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Social benefits and Greek tragedies

Paul Mason is the Technical Manager at the IPSASB responsible for the social benefits project

As Greece and its creditors work towards finalizing the next bailout deal, one of the most contentious issues has been reforms to the pension system. Although occupational schemes and private insurance exist in Greece, social security (which is supported by the Government) accounts for almost all of the pension system. Hence the creditors' interest in this area.

In the past, Greek pensions were seen as generous. However, since the crisis began, austerity has reduced the average Greek pension by more than a quarter.

Contributions result in lower pensions due to less favorable contribution rates. Retirement ages have been increased. The full contributory period has been changed to forty years instead of thirty-five, and the indexation of benefits payable can no longer exceed the Consumer Price Index (CPI).

Greece and its creditors are discussing further reforms, including further cuts to benefits. The proposals also make specific reference to a "zero-deficit" mechanism - ending budget subsidies for the pension system and effectively requiring the government to collect as much in pension contributions each year as it pays out.

The reforms to date have had a significant impact on Greece's pension obligations. The reforms currently being discussed will, if implemented, also have a significant impact on those obligations. The amount that Greece can expect to pay out in pensions over the next fifty or sixty years is considerably lower than was the case before the reforms began.

The ability of a government to make changes of this scale to state pension schemes highlights some of the difficulties currently being faced by public sector standard setters. When should a liability for social benefits be recognized? How should it be measured?

Accountants are familiar with the treatment of occupational pensions. In these schemes, benefits are part of the employment arrangements. Changes to the terms normally require renegotiation of employment contracts, and so there is a solid basis on which to assess the liability.

Can the same be said about social benefits? Although Greece is an extreme example, there is plenty of evidence that governments can and do unilaterally amend social benefit schemes. In these circumstances, is there a solid basis for assessing a liability?

In order to shed further light on this key issue the International Public Sector Accounting Standards Board (IPSASB) has published its recent Consultation Paper, Recognition and Measurement of Social Benefits. This paper is the first stage in developing an accounting standard for social benefits, and the IPSASB is seeking stakeholders' views about the appropriate accounting treatment for social benefits.

The Consultation Paper sets out three approaches to accounting for social benefits. The first approach is the traditional "obligating event" approach, and the Greek example is particularly pertinent here.

The "obligating event" approach requires the presence of three factors:

  • A government formally announces that it will provide specific benefits;
  • The announcement gives rise to a valid expectation amongst future beneficiaries that the benefits will be paid; and
  • As a result of this valid expectation being created and relied upon, the government has little or no realistic alternative to avoid providing the benefits.

Governments will still formally announce that they will provide benefits. But following the events in Greece and elsewhere, at what point will potential beneficiaries rely on those announcements? At what point can it be said that the government has little or no realistic alternative to avoid providing the benefits?

With benefits such as pensions, potential beneficiaries will rely on the announcement at some point. But there may be more scepticism about the amounts that will be paid, especially amongst younger citizens. How should the liability be measured when the amounts can change? These are the questions about the "obligating event" approach on which the IPSASB is seeking stakeholders' views.

The Consultation Paper also identifies two other approaches. The second of these, the insurance approach, considers some contributory schemes to be similar in nature to insurance contracts, and applies the principles of insurance accounting to those schemes.

This approach could also be relevant to the Greek example, particularly if the "zero-deficit" mechanism is implemented. The approach considers all future cash flows - payable and receivable - and so might provide valuable information about the long-term sustainability of the scheme. Balancing cash payments and cash receipts year by year doesn't necessarily mean that a liability is not building up.

Deciding how to account for social benefits is no easy task; but getting the numbers right will provide information to help governments making these difficult decisions. To assist its considerations of these issues, the IPSASB would welcome a wide range of views on its Consultation Paper.

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