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 1¼% 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.