The pension reform challenge in Turkey

Turkey is currently introducing a comprehensive pension reform, which aims at unifying the currently disperse system and reducing the significant - and rapidly growing – social security deficit from 4.8% of GDP in 2005 to less than 1% of GDP by 2035. The cumulative value of the deficits over the last ten years, plus their debt servicing cost, amounted to roughly 110% of GDP or 1.5 times total public debt. The age dependency ratio is just 9 while the average age of the Turkish population is currently 27 years. With an annual growth of about 1?% in the working-age population, Turkey should not have had a pension deficit. Furthermore, today’s demographic advantages are expected to disappear within the next thirty years. The ageing of population will lead to a ballooning deficit - to over 6.5% of GDP by 2050 - unless the authorities readjust benefits and/or contributions. Hence, fiscal space could be gradually created for more productive expenditures, which may lead to a faster convergence towards EU-income levels. Besides, in a country where the tax wedge is already much higher than in most EU Member States, any tax hike would risk further increasing informal employment without generating substantial revenue growth.

This country focus concludes that the prepared reforms are steps in the right direction, even though not enough to build a sustainable, adequate system in this young and already highly indebted EU-candidate country.