Transcript Basic non-contributory pension - Lebanese Economic Association

Pension Reform & Elderly Social Security
Mounir Rached
Vice president LEA
& Mario Nasser-Research Assistant
September 22, 2010
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Contents
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Introduction
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Social Security Law 1963
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Proposed Reforms
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Government proposal-Law 2004
International Labor Organization proposal
Alternative Suggestions
Benchmarks
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Brief Description
Conditions
Benefits
Contribution
Settlement
Evaluation
Different Pension Features
International Examples
Basic non-contributory pension
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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
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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
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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.
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Introd. cont
 LEA’s optimal Target is to propose a universal non-
contributory social pension and medical insurance for
the elderly without any coverage.
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Project implementation in collaboration with: a
working group composed of:
MoSA, MoF, & NSSF
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II.
Social Security Law-1963

Issued on 26/9/1963 by decree No.13955
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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
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Foreigners can benefit from illness, and maternity
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Optional insurance is also available.
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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
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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.
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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
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II. Law 1963-Benefits (Cont)
 Disability
 Death benefits
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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
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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
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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
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III. Proposed ReformsGovernment 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
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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.
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Proposed reform
The contribution is distributed as following:
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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
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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
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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
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IV. Proposed ReformsInternational 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
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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.
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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.
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Benchmark- Schemes’ Options
Funded vs. Unfunded
 Funded:
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•
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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:
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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
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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
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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
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Cont.
Non-actuarial
 In an “entirely” non-actuarial model, benefits would
be flat-rate.
 Give incentive to retire early
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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.
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VI. Basic pensions
 Basic pensions
 Non contributory pensions
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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.
There are different
types of non-contributory pensions:
• Universal pensions
• Residence-based pensions
• Social assistance pensions
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.
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
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:
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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