Facelift needed for ageing pensions
Pensioners may pay a hefty price for delays in reforming the pension system. Niveen Wahish investigates
Ever thought that your pension check might bounce? Although this is theoretically impossible because pension payments are guaranteed under Article 17 of the Egyptian Constitution, experts fear it could happen in the not-so-distant future. They point out that the impact of demographic changes of increased longevity and fewer children will result in the payment of more pension benefits with fewer workers to support them. Further, resources from social insurance contributions will not cover pension commitments. They emphasise that the way the system is currently managed is unsustainable and in dire need of reform.
To a casual observer, Egypt's pension system appears to be in good health. According to a study prepared by Omnia Helmy for the Egyptian Centre for Economic Studies, the country's relatively young population has enabled its pension system to accumulate large long-term savings representing 37 per cent of the savings available to the Egyptian economy. This is almost equal to the savings available in the banking system. It boasts around LE174 billion in reserves deposited in the National Investment Bank (NIB). So far the contributions from those who subscribe to the system exceed the benefits paid. Around 18 million social insurance subscribers support some seven million pensioners.
Egypt's social insurance system, which dates from 1854, is run by the General Authority for Social Insurance. It manages two funds, one for government employees and the other for public and private sector employees. Four social insurance laws regulate contributions made by government employees, public and private sector employees, irregular labour, Sadat pensioners and expatriates. Subscription to the system is mandatory for all except Egyptian expatriates.
However, the reality is not as rosy as it might seem. Already there are signs that the system will not be indefinitely sustainable. According to Helmy, contributions from employees in the public and private sector cover only 73 per cent of the pensions due. This figure is expected to drop to 37 per cent by 2012. The reduction in contributions will affect the ability of the system to meet its pension commitments and will mean lower pensions for employees. Moreover, Helmy states that the general budget contributions which finance pensions have increased by 150 per cent in the past five years and now comprise 70 per cent of all pension funding. According to Abdel-Fatah El-Gebaly, advisor to the minister of finance, that 70 per cent includes the government's contribution as an employer in social insurance premiums and the annual increases that it provides to pensioners to maintain the real value of their income. Those annual increases are not paid by the pension funds because by law the funds are responsible only for the commitments stated within the law and any additional privileges that lie outside the law are borne by the general budget.
El-Gebaly states that the government paid out LE13 billion in 2001/02. Of this it paid out LE3.5 billion as an employer with the remaining LE9.5 billion comprising the additional privileges that it grants pensioners. The LE9.5 billion represents the annual increase in pensions which the government has been paying since 1987. As a result of those annual increases, someone who received LE100 as a monthly pension in 1987 now receives LE713. This increase is borne entirely by the general budget, and LE13.8 billion has been earmarked for these annual increases in the 2003/04 budget.
While the government's contribution in maintaining pensions is increasing every year, that of subscribers is decreasing. Omnia Helmy points out that there is a reluctance on the part of both employers and employees to pay their premiums. She says that employers consider social insurance premiums a burden adding to the costs of their business. Some employees are also not fully committed to the system because it takes up a large percentage of their salary (up to 41 per cent of the basic salary and 25 per cent of the variable salary) and because they feel that their contribution is not commensurate with the pension they will ultimately receive.
Another factor affecting the resources of pension funds is the early retirement compensations scheme for employees of privatised companies. This, Helmy says, has meant less people making contributions and more benefits being paid.
According to Helmy, the system has transformed from being fully funded and based on specific contributions by benefactors to more of a government-run system where retirement benefits are determined according to years of work and salary rather than the financial contributions of individuals. For example, Helmy points out that pensioners receive an average of their salary during the last two years of service rather than an average of their salary throughout all their years in service. And, she says, while irregular labour pays LE1 per month, they receive LE80 per month. This must be addressed, she argues, and there must be a return to the fully funded system.
For a stopgap solution while comprehensive reform is created, Helmy recommends better utilisation of the pension reserves of the government-owned NIB. Pension funds have some LE174 billion in reserves with the NIB. That sum is the accumulation of years of surpluses from the pension funds and interest. Although pension funds represent the bulk of NIB resources along with post office deposits and investment certificates, the money which has been used to finance infrastructure projects is virtually inaccessible.
There have been recent suggestions that the government will swap its debts to pension funds for ownership of state assets that are profitable and performing well and that the management of these entities will continue in the hands of the concerned authorities.
But the idea is facing strong criticism and has been dubbed the confiscation of private money. One of the critics, Aly El- Selmy, professor of management at Cairo University, speaking at a seminar organised by the Centre for the Study of Developing Countries, asked how pension funds would be able to guarantee the efficiency of those assets if they were not going to have a say in the management.
Abdel-Fatah El-Gebaly supports the proposal saying that it is in the interest of both the government and the social insurance funds. Swapping the debt for equity will save the government millions of pounds and will shrink the size of public debt. Currently the government pays the funds 11 per cent interest on the money they deposit in the NIB. The NIB then re-lends this money to government entities at an interest rate between 12 to 13 per cent. Thus the government is paying an interest rate of 23 per cent. By swapping the debt for equity, it could at least cut the 11 per cent interest it is now paying on the reserves.
"The funds will benefit because they will be owners of real economic entities which will generate actual revenue, rather than revenue on paper as is the case with NIB," he said.
In fact, as Mahmoud El-Shazly, first deputy of the Ministry of Finance put it, "there are not many other alternatives." He pointed out that since 1998 the funds have been able to invest up to 25 per cent of their reserves, but this option has not been fully used. In 1998 some LE900 million was invested in the stock market, but largely without success.
According to a study prepared by El- Gebaly, in 2002/3 only 0.8 per cent of funds was invested in the stock market, while 5.8 per cent was put into local banks and 92.1 per cent was invested with NIB.
