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PENSION REFORM
HIGHER BENEFITS, HIGHER COSTS
BY RASHAD MAHMOOD
The Ministry of Finance is putting the finishing touches to a draft social insurance law that would radically reshape the system by switching to individual accounts and raising required contributions as well as benefits. The proposal would also provide expanded coverage, unemployment insurance and a more substantial death benefit, and pension accounts guaranteed to keep pace with inflation.
Few parties are happy with the current social insurance system, least of all the government. Mohamed Maait, deputy minister for social insurance and pensions, is unflinching in his criticism of the system, saying its “benefits are inadequate” and it suffers from “misguided incentives.” Safaa Abdel Moneim says her husband, who used to run a small convenience store, receives a pension of LE 150 a month. “There is a huge difference between the money he used to earn and what we receive through social insurance,” she says. Ninette Halim’s husband worked as an engineer for the government for many years and his pension is LE 920 per month, a big improvement over others, but “not enough to live on,” she says. The social insurance system was created in 1950, and last amended by Law 112 of 1980, which expanded coverage to casual workers.
According to Maait, contribution rates to the current system by employers and individuals are high, percentage-wise, but limited to only the first LE 1,550 in salary. Another problem he cites is that benefits are based only on pension contributions for the five years preceding retirement, which creates an incentive to under-report income and contribute as little as possible until just before retirement. The system also faces the prospect of long-term deficits without some combination of increasing contributions, raising the retirement age (currently 60) or allowing more profitable investments. Perhaps most importantly, the system is nowhere near meeting its stated target of replacing 80 percent of income at retirement, since pensionable income and benefits have not kept up with inflation.
The proposed law addresses many of these concerns. First, it would establish individual accounts, so that contributions would be credited to the person who made them. “Contributors will receive a statement every year indicating how much they have contributed, their current balance and expected pension upon retirement,” says Maait. The value of contributions would also be tied to inflation, so pension fund returns would be guaranteed to keep pace with the rate of inflation.
The new law would also change how and where social insurance funds are invested. Currently, funds are mostly invested in low-yield government bonds. Under the proposal, 25 percent of the funds from the new system would be invested in a diversified portfolio, leading to the possibility of higher returns, but also higher risks. “An investment board of directors will be chosen, comprised of experts from the private sector and government,” says Maait, noting that the government would guarantee a “rate of return based on the inflation rate” as insurance against market fluctuations.
Contribution rates for the old and new laws are detailed in the accompanying table. The new law would remove the cap on pensionable income, so contributions would be based on an individual’s entire salary. For example, someone making LE 1,000 a month would see his personal contribution decrease from LE 140 to LE 90. However, someone making LE 10,000 would see substantial increases, from about LE 217 to LE 900. Perhaps more significantly, the employer contribution would jump from LE 403 to LE 1,100. According to Maait, the cutoff point is about LE 2,000 a month: those earning less will pay less under the new system, but those earning more will pay more. When asked whether he had sought feedback from business leaders while drafting the law, Maait responded, “no, not too many.”
Some in the private sector have concerns about the new law. “A new system is needed,” says Hanaa Sabry, Egypt concentrate plant human resources manager for Coca-Cola Egypt – Atlantic Industries. However, she says, details of the proposed changes have been hard to come by, and “there needs to be more transparency in the reform process. You need time to plan for changes so that you can cover your employees in a satisfactory manner.”
Specifically, she questions how the conversion from the old to new system would work. “Will employees or employers have the choice of switching to the new system? It should be an agreement between the two,” she says. This is of particular concern to multinational corporations, which generally provide significant pension programs of their own. According to Sabry, most Atlantic Industries employees earn significantly more than LE 2,000 a month, so the new law will have a big impact on labor costs, depending on how many employees switch systems. Despite her concerns, Sabry says, “if the new system is well implemented, we are optimistic.” She also appreciates the addition of unemployment coverage and stronger disability coverage.
Enforcement is another concern, since many businesses may try to evade the higher required contributions. “The current fine for violating the law is very small. In the new law the punishment will be a large fine and one year in prison,” according to Maait. Since social insurance payments would be collected based on current tax forms, “what you report to the Tax Authority is what you will report to NOSI [National Organization for Social Insurance].” Overall, Maait is optimistic compliance wouldn’t be a problem.
Bringing people from the informal sector into the pension system is a big goal of the new law, according to Maait. Under current law, Egyptians who work in the informal sector can pay LE 1 per month for 10 years and be entitled to LE 75 a month upon retirement, through what is called the solidarity fund. While noting that this is a helpful anti-poverty measure, Maait says some people who contribute to the system through their work end up with pensions smaller than that, which means they end up losing money. Under the new law, the government would encourage those with low incomes or in the informal sector to make contributions to the social insurance system by matching 25 percent of the funds they contribute. So if someone contributes LE 100, for example, the account would be credited LE 125.
In addition to the legal changes, the new law would entail many administrative changes as the staff of NOSI adapt to the new system. However, the system has already gone electronic, which should ease the transition. Social insurance recipients are issued a smart card they can swipe at any NOSI office to receive monthly payments. Since the system is already digitized, the payment distribution system would remain relatively unchanged. Pensioners Abdel Moneim and Halim praised the ease of the new electronic system, noting it makes the process easier and quicker.
The new law is scheduled to be submitted as a draft this month, and Maait hopes it will pass by the end of June. Otherwise, he thinks it may be delayed until after parliamentary elections next year. There have been delays before. In February 2008, Daily News Egypt reported that a new social insurance law with very different details than the current proposal would be introduced by March 2008. That did not happen. Regardless, Maait is optimistic that the current draft will be passed on schedule.
While the changes the new law proposes are dramatic, many seem to agree they are needed. It all comes down to the details. The text of the draft law has yet to be finalized, so it was not available. However, it is clear that if passed, it will increase costs for many companies, while at the same time strengthening the government’s financial position and increasing social insurance payments.
Social Insurance Contribution Rates
|
Current |
New |
Employee |
14% |
9% |
Employer |
26% |
11% |
Totals |
41% |
20% |
Social Insurance Contribution Examples
Salary: LE 1,000
|
Current |
New |
Employee |
140 |
90 |
Employer |
260 |
110 |
Totals |
400 |
200 |
Salary: LE 10,000
|
Current |
New |
Employee |
217 |
900 |
Employer |
403 |
1,100 |
Totals |
620 |
2,000 |
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