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Al-Ahram Weekly 13 - 19 April 2000 Issue No. 477 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 13 - 19 April 2000 Issue No. 477
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Books Features Travel Living Sports Profile People Time Out Chronicles Cartoons Letters Pension schemes need to be retired
By Niveen WahishHow can the Egyptian social insurance system (SIS) sustain itself 30 years from now? This is just one of the questions that a workshop organised last week by the Fulbright commission attempted to tackle.
"Pension systems and social insurance: global experiences and potential applications" is the seventh workshop in the Harvard in Egypt series.
The two-day workshop reviewed case studies in both developed and developing countries, as well as examined the social insurance system in Egypt, its financing structure, implications for economic growth and ways of enhancing its performance.
Michal Rutkowski, head of the Social Protection Group for Europe and Central Asia at the World Bank estimated that by the year 2030 the world's population over 60 years of age will have increased from nine to 16 per cent. This necessitates greater future spending on pensions, to avoid the steady erosion of any current pension surplus. "The increase in longevity," he argued, necessarily "motivates the reform of pension systems."
Egypt's social insurance system had assets totalling LE114 billion at the end of the fiscal year 1997/98, the bulk of which are due to the fact that contributions exceed the benefits paid. This is not, though, a situation that can be maintained forever. A report prepared by the Technical Assistance for Policy Reform (TARP) project, funded by USAID, predicts that Egypt's social insurance system "will come under increasing financial strain as people live longer and have fewer children, implying growing pension benefits and fewer workers to support them."
According to the report, the findings which were discussed during the workshop, benefit payments accounted for 12 per cent of total government spending in 1998. However, by 2010 SIS payments, as a percentage of government expenditure, could increase by 35 to 40 per cent.
Nor is the phenomenon unique to Egypt. Eytan Sheshinski, director of the International Program on Privatisation and Regulatory Reform at Harvard University, pointed out that by the year 2030 the US will be facing a similar situation. According to Sheshinski, the US social insurance surplus will cover only 75 per cent of the system's obligations.
Currently, Egypt's SIS is based on a pay as you go, defined benefit (PAYG-DB) system. Retirement benefits are determined according to years of work and salary rather than being directly based on the financial contributions of individuals. PAYG-DB systems are, the report warns, "highly susceptible to the demographic changes that accompany economic growth."
Given such in-built unsustainability, social insurance funds must be diversified. To this end, the Egyptian government has already started to investigate new strategies for investing its funds. In September 1998 it launched three investment funds, allocated a total sum of LE900 million, less than one per cent of total Egyptian social insurance assets, to invest in the stock market. Currently the majority of social insurance funds are held by the National Investment Bank.
While the report encourages the investment of social insurance funds in the capital market, it acknowledges the risk involved for both corporate governance and privatisation plans if the government is itself the vehicle for investing pension funds.
One possible solution would be for pension funds to be invested in the capital market through a multi-tier approach, which would involve the creation of "personal, defined contribution plans that tie a worker's retirement benefits directly to his or her contributions, plus investment return." Such modifications to the current system could "encourage a greater link between pension savings and the capital markets that could strengthen the pension system, promote economic growth, and create sustainable employment."
