Uleac pension reform and elderly social security in lebanon part 1

• 1. Pension Reform & Elderly Social SecurityMounir RachedVice president LEA& Mario Nasser-Research AssistantSeptember 22, 20101

2. Contents Introduction Social Security Law 1963 Brief Description Conditions Benefits Contribution Settlement Evaluation Proposed Reforms Government proposal-Law 2004 International Labor Organization proposal Alternative Suggestions Benchmarks Different Pension Features International Examples Basic non-contributory pension2 3. I. Introduction Lebanon does not have a uniform old-age pension Private sector plan NSSF: all benefits terminate atretirement. Pays end of service indemnity Government employees, covered by pension andhealth plan-after retirementCost to budget 2.5% of GDP3 4. Introd. Cont. Non-government population does not have a globalpension and health Approximately 80% of old age (above 65) populationis not covered Professional associations (doctors, lawyers, etc.) havepension schemes but limited coverage4 5. Introd. contProposed new schemes New schemes are contributory only and will affectfuture generations who participate There is no scheme that is non-contributoryunder consideration.5 6. Introd. cont LEAs optimal Target is to propose a universal non-contributory social pension and medical insurance forthe elderly without any coverage.6 7. Project implementation in collaboration with: aworking group composed of:MoSA, MoF, & NSSF7 8. II. Social Security Law-1963 Issued on 26/9/1963 by decree No.13955 Coverage Illness and maternity Accidents of Labor and illness due to work injury (not applied) Family and educational allowance Beneficiaries: The workforce and their families as well as students Foreigners can benefit from illness, and maternity Optional insurance is also available.8 9. II. Law 1963- Brief DescriptionThe system was put in effect on 24/4/1965. It provides an indemnity only. All benefits are terminatedat retirement Law permitted converting end of service indemnity to apension (article 54) but was not executed The end of service indemnity system is a compulsorysystem Illness, maternity, and family allowance are optional9 10. II. Law 1963-BenefitsFull Indemnity (minimum 20 years of contribution): 1 month/year of service up to 20 years.After 20 years of service, 1.5 months /year ofservice.10 11. II. Law 1963-BenefitsReduced Indemnity: 50% (0.5 months/year of service) of full indemnity for lessthan 5 years of contribution 65% of the total indemnity for 5 to 10 years of contribution 75% of the total indemnity for 10 to 15 years ofcontribution 85% of the total for 15 to 20 years of contribution11 12. II. Law 1963-Benefits (Cont)DisabilityDeath benefits12 13. II. Law 1963-Contribution The employer contributes : 8.5% of non-capped wage for end of service Indemnity 6% of wage capped at 5 times minimum wage for familyallowance 7% of capped wage at Lbp 1.5 million for health andmaternity Total 21.5 % Employee contributes 2% of capped wage13 14. II. Law 1963- Settlement When the insured reaches the age of 64, all benefits ceaseand his account is liquidated. To compensate employees for the loss of value of the SSFduring the war years the amendment to the NSSFstipulated:The employer pays the social security fund thedifference between the amount of the benefit paid to theindividual and the accumulated contribution and itsinterest in the account of the insured person14 15. II. Law 1963-EvaluationThe current NSSF law has several drawbacks: Limited categories are protected Earlier liquidation is allowed which thereby reduces the amount ofindemnity, social protection and other benefits (health) Contribution and Settlement create a heavy financial charge on employers The indemnity is paid in one installment & does not provide social security. Retirees are no longer covered by health insurance Lack of equality between public servants and private sector employees15 16. III. Proposed Reforms-Government Draft Bill 2004 The government issued a draft bill of retirement and social welfare by DecreeNo. 13760 dated 15/12/2004 suggesting (Not limited to): Transformation of the Indemnity system into a retirement, disability andsurvivors pension regime Fully-Funded defined contribution Individual accounts Normal retirement age is 64 Pension-Life annuity after 20 years of contribution The possibility to commute 10% of the accumulated account to theinsurer in one installment16 17. Proposed reforms A minimum benefit of 180,000 L.L. to the insuredwho have contributed for at least 20 years Less than 20 years receive lump sum indemnity one month /year of service Adopt the principle of disability pension Transfer of pension to successors after the deathof the insured The total contribution is set to be 17.25% of wages,12.25% on the employers and 5% on employees.17 18. Proposed reformThe contribution is distributed as following: 12.25% for the retirement pension - 0.25% to support minimum pension - 1.5% for the disability or death - 2.5% for the sickness for retirees and maternity - and 0.75% for administrative expenses18 19. Reforms- cont.AdvantagesPension & health service at retirement Combination of Allocation & Capitalization Takes into account any increase in life expectancy Self-financed regime Terminates employers obligation to pay settlements Fixed contribution rates19 20. Reforms- cont. Disadvantages: Increase the administrative cost with individual accounts Workers face high risks of inflation and low-yield investments Law didnt provide insurance of investment risk No guarantee that the replacement rate could be achieved High risks that the Lebanese financial institutions would be able to absorb all theaccumulated contributions Burden on employers to settlement of accounts for service prior to the date the new regimeenters into force. ILO considers 15 years is sufficient for entitlement to retirement pension Does not include a basic pension20 21. IV. Proposed Reforms-International Labor Organization The ILO suggested the transformation of the system into aNotional Accounts regime-essentially unfunded scheme. Provides coverage to workers close to retirement age The system combines features of both capitalized and Pay as YouGo systems; it relies on virtual accounts and continues to operatethrough allocations The system helps discard immediate settlement of accounts It would also reduce investment risk by restricting theaccumulation of a hefty capital in the fund21 22. V. Benchmarks After reviewing the present pension plans andevaluating suggested reforms, and in order for LEA tobase its proposition on international standards andmake use of other countries experience, LEAcommenced the assessment of global schemes.22 23. Benchmark- Schemes Options Three important features of a pension system shall bediscussed: how payments are funded, whether thereare defined benefits or defined contributions, andactuarial fairness.23 24. Benchmark- Schemes OptionsFunded vs. Unfunded Funded: Individuals make contributions from their salaries to their pension plan More capital formation Low levels of intergenerational redistribution Requires fairly developed financial markets Higher administrative burden Unfunded: Benefits for the retired population are financed by a tax on the workingpopulation Less capital formation High levels of intergenerational redistribution Requires a certain level of fiscal prudence More vulnerable to political risk24 25. Benchmark- Schemes OptionsDefined benefit vs. Defined contribution Defined Benefit: Benefit levels are a function of past earnings Individuals vulnerable to earnings risk can lead to a large imbalance between assets and liabilities Defined Contribution Benefit levels are a function of past contributions less vulnerable to problems of un-sustainability Notional Accounts is a defined contribution scheme25 26. Benchmark- Schemes OptionsActuarial vs. Non-actuarial Actuarial: Refers to the financial sustainability of the scheme (on the macrolevel) Contributions and benefits of an individual are linked Non-actuarial: Refers to the relationship between contributions and benefits (onthe micro level) Contributions and benefits of an individual are not linked26 27. Cont.Non-actuarial In an entirely non-actuarial model, benefits wouldbe flat-rate. Give incentive to retire early27 28. Benchmark- InternationalExamples The general European model now is one of an unfunded system, butwith some reliance on the (funded) private sector and occupationalpensions. European countries such as Italy and Sweden moved from a definedbenefit to a defined contribution pensions system, and most othershave tightened the relationship between contributions and benefits.Countries such as the Netherlands still have a defined benefit system,whereas the French and UK systems are closer to the definedcontribution system, with earnings related pensions. Most countries choose a combination of the Actuarial and non-Actuarial , with a minimum income component supplemented by acontribution related component, so that there is a positive marginalrate of return for all but the worst off in society.28 29. VI. Basic pensions Basic pensions Non contributory pensions29 30. Basic Pensions A Basic Pension, can be introduced next to anyproposed contributory pension scheme (World BankRequirement) It is an anti-poverty pillar that guarantees a minimumincome to old members The Basic Pension should be non-contributory It is separated from earnings-related pensions. 31. There are differenttypes of non-contributory pensions: Universal pensions Residence-based pensions Social assistance pensions 32. Universal pensions Universal pension is paid at a flat rate to all persons oncethey reach a designated age. It is not mean-tested; it only requires evidence of age. Universal pension is tax-financed, easy scheme toadminister, but considered fiscally expensive Countries where Universal Pension systems are practiced:NewZealand, Mauritius, Namibia, Botswana, Bolivia, Nepal, Samoa and Brunei. 33. Residence-based pensions Residence-based pensions are quasi-contributorypensions Each year of adult residence is considered contributiontoward an old age pension. Usually, it is tax-financed ; the tax is imposed on thenet pension benefits of the affluent Not implemented in low-income countries Seven countries have residence-based pensions:Denmark, Finland, Iceland, Norway, Sweden, Canadaand the Netherlands 34. Social Assistance Pensions The most common type of non-contributory old agepension Could be found in the form of means-tested supplements A supplement is granted to pensioner with a full basicpension and no other income received. The supplementboosts the value of pension. Some examples are: Canada: Pension value improvement by 11% per capita GDP Norway: Pension value improvement by 13% per capita GDP Iceland : Pension value improvement by 26% per capita GDP Denmark: Pension value improvement by 20% per capitaGDP