Download Deutsches Institut für Entwicklungspolitik

Pension Schemes and Pension
Reforms in the Middle East and North Africa
Markus Loewe
German Development Institute, Bonn
Paper presented at the Workshop “Beyond International Security:
Social Security and Social Welfare in the Middle East and North Africa - What are the research and policy choices? ”
organised by the Middle East and North Africa Social Policy Network at the Institute for Policy Research (IPR), University of Bath, 03 Decemb
2013
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Markus Loewe: Pension schemes and reforms in MENA
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Structure
• Problems of existing pension schemes
• Pension reform initiatives
– Overview
– Increasing the effective coverage rate:
the case of Tunisia
– Plans to replace PAYG by a funded scheme:
the case of Egypt
• Conclusion
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Markus Loewe: Pension schemes and reforms in MENA
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Problems
of existing pension schemes
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Funding is not the main problem for social
protection in most MENA countries!
Egypt, e.g., spends more than 25% of GDP on social protection:
Government expenditures: for public health social
transfers, subsidisation of social insurance: 13%
Premiums paid to social insurance
or private health or life insurance: 4%
Other private expenditure
(saving, out-of-pocketspending): 8-13%
Spending by other actors
(mainly NGOs): 1 %
Loewe (2010)
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Funding is not the main problem for social
protection in most MENA countries!
Even public spending for SP ranges between 7 and 13 % of GDP
0
2
4
6
8
10
12
16
14
Egypt
Algeria
Yemen
Jordan
Tunisia
Bahrain
Moroco
Syria
Oman
Pension schemes
Health system
Cash for work
Social assistance
Child allowances
Food subsidies
Energy subsidies
Mauritania
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IMF (2011)
Markus Loewe: Pension schemes and reforms in MENA
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1st problem: gaps in coverage
Gaps in coverage: mean that considerable parts of the
population are completely left out
rich
Non-contributive pensions
for armed forces and
top-level bureaucrats
Private life insurance
1–7 % of population
5–20 % of population
Social pension
insurance
5–40 % of population.
Only Libya, Algeria,
Tunisia: > 70%
Loewe (2010)
poor
formal
sector
Traditional /
informal mutual
support networks
(25–50% of
population)
informal
sector
(50–75% of
population)
social
assistance
< 3 % of population
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1st problem: gaps in coverage
Loewe (2014)
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military
civil servants
other employees
in public
administration
employees in
state-owned
enterprises
private sector
employees
outside agriculture
with a permanent
working-contract
temporary
employees
employees in
agriculture
employers and the
self-employed
domestic workers
foreigners
1st problem: gaps in coverage
x
+
+
+
+
+
+
x
+
+
Loewe (2014)
Algeria
+/–
+
x
+
x
x
+
+
+
+
(x)
(+)
(+)
+
x
+
―
+
―
―
+
c
―
+
x
x
+
+
+/–
Egypt
x
x
+
+
Iran
x
x
x
Iraq
x
x
x
b
a
―
Bahrain
b
a
(+)
―
+
+
+
+
―
+/–
+
+
+
+
+
+
+
(x)
+
―
x
x
x
x
+
―
+
―
―
―
Libya
x
+
+
+
+
+
+
+
+
+
Morocco
x
x
x
x
+
+/–
+/–
―
―
+
Oman
x
x
x
+
+
―
+
―
―
―
OPT
x
+
+
―
―
―
―
―
―
―
Qatar
+
+
+
―
―
―
―
―
―
―
Saudi-Arabia
x
+
+
+
+
―
―
(+)
―
―
Sudan
x
x
x
+
+
+/–
+
+/–
―
+
Syria
x
+
+
+
+
―
+
+
―
+
Tunisia
x
x
x
x
+
+
x
x
x
+
x
Markus
Loewe:
Pension
schemes
and
+
+
+
+
― reforms
― in MENA
―
―
―8
Jordan
x/+
Kuwait
x
Lebanon
UAE
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x/+
1st problem: gaps in coverage
At the same time, the potential of traditional mutual support
networks is shrinking…
0
20
40
60
80
100
Egypt
Palestinian Territories
Jordan
Jamaica
Share of households
that receive regularly
fianncial or in-kind
support from
relatives or
neighbours
Nepal
Panama
Kazakhstan
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Loewe (2010)
9
2nd problem: Unequitable distribution of
available funds on different social groups
Fragmentation of public pension schemes leads to preferential
treatment of powerful groups and the urban middle classes
Here: case of Egypt in 2010s
Armed forces,
higher rank state
employees
(8 % of population)
• generous
non-contributory
pension
• separate highstan-dard health
system (incl.
• dependants)
lay-off
protection
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Employees with
unlimited contracts in private &
public sector
(52 % of pop.,
but only 36% enrol)
• contributory
pension
• separate health
system (only for
contributors)
• unemployment
pay
Self-employed
All others
(9 % of pop.,
but only 5% enrol)
• contributory
pension
(33 % of pop.,
but only 5% enrol)
• basic pension
(subsidised)
• elementary medical care
in public health system
Markus Loewe: Pension schemes and reforms in MENA
Loewe (2010)
10
3rd problem: regressive redistribution
Subsidisation leads to redistribution from poor tom middle classes
Here: case of Jordan in early 2000s
Subsidisation of
public pension schemes
public
health spending
public
transfers
Armed forces
Civil servants
Formal employees
of private
companies
Informal sector
workers
People below
national poverty
line
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per capita gross receipts
from central government budget
Loewe (2013)
Markus Loewe: Pension schemes and reforms in MENA
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4th problem: Low transfer efficiency
Administrative costs as % of total spending:
Loewe (2010)
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5th problem: Unsustainable pension formulas
In most MENA countries, the gross replacement rate is clearly
above the world average:
Robalino (2005)
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5th problem: Unsustainable pension formulas
And so is the internal rate of return:
Robalino (2005)
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6th problem: Weak link between contribution and
benefit levels
… create incentives to under-declare income for most of the life:
Here, the case of the SSC in Jordan:
Main reason:
Pension formula
does not take into
account that early
retirement means
not only less contributions but also
more pension
payments
Secondary reason:
Formula neglects
that individual wages
tend to rise faster
over life than prices
Robalino (2005)
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6th problem: Weak link between contribution and
benefit levels
… in addition to incentives to retire early:
Here, the case of the SSC in Jordan:
Reason:
Minimum
pension
provision
Reason for
difference:
Pension formula is only
based on the contributions of the last 3-5
years before retirement
Robalino (2005)
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7th problem: Inefficient investment of reserves
Robalino (2005)
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7th problem: Inefficient investment of reserves
Egypt during 1990s: Huge pension assets = implicit government debts
Insurance
members:
- 1.0 %
Government:
+ 1.0 %
Contributions: 3.5 % of GDP
Benefits: 2.5 % of GDP
Subsidy: 1.5 % of GDP
National
Social
Insurance
Organisation
Credit:
2.5 % of GDP
National
Investment
Bank
Investment of surplus:
Revenue from capital investment:
5.3 % of GDP
2.8 % of GDP
Loewe (2001)
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8th problem: Huge implicit public debts
Normalized Implicit
Pension Debt
in Select Countries
Robalino (2005)
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Pension reform
initiatives
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Reform approaches
Parametric reforms:
•
Establishment of independent investment unit (Oman, Kuwait, Jordan,
Lebanon)
•
Increase in retirement ages (Jordan, Yemen)
•
Capping of pension levels (Egypt)
•
Reduction of minimum pensions (Jordan)
•
Indexation of pension increases (Algeria, Tunisia, Yemen )
Systemic reforms and reform initiatives:
•
Merger of different pension schemes (Jordan)
•
Increasing the effective coverage rate
by the inclusion of informal sector workers
(Algeria, Bahrain, Egypt, Kuwait, Libya, Tunisia)
•
Plans to replace PAYG by funded scheme – all not implemented
(Egypt, Lebanon, Morocco and OPT)
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Increasing
the effective coverage rate:
the case of Tunisia
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Increasing the effective coverage rate
Experience globally with the extension of social insurance coverage:
- Integration into existing scheme
(under conditions of membership,
contribution and benefit that are identical or
similar to those of the employees that are
already covered
Bahrain: 20%
- Separate schemes with distinct conditions
of membership, contribution and benefit
(adaptation to the needs and capabilities of
the newly covered groups of the population)
Algeria: 75%
Libya: 80%
Mongolia: 77%
Costa Rica: 100%
Egypt: 55%
Tunisia: 84%
- Linking with local schemes
Rwanda: 85%
(particularly with existing micro-insurance schemes Ghana: 20%
or intentional establishment of
local agents)
- Predominantly tax-funded solution
Thailand: 90%
(only social health insurance so far)
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Loewe (2014)
23
Increasing the effective coverage rate
The case of Tunisia: 12 schemes, administered by two different bodies
A. Caisse Nationale de Retraite et de Prévoyance Sociale (CNRPS)
(i) civil servants and military employees (1951)
(ii) members of the government, members of the parliament, governors (1951)
(iii) employees in energy sector (?)
B. Caisse Nationale de Sécurité Sociale Tunisienne (CNSST)
(iv) employees of private formal sector companies outside agriculture (1960/1974)
(v) and (vi) employees in agriculture (old system; improved system: 1981; 1989)
(vii) members of agricultural cooperatives (1985)
(viii) self-employees outside (1982) and in agriculture (1989)
(ix) migrant workers abroad (1989)
(x) students (1988)
(xi) low-income earners such as e.g. domestic workers, independent fishermen,
small farmers, self-employed artisans (2002)
(xii) intellectuals and artists (2003)
Loewe (2010)
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Increasing the effective coverage rate
The case of Tunisia:
Coverage
civil
employees
selfemployees employees
servants in private employees
in
in
and
firms
agriculture agriculture
military
outside
(old
(improved
employees agriculture
scheme)
scheme)
Absolute number of insurable persons
518 000
970 000
495 000
156 000
20 %
38 %
19 %
6%
Total number of contributors
518 000
942 000
262 000
73 000
% contributors on respective
insurable persons
100 %
97 %
53 %
47 %
% contributors on all insurable
persons
24 %
44 %
12 %
3%
% contributors on total labour force
20 %
37 %
10 %
3%
Share of insurable persons on all
employed persons
Loewe (2010)
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Increasing the effective coverage rate
The case of Tunisia:
civil
employees
selfemployees employees
servants
in private employees
in
in
and military
firms
agriculture agriculture
employees
outside
(old
(improved
agriculture
scheme)
scheme)
Contribution rates
% total
% employer
% employee
17,20
9,20
8,00
22,75
15,50
7,75
11,00
─
11,00
10,65
0,00
10,65
6.45
4.40
2.05
of which for pension insurance
15,20
11,50
7,00
5,25
5,25
─
4,10
na
na
0,00
of which for illness and maternity
2,00
6,25
4,00
5,40
1,20
of which for unemployment
na
0,00
na
na
na
of which for work acident
─
─
─
─
of which for family allowance
Loewe (2010)
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Increasing the effective coverage rate
Factors of success:
- Strong commitment of policy makers to implement reforms
- High accountability of bureaucrats.
- Awareness campaigns among target group
- Intensive monitoring of enrolment and contribution payment
- Possibilities to sanction non-declaration of employment or income
- Financial incentives
(e.g. subsidisation of contributions made by very low-income earners)
- Differentiation of benefit packages
by income level, social group, location, kind of employment etc.
(despite higher administrative costs)
- Broad, well-tailored benefit package
- Good customer service
Loewe (2010)
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Plans to replace
PAYG by a funded scheme:
the case of Egypt
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Plan to replace PAYG by a funded scheme
June 2010: Parliament passes law to establish a
new pension scheme in Egypt on 1 January 2012
After revolution: implementation put on hold until today
• membership mandatory for labour market entrants;
members of the old system allowed but not obliged to switch
• informal sector workers fully covered, their contribution being topped up by
25% of their own contribution (subsidy from the treasury)
• Improved mechanisms to detect and sanction contribution evasion by NSIO
• Contribution rates reduces from about 40 to about 30 % of gross salaries,
while cap on pensionable wage is removed
(so that higher income members pay higher contributions)
• Largest share of contributions deposited on individual accounts,
smaller share paid into solidarity funds financing survivor and work-disability
pensions and risk sharing of longevity
• ... (see next slide)
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Sabreen / Maait (2011)
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Plan to replace PAYG by a funded scheme
• ...
• Pension age raised gradually from 60 to 65
• Early retirement pensions reduced in an actuarially fair way
• Pensions indexed to inflation rates
(treasury bearing costs of increases higher than 8% annually)
• Minimum pension (= 18 % of net average wage) guaranteed by treasury (which
will top up pensions that would be inferior otherwise)
• Shift from taxing contributions to taxing pensions
• Reform of the management of reserves:
independent board of investment;
up to 40% portfolio to be invested into broad portfolio of high yield high risk
assets – only the rest to be deposited with the National Investment Bank
Sabreen / Maait (2011)
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Conclusion
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Conclusion (for discussion!)
– Financing is not the problem!
Rather, available public funds (7-13% of GDP) are spent for inefficient
instruments and allocated in an unequitable way.
– Likewise, lack of technical and administrative know-how does not
constitute the decisive bottle-neck!
If needed, MENA governments could buy it in easily.
– Apparently, political factors are the core factors!
MENA governments do not dare to implement any reforms
because these might hurt their constituency or other influential social groups…
• The neopatrimonial regimes in the MENA region have to perform in
social policies vis-à-vis the urban middle class to legitimise their own
rule … but much less so vis-à-vis the poor who are much less well
organised and start bread riots at utmost
• The only states that have really tried to integrate the informal sector
into pension schemes have redundant resources (Algeria, Libya,
Kuwait…) or a regime that used to be based on oppression much more
than neopatrimonialism (Tunisia)
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Thank You very much
for Your attention!
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References
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Loewe, Markus. 2001. Social Security in Egypt: An Analysis and Agenda for Policy Reform, Cairo.
Economic Research Forum (Working Paper 200024)
Loewe, Markus. 2004. “New Avenues to be Opened for Social Protection in the Arab World: The Case of
Egypt.” International Journal of Social Welfare, Vol. 13, No. 1, pp. 3–14.
Loewe, Markus. 2010. Soziale Sicherung in den arabischen Ländern: Determinanten, Defizite und
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Arab countries.” In Katja Bender, Markus Kaltenborn and Christian Pfleiderer (eds.), Social Protection
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Loewe, Markus. 2014. “Pension Schemes and Pension Reforms in the Middle East and North Africa.” In
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Loewe, Markus et al. 2001. Improving the Social Protection of the Urban Poor and Near-Poor in Jordan:
The Potential of Micro-insurance. Bonn: German Development Institute
Robalino, David 2005. Pensions in the Middle East and North Africa. World Bank, Washington D.C.
Sabreen, Mervat, and Mohamed Maait 2011. “Reforming Egypt’s Social Security System: A vision for
social solidarity.” Social Security Observer 13.
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