January 27, 2008 - Pension systems in the Middle East and North Africa need to be reformed and strengthened by a healthier job-creating economy to avoid insolvency, a regional conference has warned. Many pension funds will exhaust their reserves in the next decade unless changes are made now, experts at the World Bank-organized conference said.  Pensions are modest, paid to only 5 to 10 percent of the elderly, and cover only 30 percent of the region’s labor force. But they amount to 1 to 3 percent of the gross domestic product (GDP) in the region’s countries.
Most pension funds are accumulating large and unsustainable unfunded liabilities, and problems regarding equity, efficiency, governance, and administration are pervasive. Funds Are Based on Outdated Demographics The pay-as-you-go funds are based on schemes from the late 1960s and early 1970s, and need to be adjusted to current demographic trends, which show a bulge in the percentage share of the younger population. If more of the jobless young could find jobs, their contributions could help replenish pension funds. At the Regional Conference on Pension Reforms in the Middle East and North Africa, held in Limassol, Cyprus, in early December 2007, participating countries shared experiences in recent reform initiatives and identified reform options for their pension systems. Attendees included high-level policy makers and experts from the ministries of Labor, Finance, Planning, Social Affairs, Social Security Institutions, and public and private stakeholders. A key organizer of the conference was David Robalino, World Bank Senior Economist and lead author of the 2005 report “Pensions in the Middle East and North Africa: Time for a Change”, who has worked with MENA countries on pension reform for a number of years. According to Robalino, by the time the pension report was released the World Bank “had already worked with most of the countries- with initial work focused on raising awareness about the problems facing pension systems and on a policy framework to guide discussions about pension reform. Since then, countries such as Egypt, Jordan, Morocco, and Lebanon have made considerable progress and in a relatively short time”.  Pension reform is usually driven by problems attributed to an aging population. But MENA is different because “the financial problem of the pension systems goes beyond the issue of aging,” says Robalino. “Even without major changes in demographic structures, most systems would be insolvent.”
MENA countries are still relatively young, which gives them a window to exploit the "demographic gift" of an active population that is large relative to the population of dependents. But to benefit from that gift, the region’s nations must create more jobs for the younger population which in turn will strengthen underfunded pension plans. Pension Reform, Economic Growth, and Job Creation “The majority of countries have made important progress in improving how pension funds are operated”, Robalino says. “The main challenge will be stimulating economic growth and job creation in the private formal sector”. Pension reform can help do that by reducing distortions in labor markets, which promotes increased national savings and has a positive impact on financial sector development. Without job creation and additional economic growth, an important part of the labor force will remain outside the pension system and might not be accumulating sufficient savings to finance an adequate standard of living during old age. Sustained economic growth raises living standards for the elderly. But most recent regional forecasts put the average yearly growth rate of income per capita for the next decade in the too-weak 1–2 percent range. The region’s unemployment rate is among the highest in the world, conservatively estimated at 15.9 percent. The urgency of the regional pension crisis varies among countries, but reform measures need to be enacted before countries are faced with a very serious crisis. According to Robalino, “taking action now is important because it will take time for the pension system to show positive results. If countries want to avoid a major one-time cut in benefits [or increase in taxes] and instead opt for a gradual transition to a balanced system, then you need to start the reform process now. Waiting to reform would allow unfunded liabilities to grow and force the burden on future generations to finance these in the form of higher taxes, lower benefits, and/or lower public expenditures in other areas, such as education or health.” |
RSS