The pension traps of Northern Cyprus

Abstract

This paper estimates the annual and present value of the future deficits of the Pay-As-You-Go (PAYGO) Civil Service and Social Security pension systems in Northern Cyprus. The historical and political context that led to their current design is reviewed. The quantitative analysis covers the period from 2015 until the last person now contributing retires and dies. The findings indicate that the system is not sustainable unless major reforms are implemented. Various parametric reform options are also assessed in this study. The estimated unfunded cost of these pension plans is found to be so large that none of these reforms alone is effective in fixing the fiscal imbalances already created. Structural reforms in the context of an overall income tax reform are needed to reduce the generosity of the pensions formula, increase in the age of retirement and increase the rates of contribution.