CNBC Explains

Greek move on pensions could mean deal is close

Greek pensioners shout slogans during a demonstration in Athens May 20, 2015.
Alkis Konstantinidis | Reuters

Facing a Friday deadline to pay back lenders, Greece has opened up debt talks to an area that has its creditors pleased and its already-worried citizens even more frantic.

Greek officials had been hesitant to compromise over its pension programs, as it had already run into problems paying retirees earlier this year. But with little time remaining to avoid a default, the supposed "sticking point" might be the breakthrough that brings the two sides together.

If the newest proposal even slightly compromises on pensions, it could be a major factor. Greece spends more than any other European country on pensions as a percentage of GDP, around 17 percent. That's 5 percent above the European average, and it was projected to swell to nearly a quarter of the country's GDP by 2060.

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What's really going on in Greece?

An aging population has made things worse, but it's not a unique problem for a country to have. What is unique, however, is that three-fourths of Greek pensioners are filing for early retirement benefits—allowing workers to retire before age 61. While Germany recently lowered its retirement age to 63, U.S. workers generally have to be 67 years old before reaping similar benefits, yet even when they do. American benefits pale in comparison. (Tweet This)

Even after factoring in cuts called for by creditors in 2010, pensioners in Greece still boast net pension benefits at a multiple of 8.4 times annual gross earnings, compared with just 6.7 for those in Germany, and 5.6 for retirees in the United States. Generous benefits like that catch the attention of European creditors such as German Chancellor Angela Merkel, who made tough cuts to her own budget when the recession hit.

"How do you tell your citizens to retire at 63 when the guys you are writing a check to retire at 61?" posits Edward Dempsey, chief investment officer at Pension Partners. "That's a hard sell that her opponents would absolutely use against her."

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Greece officials tried to deflect a change in attitude over pension reform saying, the country has been flexible for a long time on pension reform, willing to scrap incentives for early retirement and proceed with merging pension funds. But creditors like the IMF hadn't been pleased with what they had seen before Greece's latest proposal on Tuesday.

The newest proposal from Greek Prime Minister Alexis Tsipras already has creditors feeling optimistic. The European Union's economics commissioner, Pierre Moscovici, said talks were making progress, citing the new Greek proposals on early retirement and merging pension funds.

The country's central bank governor, Yannis Stournaras, has urged outsiders to respect the sacrifices Greeks have made to stick with the euro, pointing to a 35 percent fall in living standards since the global downturn began in 2009.

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Older citizens reliant on Greek pensions have already felt the effects of the credit crunch. Earlier this month, more than 2 million pensioners suffered through delayed payments after the government claimed a "technical glitch" held up disbursements, according to the Financial Times. But officials cited by the paper said state pension fund shortfalls were the real reason behind the delay.

"There can be a deal on reforms—without it necessarily needing to include harsh cut backs on pensions or mass layoffs of workers, which are recession-creating measures," one Greek official told CNBC last month.

—CNBC's Holly Ellyatt and Reuters contributed to this report.