IMF’s Thomsen: Pension system reform crucial for the country’s debt “sustainable”.

“A plan built on over-optimistic assumptions will soon cause Grexit fears to resurface once again and stifle the investment climate,” he said in an IMF blog.
“The IMF does not want Greece to implement draconian fiscal adjustment in an already severely depressed economy,” Thomsen said.
But he said that reform of the pension system was crucial to making the country’s debt “sustainable”.
Thomsen said the pension reform must be accompanied by debt relief from the Europeans.
“There is no doubt that both Greece and its European partners will face politically difficult decisions in the coming months to arrive at a program that is viable — one that adds up,” he said.
The IMF repeatedly has said it would not participate in this third European bailout of Greece since 2010, after doing so in the prior two rescues, unless the Greek government proposes credible reforms and the Europeans ease Greece’s debt burden.
Greece’s pension system remains unaffordably generous. For instance, the standard pensions in nominal Euro terms are broadly similar in Greece and Germany, even though Germany—measured by the average wage—is twice as rich as Greece. Add to this that Greeks still retire much earlier than Germans and that Germany is much better at collecting social security contributions. The result is that the Greek budget needs to transfer some 10 percent of GDP to cover the gaping hole in the pension system, compared to a European average of some 2½ percent. Clearly, this is unsustainable.
But can’t Greece protect pensioners by cutting somewhere else or increasing tax rates? There is some scope for those measures, but it is very limited. Most other spending has already been cut to the bone in an effort to protect pensions and social payments, while the failure to broaden the base and improve compliance has already caused too much reliance on high tax rates. To reach its ambitious medium-term target for the primary surplus of 3½ percent of GDP, Greece will need to take measures in the order of some 4-5 percent of GDP. We cannot see how Greece can do so without major savings on pensions.
Pension reforms will of course be socially challenging for the Greek people, which have seen exceptional hardship in recent years. In fact, social pressures have already forced reversals of course—under both the previous and the current government—and Greece is unfortunately much further away from its medium-term goals than it was in mid-2014, before a major fiscal relaxation erased what proved to be only a temporary primary surplus. In this regard, the government is right to point out that pensions in Greece have a broader social function. But using pensions in this way is not a durable solution. What is needed—and what the IMF has argued for—is a modern social safety net that is sustainable over the medium term.