Cyprus may up pension funding and taxes in social overhaul

THE GOVERNMENT may seek an increase in public contributions and cut back on pension eligibility to counter the impact of an ageing population, a Finance Ministry report has suggested.

The report, a roadmap of Cyprus’s economic planning for the next five years, also proposes that what it referred to as “sin taxes” help pay for comprehensive medical care. Such taxes are normally imposed on alcohol and tobacco consumption.

Cyprus and five other EU states were in a “high risk” category with regard to sustainability of public finances because of the budgetary impact of an ageing population, the 2007-2011 Stability Programme submitted to Brussels said.

People were also living longer than expected, with a life expectancy of 81.7 for females and 77 for males, the report said, citing 2005 statistical data.

According to the EU, Cyprus’ public pension expenditure will have to rise by 12.9 percentage points of GDP by 2050, from 6.9 per cent in 2004.

“First wave” reforms mulled to revamp the pensions system consider tougher eligibility conditions to get a pension, a phased-in increase in payments to pension funds and discussions of increasing retirement age to 65.

“In recent weeks there appears to be a consensus on the set of initial reforms which will most likely be agreed in the first half of 2008,” the report said.

Those would probably include phased increases in social security (pension) rates, possibly seven increases every five years, with the first increase in 2008, it said.

It would also consider stricter eligibility conditions to obtain old age pensions, and stricter conditions for payments of lump sums to those who retire at 65.

Cyprus, which joins the euro zone on January 1 2008, also made reference in the report to “sin taxes”, a provision also included last year but never implemented.

The introduction of comprehensive healthcare could start in late 2008 with primary care, with the inclusion of secondary care coming later, it said.

Options for funding the scheme included higher contribution payments, sin taxes and reduced coverage of certain medical services, it said.

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