Innovation, Fiscal Prudence and Social Equity in the Social Security Reforms of Northern Cyprus

Abstract

This paper contains a quantitative assessment of the innovative social security pension reforms in Northern Cyprus that were introduced in 2008 and later refined in 2012.A set of estimations are carried out to determine whether the reforms were sufficient to make the system self-financing. The key question is whether the contributions over a participant’s working life would currently be sufficient to finance the pension promises throughout retirement. It is found that although significant improvements have been made, in the structure of the system to adjust the pension benefits for the past experience of inflation and to prevent the artificial increase of pension rights for those near for retirement, the new system is neither fiscally neutral nor socially equitable. Without further adjustments to either the contribution rates or to the benefit formula, it will require budget subsidies to be sustained. For individuals it provides a great subsidy to high-income participants compared with the subsidy received by those with lower incomes. The major beneficiary group is rich widows. Recommendations are made for policy changes to correct these defects.