Our View: Why should the taxpayer subsidise failing pension funds?

Although all the economic indicators for next year are positive and Cyprus was the third fastest-growing economy in the eurozone in 2024, Finance Minister Makis Keravnos did not try to hide the risks ahead in presenting the 2025 state budget to the legislature. While this year would close with an impressive growth rate of 3.7 per cent, despite the instability in our region, there were fiscal risks ahead, which was why it was vital to maintain a fiscal surplus in 2025 – projected to reach 2.7 per cent of GDP – said the minister.

Keravnos explained his concerns about next year which included the possibility of having to pay the former contractor of the Vassiliko gas terminal a few hundred million euros in compensation over the contract dispute that is now the subject of litigation. He also mentioned the Okypy deficit expected to reach €95m this year and unlikely to be any lower in 2025. With an annual payroll of €300m and hospital unions constantly demanding more money, it is difficult to see how the Okypy deficit could be reduced. It is more likely that it will increase next year as more health providers are entering Gesy and state hospitals are earning less from the Health Insurance Organisation.

There were also concerns about the public payroll which will stand at €4.2bn in 2025, but it is a bit rich for Keravnos to complain given the role played by the government in its indefensible increase. Its decision to change the way the Cost of Living Allowance was calculated last year, at a time when inflation was at 8.3 per cent pushed up the payroll significantly, while this year the government gave a 1.5 per cent, across the board, pay rise for no legitimate reason. On Monday, Keravnos said the government would initiate discussions to see how CoLA would be ‘rationalised’. He is fooling himself if he thinks unions, which have been demanding that the full amount is incorporated in wages, instead of the current 67 per cent, would be amenable to it being ‘rationalised.’

Another concern mentioned by the minister are the huge deficits in the pension funds of semi-governmental organisations (SGOs) and local authorities, which amount to €500m. There are 32 pensions funds with deficits, but more than half this amount, €275m, belongs to five SGOs. CyBC alone has a staggering deficit of €123m. Little is ever said about these deficits, because SGOs have powerful unions and politicians would never dare raise the issue of pensions funds.

In a rational world, when pension funds have growing deficits, one of two things can be done – the pensions being paid by the fund are reduced or the contributions of employees are increased, or both. In Cyprus, the taxpayer steps in to cover the annual deficits, because nobody dares reduce the obscenely high pensions being paid to SGO workers. It is an outrageous situation that should not be allowed to go on. Why is the state paying CyBC pensioners to receive monthly pensions of €3,000 or €4,000 while there are people that receive state pensions of €400?

A pension fund must be viable and the state should have no obligation to subsidise it with the taxpayer’s money. It is time this inequity was addressed by the government. Keravnos, to his credit, has identified the problem. Now he should tackle it.