The government’s policy proposal to end the use of surpluses from the Social Insurance Fund and to halt the accumulation of state debt to the Fund marks a significant change in the country’s fiscal management. From now on, each government will have to draft its budget without relying on these resources as an indirect source of financing.
In practical terms, future governments will need to identify offsetting measures, curb spending or forecast revenues more accurately, as Social Insurance Fund surpluses will be ring-fenced for the Fund’s own purposes.
Labour and Social Insurance Minister Marinos Mousiouttas said after Monday’s meeting of the Labour Advisory Board, which discussed investment policy and issues relating to provident funds, that the state will stop borrowing from the Social Insurance Fund. State debt to the Fund currently stands at €12 billion.
On 4 May, the Ministry of Labour will provide social partners with answers on issues linked to the first pension pillar and will present the investment policy for the Social Insurance Fund.
According to Mousiouttas, the government is examining a formula for the gradual repayment of amounts owed to the Fund. As for annual surpluses, these will be credited directly to accounts belonging to the Fund and will no longer be channelled through the Ministry of Finance to cover state needs.
This change will force future governments to operate with stricter fiscal discipline, as they will lose what has been an informal but significant tool for meeting budgetary requirements.
Another issue that arises concerns the management of the Fund’s surpluses. At present, Mousiouttas said, the Ministry of Finance manages the Fund’s resources. Under the proposal, the ministry will no longer manage those surpluses but will instead transfer them to the Ministry of Labour for management. Both the surpluses and instalments repaying the state’s debt will be credited directly to Social Insurance Fund accounts.
“We need to determine which authority will manage these amounts,” Mousiouttas said. He noted that if the current practice had continued, the surplus could have reached €50–60 billion over a 50-year period.
“This is an enormous sum and we have a duty to manage and safeguard it with the utmost care,” he said. At present, 95 percent of the Fund’s assets are invested in government bonds, considered a safe investment, and 5 percent in Cypriot banks.
Provident funds
With regard to the second pension pillar, the provident funds, a technical committee will be set up to submit recommendations following consultations. The most critical question is whether participation in a provident fund will become mandatory or remain voluntary.
“This is a crucial issue and we want to hear the views and arguments of both sides – trade unions and employers,” the minister said.
He acknowledged that opinions differ but added that dialogue could identify common ground and narrow differences, paving the way for consensus and progress.
Other issues under review include the timing of benefit withdrawals, the provision of loans to fund members and the method of payment, whether as a lump sum, a pension or a combination of the two.
“We want to hear all sides, the pros and cons of each option, so that we can shape a better and more consensual approach,” Mousiouttas said.