Pension reform in Cyprus: Minimum benefits up by up to 50%

Pension reform in Cyprus could bring the largest increases to those currently receiving the lowest benefits. The project presented to the social partners envisages an increase in pensions for approximately 123 thousand people, and in some of the examples presented the increase reaches 50%.

The changes, however, are much broader. The government is proposing a revamp of the basic pension calculation method, a partial relaxation of the 12% deduction for retiring at age 63, new contributions on certain incomes, and the inclusion of periods of childcare, study, or caring for loved ones. The retirement age is to remain at 65.

Pension reform in Cyprus: the biggest increases for the lowest benefits

The presented project assumes, first of all, a change in the method of calculating the basic part of the pension from the Social Insurance Fund.

Its amount will depend on the entire registered insurance period – both contributions actually paid and periods financed or credited by the state. The new model is intended to provide greater support to individuals with lower incomes and shorter contribution histories.

In the examples provided by the government, the person currently receiving 508 euros per month she would receive 764 euros, which is about 50% more.

Another example shows the increase in benefits from 436 to 702 euros per month.

The project also provides for a minimum guaranteed increase of 30 euros per month for current Social Insurance Fund pensioners whose benefits do not exceed €600. It is to be effective from the first month of the reform's implementation.

53,000 people will receive over 100 euros more

According to the document, approximately 53 thousand pensioners is to receive a pay rise of more than 100 euros per month during a five-year transition period.

Another approximately 60 thousand people is to receive a raise of less than 100 euros per month. The entire bill provides for an increase in benefits for 123,000 retirees.

The transition period for the new system is planned for the years 2027–2031For new retirees, benefits calculated under the current and new rules will be compared during this period. If the new calculation proves less favorable, the more favorable coefficient for the supplementary pension will be applied.

What happens to the 12% withholding?

One of the most anticipated elements of the reform was the issue of the so-called 12% penalty imposed upon retirement at the age of 63.

The government is not proposing its complete abolition. It argues that such a step could threaten the long-term stability of the Social Insurance Fund.

The draft provides for a relaxation of the deduction in relation to basic part of the pensionThe relief is intended to cover half the period covered by the reduction, but for a maximum of nine months. It will cover current retirees and those retiring until the end of 2031 and will apply for life.

This does not mean a simple abolition of 12% on the entire pension.

Former EKYSA Secretary General Kostas Skarparis criticizes the proposal as too small. According to his calculations, the actual benefit will be limited precisely because the easing applies only to the basic part of the benefit.

The retirement age remains unchanged

One key issue remains unchanged.

The basic retirement age will remain 65. A person who decides to work and pay contributions until the age of 67 will be able to receive a higher benefit.

The new basic pension is to be calculated using a coefficient increasing with age – from 1.1 at age 63 to 1.5 at age 67.

Childcare and studies are to count towards pension entitlement

The reform is also intended to extend protection to people who have not worked for some time for social reasons.

The project provides for the financing or recognition of periods related to:

• women's care of children,
• unpaid home care for a relative up to the second degree,
• disability,
• studies,
• entry of young people into the labor market.

The aim is to reduce gaps in insurance history caused by temporary absence from the labour market.

New contributions also on rents, interest and dividends

The reform doesn't just mean higher benefits. The government also wants to expand the system's funding base.

The draft provides for a new contribution obligation for some people living on income other than work, if they are not already subject to another insurance obligation.

The following are to be taken into account, among others: dividends, interest, rental income, copyrights and patents and other income from propertyIn the case of employees who are also shareholders in the company, dividends received from the employer are also to be included in income.

The state will stop borrowing from the Social Insurance Fund

The way the Social Insurance Fund manages its money will also change.

The bill proposes ending the practice of the state borrowing the Fund's annual surpluses. The money would be transferred to its investment account.

A gradual repayment of the state's existing debt to the Fund is also envisaged.

This is part of a broader plan to increase the long-term stability of the system while increasing the lowest benefits.

This is a reform project for now.

The most important thing from the point of view of current and future retirees is that the presented solutions are not yet applicable regulations.

This draft reform has been submitted to the social partners for further discussions. The document assumes a five-year transition period from 2027 to 2031, and some regulations refer to the new system starting on January 1, 2027.

The final shape of the regulations may still change.

Source: Philenews / pension system reform project