By CAndreas Charalambous and Omiros Pissarides

he issue of income inequality lies at the heart of political discussions, both at EU and worldwide levels. Inequality manifests itself in different forms – inequality within a country, inequality between countries and intergenerational inequality.

Today’s article deals with the issue of intergenerational inequality, aiming at safeguarding a satisfactory quality of life for future generations, with a particular emphasis on vulnerable citizens. The main policy instrument for this purpose is the adaptation of pension systems.

Modern pension systems are based on three pillars – state social pensions, occupational pensions and private arrangements, with the latter often linked to insurances. It is generally acknowledged that the current framework neither safeguards the long-term adequacy for individuals nor the financial viability of the pension systems.

The state social pension, financed via tripartite contributions and partly via government budgets, is expected to remain the main pillar in the future. However, the likely prolonged low interest rate environment, in conjunction with population aging, will unavoidably necessitate beneficiary contribution rate increases, as well as increases in budgetary support with a view to safeguarding adequate pensions for all, including the less fortunate social classes. Contribution increases should remain within affordable boundaries, thus avoiding an undue burden on labour costs and household disposable incomes. Increases will also be required in terms of state contribution in order to ensure socially acceptable minimum pensions for the unemployed and the low paid. Evidently, although this goal is a key social priority, margins are not unlimited.

Read more @Cyprus