν χρησιμοποιούντο, και τα υπόλοιπα (58%) τα χρησιμοποιούσαν για δική τους χρήση είτε τα ίδια τα ταμεία είτε το ευρύτερο δημόσιο. Τα έσοδα από εκμισθώσεις μετά βίας φτάνουν τα 20εκ, δηλαδή δεν ισοδυναμούν ούτε το ένα χιλιοστό από τα έξοδα των ταμείων.

Όσο για τα χρηματοοικονομικά στοιχεία του ενεργητικού, μια ματιά στα στοιχεία της Eurostat εδώ δείχνει ότι τα ταμεία έχουν στο ενεργητικό τους κατά τα τρία τέταρτα ομόλογα, ρευστό και καταθέσεις (που δεν αποδίδουν σχεδόν τίποτε), και αυτή η κατανομή είναι υποχρεωτική βάσει του νόμου. Από την άλλη σχεδόν το ένα έκτο του ενεργητικού των ταμείων είναι οφειλές τρίτων - που αν μη τι άλλο έχουν αρνητικές αποδόσεις.

Κοινωνικό παρακράτος

Μια από τις πρώτες (και πιο εύστοχες) αντιδράσεις που έλαβε το κείμενο αυτό όταν πρωτοδημοσιεύτηκε ήταν η εξής

θα μπορούσε κανεις να πει πως αυτή η αυξημένη επιδότηση στις συντάξεις εμπεριέχει τα (συνήθως ανύπαρκτα-ανεπαρκή) επιδόματα σίτισης, στέγασης, ανεργίας κλπ για α',β', ίσως και παραπάνω βαθμού συγγενείς (και φίλους ίσως) τα οποία αναθέτει προς διανομή στα σοφά γηρατειά της ευρυτερης οικογένειας - ένας ιδιαίτερος τρόπος στήριξης της οικογένειας.

Εννοείται αυτό είναι 100% αλήθεια. Οι συντάξεις στην Ελλάδα δεν είναι απλά συντάξεις - είναι ένας από τους πυλώνες του οικογενειακού εισοδήματος, το οποίο όπως εξηγώ εδώ είναι πολύ πio πιθανό να το διαχειρίζεται συλλογικά η οικογένεια (αντί το κάθε μέλος τα δικά του χρήματα ξεχωριστά) στην Ελλάδα από ό,τι στην υπόλοιπη Ευρώπη. Ο λαός ζητούσε συντάξεις επί χρόνια, και οι πολιτικοί τις έδιναν, για να καλύψουν άλλα κενά του κοινωνικού κράτους, ουσιαστικά κάνοντας outsourcing του κράτους πρόνοιας στους συνταξιούχους pater familias. Το αποτέλεσμα αυτού του κοινωνικού παρακράτους φαίνονται ξεκάθαρα από το πώς εξελίχθη η ανισότητα στην Ελλάδα από το 80 και μετά, όπως εξηγώ εδώ. Λίγο οι συντεχνίες, λίγο το δημογραφικό, τελικά το ελληνικό κοινωνικό κράτος έφτασε να λειτουργεί (υπό την έννοια της άμβλυνσης της φτώχειας και των ανισοτήτων) μόνο για τους συνταξιούχους.




ΣΥΝΕΧΙΖΕΤΑΙ

DON'T TAKE THE BAIT, ALEX! THEY ARE MASTER BAITERS!

Last week I spent some time looking into the argument, first made by Alex Andreou in response to populist stereotypes propagated by foreign journalists and politicians, that Greeks work longer hours than the citizens of almost any other developed country. Alex’s post, Democracy v. Mythology, has travelled around the world and it’s encouraging to see that people are willing to stand up to slander with facts rather than Yo-mama-nomics. However, I was not entirely sure Alex's facts stacked up. So I checked.

I found, as readers will recall, that relying on the OECD figures is actually not very useful, and that once we adjust for self-employment (the unregulated labour market that does not reflect the Greeks’ political choices), prevalence of part-time work (which is rare in Greece and which the OECD just lumps in with full time work) and differences in the methods of data collection (LFS based methods like ours tend to give the highest estimates of hours worked), most of the difference is whittled away until we end up working respectable but not ridiculous hours. The rest is down to lower productivity, which we have to work extra hard to make up for. The point is well made that Greeks are not lazy, although we are frankly uncompetitive.

But I think it’s worth examining another claim made in this riotously popular post as it is highly misleading and could convince some of our fellow citizens that one policy area in terrible need of reform is actually viable – even though this is probably not Alex’s intention. Again, I must stress that Alex’s fact-based argumentation is refreshing and desperately needed: more people should adopt his rejection of sensationalism and racism. But in serving this purpose he keeps taking the bait of populist and sensationalist idiots in Europe and further afield, which means he ends up rebutting arguments that never really mattered and that more serious critics in Europe have never fixated on.

Still, if we examine the figures in detail, their story is fascinating and can sometimes be other than what it appears.

Countermyth: Greeks retire no sooner, if not much later, than other Europeans

The sensational claim against the Greeks making the rounds in some parts of Europe is that we retire at ridiculously early ages. True, some of us do but this is not the case in general. Alex demolishes this claim by demonstrating that the average Greek pensioner left the labour market later than his or her counterpart in most European states. Cudos to Alex for digging up the data and clarifying that point, but there’s a problem in his reasoning and it is inevitable when one is trying to out-stat moron journalists – he’s stepped into their idiotically framed argument and now his shoes are caked in shit.

You see, how late in life people retire is utterly beside the point. What matters is how long their working lives are, which in turn determines how big their retirement pot is (ok, whatever notional retirement pot they have in pay-as-you-go systems). Sensationalist politicians and journalists abroad (and some at home) might care about the retirement age but the real argument (and the question Greeks should be asking first and foremost) is whether or not we Greeks were running a sustainable pension system. You see, Amaryllis, who retired at 70 but joined the labour market at 35, may look on (news)paper like she’s been dealt a shit hand by the pension system compared to Gertha, who retired at 65 but joined at 25, but in fact for the purposes of pension scheme viability Gertha is a more viable ‘client’.

In reality, it is the labour market that dealt Amaryllis a shit hand, and the Greek labour market has been shaped by Greek politics (i.e. the will of the people), giving us the most inflexible labour market in the developed world. But let’s check the pensions numbers first.

***THE EUROSTAT LINKS BELOW WERE NOT WORKING PROPERLY EARLIER. I BELIEVE I'VE FIXED THIS NOW***

In 2006, when Eurostat last collated the numbers on length of working lives across Europe, those Greeks who were still working after they had started receiving retirement benefits had on average worked for 29.9 years – the lowest number in Europe bar none (source). This ranking holds regardless of whether people worked to afford themselves a basic income or for personal reasons unrelated to money. Only one category of working pensioners in Greece had a working life behind them comparable to the EU average: the people that kept working despite having more or less enough to live on, simply because they wanted to top up their income and live more comfortably (source). And these guys had worked longer working lives than either of the other two groups.

But what of the people who were no longer working and living only on retirement benefits? Well they had spent an average of 34.6 years working. Of all the European countries, only a handful boasted shorter working lives (source), and these included fellow PIIG Spain, fellow Greeks Cyprus, and of course Romania, Bulgaria and Poland.

So you see, Alex, it is possible for both you and idiot Greek-bashing journalists or politicians to be wrong. Greeks work shorter working lives; hence the state cannot afford their pensions as well as other countries can. Or if it can afford those, it can’t afford their prolonged education before or their prolonged spells of unemployment during. No mythology, just pure math.

NOTE: As some trolls find it impossible to check official statistics for themselves, I should like to provide four pieces of advice.

1. click on the source links. It's way easier than making a washing machine, so even I can do it. The 2006 study is an ad-hoc module of Eurostat's Labour Force Survey - the collated dataset made up of the individual labour force surveys that we get, say, our unemployment statistics from; I know it's not as good as your anecdotal evidence based on a small sample of acquaintances, friends and relatives but it is the best I have access to, or that anyone else has access to for that matter. Check with someone of a nationality that you trust if you don't believe me.

2. If you need trade statistics that are up to date, go to an official source, not a random website. And remember to read the 'about us' section before you decide what is or is not a government website. As a rule you can tell a gov't website because they carry all manner of insignia showing which ministry or investment programme they are funded by.

3. if you don't know where the data come from or what they mean then perhaps you should look up the answers. For a start, I would look at Eurostat's metadata for the 2006 study.  If that won't do, try the full evaluation report. Don't like the findings? Write to Eurostat and demand a correction.

4. read the article again just to make sure you've understood what I'm saying before vomiting your tedious thoughts onto my comments section.

I guess all of the above shows just how hard it is not to take the bait.

KILL GRANDMA!!!

Very few analyses of the Greek fiscal situation and the inevitable default discuss demographics, which I find frankly baffling. The typical defaulting country is young (see my Greece vs Argentina comparison here). Greece is patently not. Some people think this changes nothing but it changes absolutely everything.

First of all, let's get a few things straight. Demographics can't be talked around. The ageing of Greece's equivalent to the baby boomers is going to happen regardless of whom we vote in to manage it, and regardless of what mandate we give them. (Except perhaps Kill Grandma!). It is a tectonic shift; a force of nature; the wrath of god. As you can see from my friend Diego's comments below, the same forces are at work in Spain; Portugal and Italy aren't far off. In fact, the only exception is Ireland... for now.

Simply put, Greeks are living to a ripe old age, which is fantastic. Long may it continue. But there is a price to pay, and we will pay it in two ways.

The first of these is the complete PWNAGE of the assumptions built into the social security system. Remember, actuarial projections tend to be done on a 50-year basis (see here), so if you get your assumptions wrong, things can get out of hand very quickly. And assumptions were off indeed in the past. In fact, mortality was assumed under EU guidelines to be 33% higher than the ILO would have recommended. This is money that should have been set aside for grandma's old age but was not because she wasn't expected to live to that age. We were literally keeping our fingers crossed, knuckles white, that grandma would die so we wouldn't have to fork out her pension money. Even so, by 2009 the bill for caring for the elderly had reached EUR27.3bn, not counting any health-related spending on older patients. My best guess based on the correlation between the two is that that would be another 2bn per annum. Older Greeks' share of the population is growing in an almost linear fashion [See graph on SeekingAlpha]. Payouts on pensions in Greece (other than private policies) have grown much faster than the Eurozone average (source); this is the third fastest growth rate in Europe, surpassed among others by fellow PIIG Portugal.

On top of this, fertility in Greece looks like it fell off a cliff going into the 80s (although you may want to look at the very detailed note left below by a helpful contributor and my much more detailed look into the matter here) and never recovered, despite the best efforts of immigrants. There's a number of reasons for this, reviewed here, but essentially, the nation's values and lifestyle had been changing beyond recognition for decades. The 80s only really marked a more decisive turning point. See the trajectory of fertility below (Source UN Statistics Division and INED via Seeking Alpha), although I should note there are alternative forecasts of fertility (H/T @Geo_Gem) which are more optimistic, on the assumption of consistent migration patterns. Which won't happen because of this.

That's part one, but it's not the greater change.

Age changes everything. Older people draw down savings to finance their consumption. They are less likely to chase after jobs. They are less likely to retrain. They work, spend and vote differently. They are much more likely to, let's face it, just die.

Let's start with the spending bit. It's pretty simple to see how age changes consumer behaviour as there are some handy statistics to call upon. Try this table for example. Sure the data are a little dated (2005) but ageing is not a new process so I suspect the key findings will remain the same. At any rate, the graph below shows how much more or less the typical adult equivalent (i.e. either one adult or a minor 'scaled up') consumes in a household where the reference person (typically the head of the household) is 60 or over, versus one where the reference person is 45 to 59. I focus on the latter because they are the main earners and the wealthiest among the Greek population, so how they spend their pennies tends to matter more than how students do.

Let me give you a few hints on what this means. It means the Greek market for drugs and medical treatment will boom. It means the national electricity corp. is worth more than some people think. It means the usual route out of unemployment will soon be as a maintenance/repairman, a cook or a waiter, as opposed to a retail salesperson or clerk. It also means that, long-term, steadily ramping up taxes on alcohol is likely to make more money than taxing tobacco.

You know how the Greek government expects 1bn per annum in VAT from tobacco sales alone? Well the over 60s tend to spend 39% less on tobacco than the 45 to 59ers. When the Greek government tries to sell our Electricity company, they may want to remind prospective buyers that an ageing population is good for them, as the over 60s spend 43% more on fuel than the 45 to 59ers. Of course it will probably spend the increased fuel tax revenue (we expect 7.65bn per annum in various fuel taxes) subsidising shivering grandmas, so better not count on that money. Selling OTE, on the other hand, might be an issue as the over-60s spend 20% less on telecoms than the immediately younger group. The list goes on and on.

More analysis to come. 

DOG ATE MY HOMEWORK, GREEK EDITION

The Government has published today its newest Statement of Intent regarding our standby agreement with the IMF, and the IMF has released its latest review of our stabilisation programme.

At first glance, the two documents (which appear to have been written by the same person) reiterate much of what is already known. Read between the lines, however, and it's not so good anymore. My play-by-play is as follows:

• tax receipts have collapsed because the economy is imploding much faster than we had expected, but we're holding back spending even further so it's all good (hint: it isn't). We still expect growth to match the -4% forecast we've agreed with the IMF (ed: it won't).

• we're having a bit of trouble controlling anything outside of central government (nothing to do with the upcoming municipal and prefectural elections) and are making up for this by keeping central government expenditures down:

"Through June, the large margin under the targets created in the state budget has offset the overruns to date in subnational entities. "

• we've been able to hold back central government spending so much partly because we're putting off payments to our own funds or citizens, a state of affairs often called default.

"However, there has been some undesirable buildup in accounts payable/arrears in hospitals and social security funds."

• Inflation is out of control, partly "because the government frontloaded a number of large indirect tax increases, which have been passed on as a step up in the price level." We couldn't possibly have foreseen that, even though "[t]he high pass through of indirect tax increases to final prices is indicative of a lack of competition and the prevalence of oligopolistic market structures" which we've known about all along. Actually we don't mind because inflation is also eating away at our mountain of debt - so it's definitely all right. This is what the IMF mean when they say: "Staff and authorities agreed that nominal growth will be somewhat higher than originally anticipated." This puts us on track for debt to GDP of 144% in 2013 rather than the 149% originally forecast. YAY.

•  Thankfully we can always count on the contribution of pimps, drug dealers and tax cheats to consumer demand: "The authorities saw the risks to the growth outlook as being on the upside. They noted that the informal economy and unrevealed pockets of wealth act as a buffer and underpin private consumption data." It won't be the first time that our shadow growth sector comes to the rescue.
  
  
• We're sorting out our budgeting process. Now all levels of government and all government agencies will be handed actual budgets on a top-down basis (WOW), along with contingency margins (ed: which they will use 9 times out of 10). Our budgets will be part of a UK-style Comprehensive Spending Review, which will do almost nothing to keep us from screwing our grandkids over in the same way that it did for the British. Yay.
  
  
• We now have a much better idea of how many people we employ in the public sector: just under one in five persons in employment. We'll commission a review of the function of public administration to see what we're going to do with them. Even though public admin only accounts for half of the public sector payroll.
  
  
• We've implemented price caps on medicines, forced hospital suppliers to give us a massive discount and accept payment in Greek bonds, all to to keep our health sector from folding. Predictably we are now facing dangerous and humiliating shortages of absolutely every sort. 
  
  
• We've passed a highly controversial law, codenamed 'Kallikrates', to reform local authorities. Its main function to date appears to be to merge insolvent authorities with solvent ones, the intelligent solution to insolvency so successfully pioneered in the banking sector.
  
  
• We've passed a massively controversial (and much needed) law to reform our terminally ill pensions system. We're pretty sure it will work (the IMF forecasts a saving of 8% to 10% of GDP by 2050) even though "The National Actuarial Authority will complete an assessment of the effects of the reform on the main pension funds by end-December 2010, and of the largest auxiliary pension funds by end-March 2011." If it turns out the system still isn't solvent (ed: it will), we'll just pass another law to amend it, even though passing the first one nearly toppled our government.
  
  
• We will continue our trend for selling ever smaller amounts of ever shorter-term bonds ever more frequently, because nobody will buy them otherwise.
  
  
• Our banking system is in good shape - all but one bank passed the incredibly rigged CEBS Stress Tests, which, by omitting any haircuts on assets held to maturity (like most Greek bonds out there), made our banking system look less doomed than it actually is. "Liquidity conditions have remained strained" is a tactful way of saying that our banking system is losing billions of Euros of deposits per month and would not survive one second without funding from the ECB.
  
  
• We've commissioned a strategic review of options for our banking sector by "independent consultants." Money well spent, as our government have clarified that they want a large part of the sector to remain public and that's that. The IMF helpfully point out that the Greek state has a controlling interest in over 11% of the Greek banking system by assets. Someone ought to tell them we don't take hints very well.
 

Dear friends. Do not be fooled. There is only one thing that matters in all of this sorry saga. Earlier this week the Basel Committee announced that the implementation of Basel III will be phased in over four years, and parts of it will wait until 2019. 2014-15 now becomes the likeliest date of the Greek default, if nothing else goes wrong in the world. Welcome to the end of the world.

WE ARE NOT [NAME OF DISTRESSED COUNTRY] FAIL PART 2

Apologies for the long interval, dear readers. Even LOLGreeks must work for a living.

However, I have come across a real gem on Alphaville today which I thought I must share with you. A report by Morgan Stanley entitled "Ask not whether sovereigns will default but how".

Remember how the IMF proved to us the other day that we are not Hungary (but would really, really like to be)? I'm sure I got some cheers from the Troktiko-readers back home by pointing out that Ireland and the UK and in worse shape, from an intertemporal budgets perspective, than we are.

Oh, dear. Well it turns out they are not.

You see, unlike the UK and Ireland, Greece is an old, old country. By 2050 over one third of our population will be over 65.

And we're very bad at being old because we believe people over 55 shouldn't work. The British and the Irish may be insolvent but they just might be able to dig themselves out through changes in policy if they can just buy some time. We on the other hand, cannot because we have very little discretion.Our population is ageing and they will need their hospitals, their pensions, their bus concessions and whatever have you.

Unsurprisingly, the Morgan Stanley report finds that we carry a bigger demographic burden than almost any Western country. The IMF can't fix this. The Government can't fix this. They can only work on the two first bands of the graph above, which incidentally only represent about a quarter of our problems.

Good luck Yorgo.

Readers can browse the full MS report below:

MS Default

THE END OF THE LOL – WHY I BELIEVE IN A GREEK DEFAULT

It is time, dear readers, for Greece’s creditors to take a haircut. They’ve had a good run but it’s just not going to work anymore. They made a bad bet on us as on many other risks and now it’s time to take the consequences.

In late 2009, Greece had a small window of opportunity in which to signal in a credible manner that there was more political capital to be made from reducing our liabilities than from increasing them. Similarly we needed to demonstrate that there was more political capital to be made from paying our creditors than from defaulting. I am convinced that this window of opportunity started to close in December and then slammed shut in January, when Joseph MUPPET Stiglitz supposedly came to our aid and our political elite gave up trying to convince the people that we are going to have to change voluntarily.

One after another, our politicians, our journos, and of course our people, came out in favour of a mild adjustment, or none at all. They cried “speculator” until they were hoarse. Our state banks even shamelessly played the CDS market ourselves, making money out of our own profligacy. Commentators threw tantrums, made absurd demands and blamed everyone except themselves (and their respective main constituents) for the state of our country.

Well it’s all over now – for a simple reason. We’ve left things to escalate for so long, let confidence sink so far and borrowing costs rise by so much that the math doesn’t work anymore.

Greece’s real GDP has never in the past 10 years grown faster than 4.8% per annum (see here).

Government revenues have never been more than 43% of GDP and Government spending has never been less than 43.2% of GDP. Expenditures excluding interest on public sector debt have never been lower than 38.8% of GDP (see here).

 The above suggests that we could not, over the past 10 years, ever have run a deficit of less than 0.2% of GDP, let alone a surplus. In actual fact, however, we’ve never run a budget deficit smaller than -2.9% of GDP (see here).

Finally, the informal economy has never been less than 22.6% of GDP (see here) in the past 10 years.

Now, I will assume that everything works out for us within the three years from 2010-03. We bring expenditure and the informal economy to their 10-year minima, and revenues to their 10-year maximum. I am using the IMF’s projections for real GDP growth the GDP deflator (basically the price segment of value added). I assume that the GDP deflator will tail off after 2015, while GDP growth will work out to the IMF’s projections and then gradually converge to our GDP growth maximum of 4.8%.

Under my rather rosy but at least realistic projections, debt servicing costs of anything over 9.25% would mean that our mountain of debt would never fall below current levels and eventually rise to infinity. If the market handed us that kind of interest rate, they would be handing us a death sentence. Unfortunately this came to pass as our 2-yr yields climbed above 20% in early May, courtesy of our army of subsidy-junkies, extortionists and murderers and the idiots who shelter them; hence the EU/IMF bailout. 

So far, so rubbish.

But now we have a different problem – the one at the heart of the Credit Crunch, the Great Recession, and in fact every episode of such in the past half century. In a world of fiat money, all money is debt and no monetary value is truly real. It exists only as long as it’s backed up by a web of implicit guarantees – in practice right up to the people with the biggest and best balance sheet. Hence the pressure on Germany, and potentially on the US, to guarantee everyone’s debt.  

So while have established our guarantors as the markets have demanded, the markets are still unsure they are good for the money. Why? Because if we go under, European sovereigns will have to bail out their own banks, to whom we owed north of EUR70bn last time I checked. They will also automatically become more likely to have to bail out our fellow PIIGS, with which we also have a web of liabilities. The IMF itself doesn’t have enough money by any stretch of the imagination to bail out the PIIGS – Greece is a bit of a stretch actually. So the guarantee is weak and our debt is looking decidedly blurry.

Now we can drag this sorry mess out forever, give up sovereignty over our own country and feed the delusions of Eurocrats for another couple of years before everything comes crashing down. Or we could bite the bullet, prepare for a seriously no-frills existence, and renegotiate our debt.

Is debt restructuring or indeed default a new thing? Historically it most certainly isn’t. Nor is it outside the realms of our recent experience. We have already tried restructuring our hospitals’ debts to suppliers in the past and done so again in May. Many state employees, even some that foreigners are likely to meet, are left unpaid for some time as a matter of course. The state also owes money to its pension funds. In the private sector, any of these things would be called “defaulting”. It is only out of respect for the sensibilities of a sovereign state that people do not call us bankrupt.

Perhaps more importantly, debt markets are pricing a 75% probability of Greek default by July 2015 into the price of insuring our bonds. Our creditors are already taking the damage to their share prices and those who are forced to mark-to-market will eventually take actual losses. The damage is already done.

Finally, it is fair to say our people want a default, as long as it doesn't hit pensions and benefits. That can be arranged.

What we need is an orderly wind-down; a cloak-and-daggers summit of creditors like the one held for Hungary should map our liabilities and the effects of different levels of default on them. Each creditor should come clean on the full extent of their individual exposure and write down an agreed percentage of the debt. Instead of financing us, the IMF will agree support for those banks over-exposed to our debt.

Now let’s see if anyone will bite the bullet and say it.

UPDATE: People have finally cought on to the fact that the restructuring of Greek hospital debt is tantamount to default. H/T To Nick Shay for pointing out this story. 

AND NOW FOR SOME LIGHT ENTERTAINMENT...

This fiscal stuff is really vexing, so here's a little refreshment, courtesy of the Annals of Improbable Research, the most truly fantastic online resource in the world. They are better known for running the Ig Nobel Awards and their website is well worth a read.

The new Greek tax system, we can be assured, will include some tinkering with estate tax - the unsavoury practice of taxing the wealth that people pass on to their offspring upon dying, although it's already been taxed when it was earning interest or capital gains and, of course, when it was earned in the first place.

So what if there were a hidden downside to the death tax? I do not mean the usual tax-dodging response which, as per the Laffer curve, reduces tax revenues when tax rates go up. I mean an even darker effect - the direct effect of pre-announced estate tax increases on longevity.

The research quoted by the AoIR, available here, was actually carried out by esteemed scientists in Columbia. It found that, when people know estate taxes are about to rise, they adjust their time of death (or have their time of death adjusted for them) in order to maximise the wealth of their offspring. This is an honest-to-God significant effect.

This in itself tends to mean that estate tax increases will almost never yield the amount expected by governments. But it gets worse. In Greece, a great many property-, business- and home-owners liable for estate tax are also enrolled in our famous -and famously inefficient- public final benefit schemes. Can you guess where this is going?

The fiscal straitjacket imposed on Greece by Brussels makes it impossible to sneak any tax hikes up on the population - they need to be announced to Brussels and shouted from the rooftops to make sure our friends in the bond markets can hear. So any new estate taxes will give people ample time to prepare.

So what if the notoriously long-lived Greeks decide to live longer and screw the system even harder? Their pension payouts will rise, adding to the pension fund deficits and thus to the state deficit (as all public pension fund deficits are, by law, the state's problem). Which could mean higher estate taxes will actually cost us more money than they earn.

And, of course, as our healthcare is strongly subsidised and in fact much of it is publicly provided, all these cunning derelicts will take us for a real ride on their way out.

If you're smiling ruefully at the irony of all this, remember - it's all bullshit except for the facts.