Lebanese Economic Association International Development Research Center-Canada

1.  Lebanese Economic AssociationInternational Development & Research Center-Canada Pension Reform & Elderly Social Security Mounir Rached Vice president LEA & Mario Nasser-Research Assistant September 22, 2010 1

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 pension 2

3. I. Introduction Lebanon does not have a uniform old-age pension Private sector plan NSSF: all benefits terminate at retirement. Pays end of service indemnity Government employees, covered by pension and health plan-after retirement Cost to budget 2.5% of GDP 3

4. Introd. Cont. Non-government population does not have a global pension and health Approximately 80% of old age (above 65) population is not covered Professional associations (doctors, lawyers, etc.) have pension schemes but limited coverage 4

5. Introd. cont Proposed new schemes New schemes are contributory only and will affect future generations who participate There is no scheme that is non-contributory under consideration. 5

6. Introd. cont LEA�s optimal Target is to propose a universal non-contributory social pension and medical insurance for the elderly without any coverage. 6

7. Project implementation in collaboration with: a working group composed of: MoSA, MoF, & NSSF 7

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 Description The system was put in effect on 24/4/1965. It provides an indemnity only. All benefits are terminated at retirement Law permitted converting end of service indemnity to a pension (article 54) but was not executed The end of service indemnity system is a compulsory system Illness, maternity, and family allowance are optional 9

10. II. Law 1963-Benefits Full Indemnity (minimum 20 years of contribution): 1 month/year of service up to 20 years. After 20 years of service, 1.5 months /year of service. 10

11. II. Law 1963-Benefits Reduced Indemnity: 50% (0.5 months/year of service) of full indemnity for less than 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 of contribution 85% of the total for 15 to 20 years of contribution 11

12. II. Law 1963-Benefits (Cont) Disability Death benefits 12

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 family allowance 7% of capped wage at Lbp 1.5 million for health and maternity Total 21.5 % Employee contributes 2% of capped wage 13

14. II. Law 1963- Settlement When the insured reaches the age of 64, all benefits cease and his account is liquidated. To compensate employees for the loss of value of the SSF during the war years the amendment to the NSSF stipulated: The employer pays the social security fund the difference between the amount of the benefit paid to the individual and the accumulated contribution and its interest in the account of the insured person 14

15. II. Law 1963-Evaluation The current NSSF law has several drawbacks: Limited categories are protected Earlier liquidation is allowed which thereby reduces the amount of indemnity, 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 employees 15

16. III. Proposed Reforms-  Government Draft Bill 2004 The government issued a draft bill of retirement and social welfare by Decree No. 13760 dated 15/12/2004 suggesting (Not limited to): Transformation of the Indemnity system into a retirement, disability and survivors 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 the insurer in one installment 16

17. Proposed reforms A minimum benefit of 180,000 L.L. to the insured who 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 death of 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 reform The 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 expenses 18

19. Reforms- cont. Advantages Pension & health service at retirement� Combination of Allocation & Capitalization Takes into account any increase in life expectancy Self-financed regime Terminates employer�s obligation to pay settlements Fixed contribution rates 19

20. Reforms- cont. Disadvantages: Increase the administrative cost with individual accounts Workers face high risks of inflation and low-yield investments Law didn�t 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 the accumulated contributions Burden on employers to settlement of accounts for service prior to the date the new regime enters into force. ILO considers 15 years is sufficient for entitlement to retirement pension Does not include a basic pension 20

21. IV. Proposed Reforms- International Labor Organization The ILO suggested the transformation of the system into a �Notional Accounts� regime-essentially unfunded scheme. Provides coverage to workers close to retirement age The system combines features of both capitalized and Pay as You Go systems; it relies on virtual accounts and continues to operate through allocations The system helps discard immediate settlement of accounts It would also reduce investment risk by restricting the accumulation of a hefty capital in the fund 21

22. V. Benchmarks After reviewing the present �pension� plans and evaluating suggested reforms, and in order for LEA to base its proposition on international standards and make use of other countries experience, LEA commenced the assessment of global schemes. 22

23. Benchmark- Schemes� Options Three important features of a pension system shall be discussed: how payments are funded, whether there are defined benefits or defined contributions, and actuarial fairness. 23

24. Benchmark- Schemes� Options Funded 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 working population Less capital formation High levels of intergenerational redistribution Requires a certain level of fiscal prudence More vulnerable to political risk 24

25. Benchmark- Schemes� Options Defined 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 scheme 25

26. Benchmark- Schemes� Options Actuarial vs. Non-actuarial Actuarial: Refers to the financial sustainability of the scheme (on the macro level) Contributions and benefits of an individual are linked Non-actuarial: Refers to the relationship between contributions and benefits (on the micro level) Contributions and benefits of an individual are not linked 26

27. Cont. Non-actuarial In an �entirely� non-actuarial model, benefits would be flat-rate. Give incentive to retire early 27

28. Benchmark- International Examples The general European model now is one of an unfunded system, but with some reliance on the (funded) private sector and occupational pensions. European countries such as Italy and Sweden moved from a defined benefit to a defined contribution pensions system, and most others have 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 defined contribution system, with earnings related pensions. Most countries choose a combination of the Actuarial and non-Actuarial , with a minimum income component supplemented by a contribution related component, so that there is a positive marginal rate of return for all but the worst off in society. 28

29. VI. Basic pensions Basic pensions Non contributory pensions 29

30. Basic Pensions A Basic Pension, can be introduced next to any proposed contributory pension scheme (World Bank Requirement) It is an anti-poverty pillar that guarantees a minimum income to old members The Basic Pension should be non-contributory It is separated from earnings-related pensions.

31. There are different types 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 once they reach a designated age. It is not mean-tested; it only requires evidence of age. Universal pension is tax-financed, easy scheme to administer, but considered fiscally expensive Countries where Universal Pension systems are practiced: New Zealand, Mauritius, Namibia, Botswana, Bolivia, Nepal, Samoa and Brunei.

33. Residence-based pensions Residence-based pensions are quasi-contributory pensions Each year of adult residence is considered contribution toward an old age pension. Usually, it is tax-financed ; the tax is imposed on the net pension benefits of the affluent Not implemented in low-income countries Seven countries have residence-based pensions: Denmark, Finland, Iceland, Norway, Sweden, Canada and the Netherlands

34. Social Assistance Pensions The most common type of non-contributory old age pension Could be found in the form of means-tested supplements A supplement is granted to pensioner with a full basic pension and no other income received. The supplement boosts 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 capita GDP