Urgent Pension Reforms Needed in the Middle East and North Africa

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			> David Robalino (Senior Economist)
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According to the new report, pension systems in the region face problems in terms of limited coverage, fragmented administration, and system design that negatively affect incentives and equity. The report suggests that pensions systems try to offer too much in terms of benefits. On average, full-career workers would receive a pension of nearly 80 percent of earnings before retirement. This is much higher than the pension promise in 24 high-income countries (as well as 10 countries in Eastern Europe and Central Asia and 9 countries in Latin America and the Caribbean), where pension represents on average 57 percent of pre-retirement earnings.

"Pension crises are often associated with an aging population, which is misleading. In the MENA region, where 60 percent of the population is made up of young people, pension systems are already facing financial problems," says Christiaan Poortman, World Bank Vice President for the Middle East and North Africa. "So, the problem is structural, not demographic. The time for change is now. Postponing pension reforms will require dramatic adjustments in the future and it implies transferring the cost of reform to future generations," he adds.

Progress on pension reform has been uneven across the MENA region. Some countries like Algeria, Libya, and Syria are in the very early stages of the reform process or have not yet initiated discussions. In other countries like Iran, Iraq, Tunisia, and Yemen, policy discussions are more advanced but a coherent strategy has yet to emerge. Djibouti, Egypt, Jordan, Lebanon, Morocco, and the West Bank and Gaza, on the other hand, have made strides in pension reform, drafting progressive pension laws or introducing structural reforms.

The report urges countries in the early stages of reform, to conduct a proper assessment of the financial problems facing the systems. Without this baseline, it is not possible to initiate discussions about the costs and benefits of alternative reform packages. In other countries, the immediate goal is to move from strategic guidelines to a detailed reform concept, which will require further analytical work and consensus building. The remaining group needs to consolidate an integrated reform strategy and move toward implementation.

"MENA countries vary in terms of their political and economic conditions, but pension systems across the region share important design and structural problems," says David Robalino, a senior economist at the World Bank and lead author of the report. "It is possible to formulate a set of minimum standards that any reform program will have to meet; the specific content of these programs clearly will have to reflect social preferences and to be consistent with the local economic environment."

The report highlights that all the countries have earnings-related pension systems, financed on a pay as-you-go basis, which date back to the late 1960s and early 1970s. No changes to the structure of the systems have been introduced since then. These systems cover, on average, 30 percent of the labor force. Despite these relatively modest coverage levels and the fact that only 5-10 percent of the elderly receive a pension, spending as a share of gross domestic product (GDP) are already in the 1-3 percent range, which is high given the share of the elderly population.

Although there are important differences in demographic structure, all countries in the region share a relatively young population. A rapid increase in old-age dependency ratios will take place only after 15 to 20 years. However, independent of the aging process, pension systems will eventually run into trouble. The future aging of the population will simply make things worse. Most funds are accumulating large and unsustainable unfunded pension liabilities, which in the absence of reform, will have to be financed by future generations.

In addition, pension systems are hampered by policies that weaken incentives and arbitrarily redistribute income between plan members. The administration of pensions is fragmented, often with two or more schemes for different groups of workers. This is costly and limits the mobility of the labor force. The report also highlights governance issues that promote risky investment policies that do not necessarily benefit plan members.

The report also addresses the issue of gender equality within the pension systems. It shows that pension laws across the region have attempted to provide women with more flexible retirement decisions and more secure survivor benefits, driven by the assumption that men are the principal breadwinners. This feature of the law, however, also makes women more vulnerable to pension reform. Indeed, if the goal is to have a pension law that treats women and men equally, then adjustments are likely to affect women more than men. Thus policy makers will need to devise mechanisms that address the potential impact of pension reforms on women.

"International experience with reforms over the past ten years show that there's no single recipe for reform-that countries can mix and match different elements of an effective pension system, based on their own needs," says Robert Holzmann, Director of the World Bank's Social Protection Unit and a leading international authority on pension reform. "What also emerges is the continued need to reduce poverty, eliminate the risk of rapidly falling living standards, and protecting vulnerable elderly people from economic and social crises."

₁Algeria, Libya, Syria, Iran, Iraq, Tunisia, Yemen, Djibouti, Egypt, Jordan, Lebanon, Morocco, and the West Bank and Gaza.

To see more information on the Bank's work in the area of pensions, visit: www.worldbank.org/pensions