Public pensions and labor force participation: The case of Greece

Abstract

The pension system of Greece is a representative case of the Mediterranean welfare state, which is characterized by extensive segmentation, very high payroll tax rates, and yet inadequate pension benefits. In order to explain this paradox we construct an economic-demographic model. We show that in the period 1980-2000, the segmentation of the system and the very low labor force participation rates of the Greek economy have resulted in very high payroll tax rates in relation to the current level of benefits. On top of these problems, the expected adverse demographic developments in the period 2005-2050 will render the pension system completely unsustainable. Major reform proposals are suggested to remedy this situation, which threatens the public finances of the country. © 2007 The International Association for the Study of Insurance Economics.