Naomi Schaeffer Riley reviews an interesting new book titled
Crisis on Campus, by Columbia University professor Mark Taylor in today's Wall Street Journal. I've read one of Naomi's books in the past; she has been very successful as a journalist, particularly at such a young age. Miami University, my alma mater, made its budget woes public in yesterday's Cleveland Plain Dealer. Unfortunately, coming up with viable solutions may prove difficult if those charged with developing and implementing change stand to bear a disproportionate share of the burdens. We've now come full circle; when some professors don't like to spend time with their customers...students...and actually spend time trying to avoid them, it may be a sign of a flawed competitive system. Along with persistently higher costs of education, such phenomena suggest potentially fertile new ground for U.S. antitrust efforts. (Seriously, I jest, or do I?) Following up on last week's
Terminator blog , Adam Pilz, Broadleaf Intern, sent me a link to Social Security online and an
article on what Greece is doing to combat its ballooning pension obligations. (For the convenience of readers, I have copied the text below.) First and foremost, they've realized that curbing early retirement benefits may be a major help in combatting their crisis, something Arnold discussed last week. Eventually, the U.S. will follow suit; but hopefully we won't wait for riots in the streets and social unrest to motivate us in that direction. On an added note, I've often commented on the presence of fund flows going wild (tech stocks, housing stocks, private equity investments, now government bonds) as a decent leading indicator of budding new asset bubbles. In this sense, a brewing crisis in public pensions may be one manifestation of the potential damage coming from the bursting of a government asset bubble brought on by exponential and unreasonable funding obligations. Greece Pension Reform Text:
Greece
On July 8, the Greek parliament approved major changes to the national pension system, a key element in the 110 billion euro (
US$145 billion) agreement with the European Union (
EU) and the International Monetary Fund (
IMF) to restore the country's long-run financial stability. The reform cuts pension benefits and curbs early retirement. By 2050,
IMF staff projections indicate that the reform could reduce annual pension expenditures for private-sector workers and civil servants by 8.5 percent of gross domestic product (
GDP). The
IMF also projects that these reforms will lower replacement rates from an Organisation for Economic Co-operation and Development–leading average at 75 percent of wages to around 60 percent. Despite past mergers of pension funds, the Greek retirement system remains complex and fragmented. Benefits are generous relative to wages and often claimed before age 60. Furthermore, the benefit structure offers little incentive for older workers to remain in the labor force, especially for low-income workers, whose minimum pensions are not reduced for early retirement. Without reform, the
EU projects that pension spending in Greece will increase by 12.5 percent of
GDP over the next four decades, well above the
EU average rise of 2.4 percent of
GDP. Under the reform, workers are likely to remain in the labor force longer because—
- The statutory retirement age for women will be gradually raised from 60 to 65, by December 2013, to match the current retirement age for men. Beginning in 2020, the statutory retirement age for men and women will be automatically adjusted (every 3 years) to reflect changes in life expectancy.
- Early retirement will be restrained by limiting the minimum early retirement age to 60 by 2011, which includes workers in arduous occupations. The government aims to increase the effective average retirement age from the present 61.4 years to 63.5 years by 2015.
- The minimum contribution period to receive a full pension will gradually increase from 37 years to 40 years by 2015. Pension benefits will be reduced by 6 percent each year for individuals who retire between the ages of 60 and 65 with less than 40 contribution years.
The reform also lowers pension benefits in the following ways:
- Pension amounts will be frozen during the 2011–2013 period and indexed to changes in the consumer price index (instead of indexed according to changes in civil service pensions) starting in 2014.
- Benefits for new claims will be based on career-average earnings rather than the current highest 5 out of the last 10 years.
- The average annual accrual rate (at which entitlement to future pension benefits accumulate) will be limited to 1.2 percent of earnings, resulting in a less generous earnings-related pension. This benefit will top up a new means-tested, noncontributory monthly pension of 360 euros (US$474) for citizens older than the normal retirement age.
- A new flat bonus of 800 euros (US$1,053) per year will replace the seasonal bonuses (for Christmas, Easter, and summer) currently payable to pensioners. The new bonus will be available only to those with pensions less than 2,500 euros (US$3,290) a month. As a result, monthly pensions of more than 1,400 euros (US$1,806) will be reduced by an average of 8 percent. This reduction will affect about 10 percent of pensioners.
- Pensions greater than 1,400 euros (US$1,843) per month will be taxed by 5–10 percent starting in August 2010.
Sources: "The Economic Adjustment Programme for Greece," European Economy, May 2010; Greece: Staff Report on Request for Stand-By Arrangement, International Monetary Fund, May 2010; "Yesterday the Greek Government Approved a Bill Aimed at Achieving Pension Reform," Plansponsor.com, May 11, 2010; "Greek Parliament Approves Pension Bill," Reuters News, July 8, 2010; "Greek Parliament Ratifies Pension System Reform Bill," Xinhua News Agency, July 15, 2010.