© 2013 d·i·eMarkus Loewe: Pension schemes and reforms in MENA1 Pension Schemes and Pension Reforms in the Middle East and North Africa Paper presented

© 2013 d·i·e Markus Loewe: Pension schemes and reforms in MENA 1

Pension Schemes and Pension Reforms in the Middle East and North Africa

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 December 2013

Markus LoeweGerman Development Institute, Bonn


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


Problemsof existing pension schemes


Funding is not the main problem for social protection in most MENA countries!

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-pocket-spending): 8-13%

Spending by other actors(mainly NGOs): 1 %

Egypt, e.g., spends more than 25% of GDP on social protection:

Loewe (2010)


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 14 16

Egypt

Algeria

Yemen

Jordan

Tunisia

Bahrain

Moroco

Syria

Oman

Mauritania

Pension schemesHealth systemCash for workSocial assistanceChild allowancesFood subsidiesEnergy subsidies

IMF (2011)


1st problem: gaps in coverage

Traditional /informal mutual

support networks

Social pension insurance5–40 % of population.Only Libya, Algeria, Tunisia: > 70%

social assistance

< 3 % of population

Non-contributive pensions for armed forces and top-level bureaucrats

5–20 % of population

Gaps in coverage: mean that considerable parts of the population are completely left out

Private life insurance

1–7 % of population

informal sector

(50–75% of population)

formal sector

(25–50% of population)

rich

poor

Loewe (2010)



Loewe (2014)



m

ilita

ry

civi

l ser

vant

s

othe

r em

ploy

ees

in p

ublic

ad

min

istr

atio

n

empl

oyee

s in

st

ate

-ow

ned

ente

rpris

es

priv

ate

sect

or

empl

oyee

s ou

tsid

e ag

ricul

ture

w

ith a

per

man

ent

wor

king

-con

trac

t

tem

pora

ry

empl

oyee

s

empl

oyee

s in

ag

ricul

ture

empl

oyer

s an

d th

e

self-

empl

oyed

dom

estic

wor

kers

fore

igne

rs

Algeria x + + + + + + x + +

Bahrain x x + + +/– a ― +/– a (+) ― +

Egypt x x + + + x + x x +

Iran x x x + + + (x) (+) (+) +

Iraq x x x x + ― + ― ― +

Jordan x/+ b x/+ b + + + ― +/– + c ― +

Kuwait x + + + + + + (x) + ―

Lebanon 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 +

UAE x + + + + ― ― ― ― ―

Loewe (2014)



At the same time, the potential of traditional mutual support networks is shrinking…

0 20 40 60 80 100

Egypt

Palestinian Territories

Jordan

Jamaica

Nepal

Panama

Kazakhstan

Share of households that receive regularly fianncial or in-kind support from relatives or neighbours

Loewe (2010)


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

Employees with unlimited con-

tracts in private &

public sector (52 % of pop.,

but only 36% enrol)

Self-employed

(9 % of pop., but only 5% enrol)

All others

(33 % of pop., but only 5% enrol)

Armed forces, higher rank state

employees(8 % of population)

• generous non-contributory pension

• contributory pension

• contributory pension

• basic pension(subsidised)

• separate health system (only for contributors)

• elementary medical care in public health system

• separate high-stan-dard health system (incl. dependants) • unemployment

pay• lay-off

protection Loewe (2010)


3rd problem: regressive redistribution

Armed forces

Civil servants

Formal employees of private companies

Informal sector workers

People below national poverty line

Subsidisation of public pension schemes

public health spending

public transfers

per capita gross receipts from central government budget

Subsidisation leads to redistribution from poor tom middle classes

Here: case of Jordan in early 2000s

Loewe (2013)


4th problem: Low transfer efficiency

Administrative costs as % of total spending:

Loewe (2010)


5th problem: Unsustainable pension formulas

In most MENA countries, the gross replacement rate is clearly above the world average:

Robalino (2005)


5th problem: Unsustainable pension formulas

And so is the internal rate of return:

Robalino (2005)


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 con-tributions but also more pension paymentsSecondary reason:Formula neglects that individual wages tend to rise faster over life than prices

Robalino (2005)


6th problem: Weak link between contribution and benefit levels

… in addition to incentives to retire early:

Here, the case of the SSC in Jordan:

Robalino (2005)

Reason for difference:Pension formula is only based on the contri-butions of the last 3-5 years before retirement

Reason:Minimum pension provision


7th problem: Inefficient investment of reserves

Robalino (2005)


7th problem: Inefficient investment of reserves

Loewe (2001)

Insurance members:

- 1.0 %

Contributions: 3.5 % of GDPBenefits: 2.5 % of GDP

Government:+ 1.0 %

Subsidy: 1.5 % of GDP

National Investment

BankInvestment of surplus: 5.3 % of GDPRevenue from capital investment: 2.8 % of GDP

Credit:2.5 % of GDP

National Social

Insurance Organisation

Egypt during 1990s: Huge pension assets = implicit government debts


8th problem: Huge implicit public debts

Normalized Implicit Pension Debt in Select Countries

Robalino (2005)


Pension reforminitiatives


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)

Reform approaches


Increasing the effective coverage rate:

the case of Tunisia


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%

Libya: 80%

Mongolia: 77%

Costa Rica: 100%

- 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%

Egypt: 55%

Tunisia: 84%

- Linking with local schemes (particularly with existing micro-insurance schemes or intentional establishment of local agents)

Rwanda: 85%

Ghana: 20%

- Predominantly tax-funded solution Thailand: 90%

(only social health insurance so far) Loewe (2014)



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)

The case of Tunisia: 12 schemes, administered by two different bodies

Loewe (2010)



The case of Tunisia:Coverage civil

servants and

military employees

employees in private

firms outside

agriculture

self-employees

employees in

agriculture (old

scheme)

employees in

agriculture(improved scheme)

Absolute number of insurable persons 518 000 970 000 495 000 156 000

Share of insurable persons on all employed persons

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 %

Loewe (2010)



The case of Tunisia:

Contribution rates

civil servants

and military

employees

employees in private

firms outside

agriculture

self-employees

employees in

agriculture (old

scheme)

employees in

agriculture(improved scheme)

% total% employer% employee

17,20 9,20 8,00

22,7515,50 7,75

11,00─

11,00

10,650,00

10,65

6.454.402.05

of which for pension insurance 15,20 11,50 7,00 5,25 5,25

of which for family allowance ─ 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 ─ ─ ─ ─

Loewe (2010)



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)


Plans to replace PAYG by a funded scheme:

the case of Egypt


Plan to replace PAYG by a funded scheme

Sabreen / Maait (2011)

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)


Plan to replace PAYG by a funded scheme

Sabreen / Maait (2011)

• ...

• 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


Conclusion


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)


Thank You very much for Your attention!


References

Chaabane, Mohamed. 2002. Towards the Universalization of Social Security: The Experience of Tunisia, Extension of Social Security Paper No. 4. International Labour Office, Geneva.

Gillion, Colin, John Turner, Clive Bailey and Denis Latulippe. 2000. Social Security Pensions: Development and Reform. International Labour Office, Geneva.

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 Strategien für den informellen Sektor. Nomos, Baden-Baden.

Loewe, Markus. 2013. “Caring for the Urban Middle Class: The political economy of social protection in Arab countries.” In Katja Bender, Markus Kaltenborn and Christian Pfleiderer (eds.), Social Protection in Developing Countries: Reforming Systems. Routledge,: London.

Loewe, Markus. 2014. “Pension Schemes and Pension Reforms in the Middle East and North Africa.” In Katja Hujo (ed.) Reforming Pensions in Developing and Transition Countries. Geneva: UNRISD

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.

Documents

© 2013 d·i·eMarkus Loewe: Pension schemes and reforms in MENA1 Pension Schemes and Pension Reforms in the Middle East and North Africa Paper presented