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Turkey to End `Nightmarish' Pensions for 48-Year-Olds

By Steve Bryant, Bloomberg


February 27, 2008

Istanbul engineer Sina Kuseyri is planning for his retirement in two years when he reaches the ripe old age of 48, benefiting from a state pension that allows millions of Turks to end their working lives in their 40s. 

As Kuseyri figures out how to live on a stipend he estimates will be about a tenth of the 4,500 liras ($3,800) he spends a month, Turkey's government is confronting a system that eats up 17 percent of its budget. Payments for the 12 years leading up to 2006 totaled 119 percent of that year's gross domestic product. 

Prime Minister Recep Tayyip Erdogan, seeking to modernize the economy by luring foreign investors, insists that failure to change the system may bankrupt Turkey. Lawmakers yesterday began debating an overhaul proposal following a year of delay; the International Monetary Fund is withholding a $1.8 billion loan until the measure is enacted. 

Change would be ``a signal being sent loud and clear that Turkey is committed to fiscal sustainability,'' said Farouk Soussa, Turkey analyst for Standard & Poor's in London. ``The government is taking steps to ensure it won't blow out to nightmarish proportions.'' Change would ``certainly be a positive factor'' when S&P reviews the country's credit rating, Soussa said. 

The pension system is financially so overburdened that the country's largest labor union, Turk-Is, has worked with the government on draft legislation. The union says that while it sees the need for change, the current proposal's provisions affecting government workers favor senior employees over low- level civil servants. 

Difficult for Government 

``This legislation is difficult for any government,'' Labor Minister Faruk Celik told the Ankara Chamber of Industry today. ``But it must be passed and implemented, for Turkey to be able to make plans for the next 70 years. Our government is determined.'' 

The government lowered the retirement age in the 1990s, hoping that it would cut unemployment by leading older people to leave the workforce and open up jobs for young ones. 

``Setting the retirement age so low has been the main factor upsetting the actuarial balance of the social security system,'' according to a May 2007 government planning document. 

This year, women working since their teens can claim a pension at the age of 44; for men, the age is 47, the lowest within the Organization for Economic Cooperation and Development. When Kuseyri retires, the age for men will be 48 because of an earlier change to the system. 

Meager Payments 

Payments are so meager that many pensioners are forced to work illegally to support themselves. Some drive taxis. Many others find odd jobs from employers who are happy to save on social-security contributions they're obliged to pay for registered workers. 

``Rather than getting premiums from millions of people of working age, we're paying them a pension,'' Erdogan, 54, said in a Jan. 3 address to members of Turk-Is. ``And these people move to a second job, an unregistered one. Who pays the cost of this? Turkey.'' 

About half of all Turkish jobs are unregistered, according to official statistics, and the size of the black economy may equal up to half of the country's GDP. The government repeatedly has pledged to reduce tax evasion, and cabinet spokesman Cemil Cicek said Jan. 22 that police may start jailing the owners of companies that employ illegal workers. 

Social security consumes almost 4 percent of gross national product, according to the OECD, a figure forecast to increase to 6 percent by 2045 if there are no changes or decrease to zero if measures are implemented and create a balanced budget. 

Later Retirement 

The new legislation would gradually lift the retirement age to 65 for men and women by 2048. Pensions would also accumulate more slowly. Employees would get 2 percent of their salary as a pension for each year they work starting from 2016, compared with as much as 3.5 percent now. 

The phased-in changes mean the impact will mostly be felt by those who are just entering the workforce. 

``My pension offers a safety net, but I'm not sure whether I'll be able to afford to give up work,'' said Kuseyri, a self- employed engineer and consultant who supports Erdogan. 

``What this country needs is a proper system that provides people with real security and confidence,'' he said. ``Pensions need to be attractive enough that people have a reason to pay contributions.'' 

The IMF has been demanding an overhaul of the social security program since 2005. The fund said on Dec. 21 that it's ready to release $1.8 billion from Turkey's $10 billion loan package if the government approves pension changes. 

Court Veto 

The ruling Justice and Development Party passed laws overhauling the system in 2006, which the constitutional court overturned, objecting to measures that would merge the civil servants' pension fund with other providers. 

The new measures are ``more aggressive'' and will more slowly combine the funds to meet court objections, Economy Minister Mehmet Simsek said at a Nov. 7 news conference in Brussels. 

The changes might help trigger a ratings upgrade, according to Ozgur Altug, an economist in Istanbul at Raymond James Securities, the biggest broker in Turkey. Moody's Investors Service rates Turkey's bonds at Ba3, three levels below investment grade. Standard & Poor's and Fitch Ratings both rank the bonds an equivalent BB-

``This legislation is crucial because there's no way to lower taxes or create jobs without making room in the budget,'' Altug said. 

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