I explained it was an ur-myth, a defining tale of literature, but my wife quickly interjected. “Rage,” she simply said, separating our two boys fighting in the back seat. “It’s all about rage,” she emphasized as our warriors lapsed into sullen silence.
The answer was ingenious. Rage is mentioned in the first sentence of the
Iliad and makes the story of ancient Troy so compelling – but we were missing the point. Turkey is an archaeological wonderland. The country with one foot tentatively planted in Europe has one of the highest concentrations of breathtaking ruins to be found on Earth, a testament to the countless civilizations that lived, flourished and vanished into the landscape. It must strike locals like Zeki as curious that Westerners seem compelled to traipse to a pile of weather-beaten stones on Hissarlik hill.
But then, that is Turkey. While the nation can claim a legacy spanning millennia, it is still coming to terms with the mindset of the modern world. As an economy that will experience favorable demographics compared with other OECD countries for the next few decades, it is keen to take its place among the foremost emerging nations, but is still developing institutions for the challenge. One area under stress is social security, particularly pensions.
According to a recent paper, Turkey faces two challenges in efforts to provide comprehensive old-age provisioning. The first is to extend a pay-as-you-go (PAYG) system to capture a broad base of informal workers currently making no social security contributions. The second is to increase the age at which pensions can be claimed.
Kathrin Nies, the author of
Turkey – Fighting Against Informality and Low Retirement Age, says politicians abolished the standard retirement age in 1969 in the hope the measure would increase employment. The result was that the sole binding constraint for workers to qualify for a full pension was 25 years of contributions. “There is little evidence to show the initiative increased formal employment, but a lot showing that it encouraged those employed to become informally employed,” the Allianz Global Investors economist explains.
“Someone starting work at 18 could feasibly qualify for a pension at 43 years of age (38 for women). Benefits are not adjusted down for early retirement in Turkey, so the incentive is to retire early. Turkish pensioners pay no taxes on pensions and are entitled to full health insurance coverage without paying contributions.”
Such a system was ripe for abuse. Anecdotal evidence suggests many workers simply awaited their next promotion and associated salary rise, and then retired. Their pension was awarded based on their last wage, but unofficially they kept working. Employers avoided paying hefty public contributions and the “retiree” enjoyed a relatively high total income, while taxpayers carried the bill.
The approach had two consequences. The OECD estimated (
, 2006) that about 50% of males aged 50-59 worked unofficially. But regardless of whether they worked or not, on average they would receive a pension for double the amount of years paid in. The Turkish Pension System
Fast facts on Turkey
Old-age insurance was set up within social security in the 1940s.
Average life expectancy at birth is expected to rise from 73 years in 2005-2010 to 79.4 in 2045-2050. Combined with decreasing fertility rates, this could drive a 233% increase of the old-age dependency ratio.
Labor force participation of 25- to 54-year-olds is 60% in Turkey, compared with 81% in all OECD countries in 2009.
Turkey’s poverty rate (18%) lies well above that of other OECD countries (11% on average).
According to IMF and World Bank estimates, Turkey ranks 15th and 16th worldwide in terms of GDP (PPP adjusted) in 2009/2010.
UN Population Prospects; OECD – Society at a Glance (2009); IMF – World Economic Outlook Database (October 2010)
It may sound a retirement paradise for individuals, says Nies, but Turkey belatedly realized the danger of having a coterie comfortably nested inside a gift horse. While public pension expenditures amounted to 2.4% of GDP in the 1990s, it tripled within the next ten years to 7.3% and is expected to rise to 11.4% by 2050 (
, OECD 2011). In fact, spiraling social security costs have received a large part of the blame for Turkey’s fiscal issues in the last decade. Pensions at a Glance The need for reform
Reforms in 1999 and 2006 aimed to reinstate a standard retirement age and unify the fractured social security system, made up of three social security institutions: SSK (private and public sector workers); ES (civil servants); and Bag-Kur (self-employed workers and farmers). Another objective, to establish a link between contributions made on behalf of an employee and entitlements, initially backfired by resulting in an even more generous system. The OECD estimates the net replacement rate for an average earner subject to the SSK actually increased from approximately 120% to 140%, though 2006 changes subsequently led to a reduction in the replacement rate.
After the 1999 pension reform, men entering the workforce will only be able to draw a pension from age 60 onward (58 for women), which will gradually be increasing to 65 for both by 2035. Many experts believe that further action is necessary. Unless reforms are again undertaken, high replacement rates mean Turkish social security contributions must remain high. This acts as a barrier to greater employment, as firms are reluctant to take on low-skilled labor at high costs, preferring instead to hire informally, which impedes economic growth. Also at issue is intergenerational fairness, argues Nies. Older cohorts are benefiting from the system at the expense of younger tax payers.
Underlying the need for reform is also the issue of old-age poverty. Agriculture is still one of the most important industries and employs more than 25% of all Turkish workers. Informal employment in agriculture is estimated at 85%.
Such workers tend to earn less than the minimum wage. While they pay no taxes or social security contributions, they are also ineligible to receive the social security pension available to other workers. Instead, they can only depend on a means-tested state pension to support them in old age – and only after they turn 65 and have no family support. In comparison with the replacement rate under social security, means-tested pensions are estimated to be equal to only 6% of average earnings. This falls far short of the next-least-generous means-tested pension in the OECD (Greece, at 12%) and well short of the poverty line. In its 2006 study of the Turkish system, the OECD estimated that almost one in every five people lived below the poverty line.
“Those forced to survive only on the state means-tested pension do it hard,” says Nies. “A two-person household receiving social assistance would only receive 60% of the absolute poverty line.” If a purpose of a state pension system is to protect citizens from dire old-age poverty, then Turkey’s reforms need to dismantle barriers preventing the inclusion of such workers into the social pension system while discouraging employed workers from benefiting by opting out early.