Evaluation of The Legacy of The Pension Systems in Northern Cyprus And The Assessment of Current And Prospective Reforms

Abstract

Pension systems, through pension policies, always need to be designed in order to balance the adequacy of benefits with their affordability considering the possible changes in demographics and the economic and financial circumstances. This thesis analyzes the effectiveness of such policies implemented in North Cyprus. It estimates the fiscal burden of the Pay-As-You-Go (PAYGO) Civil Service Pension and Social Insurance Pension Systems that were closed in 2008 to new members. Furthermore, in the thesis an analysis is made of the sustainability of the 2008 reforms that introduced the new Social Security Pension System with higher contribution rate and retirement age and with lower replacement rates for the newly hired government employees and new private sector workers. The existing members of the old pension systems were grandfathered in terms of the benefits and contributions formulae. To calculate the overall deficit, estimates are made from the difference between the present values of future contributions and the pension benefits. In this thesis, the annual budgetary impacts of the unfunded pension benefits are also calculated for historical pension systems that are now closed to new entrants. The estimated unfunded cost of the historical pension systems is significant enough to make any marginal policy measure ineffective in eliminating the excessive fiscal burden on the current and future taxpayers for the next three decades. It is found that either a more radical reform that affects the existing pensioners and contributors to these overly generous pension systems or a partial or complete transition to a defined-contributions system is required. On the other hand, the estimates also reveal that although the newly implemented Social Security Pension System is more promising; provided the size of the labor force expands at a modest rate, in its present form it does not provide a solution to the fiscal problems created by the historical pension systems nor it is sustainable itself.