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PENSION REVISION SHORTCHANGES SENIORS
BY AMENA BAKR
For senior citizens, summer usually brings some
relief. Every June, the government increases their monthly pension
by about 10 percent, giving them more leverage to make ends meet
amidst continually rising prices. But this year was not so kind.
In May, the government announced suddenly, and without any apparent
room for recourse, that it would only increase pensions by 7.5 percent.
Why? Nobody was really quite sure. If the government had a reason,
it wasn’t saying.
Not surprisingly, rumors soon began to fly. Some said the government
had re-categorized pension funds in an attempt to make its financial
statement look better, others said the funds had been squandered
on white elephants, and some tabloids even suggested the funds were
spent on the engagement party for a prominent member of the ruling
party. One independent Egyptian daily had its own theory, suggesting
that the government was forced to cut its losses after the pension
funds it allegedly invested in the stock market were lost when the
market turned sour last March.
Pensioners, many of whom have long suspected the government has
no qualms about shortchanging them, find the allegation disturbing,
yet plausible. “I have no problem believing this was the case
since I have very little trust in the government and what it claims,”
says Foad Labib, a 72-year-old pensioner.
In Egypt, contributions to the national pension fund are deducted
from the monthly salaries of all legally employed individuals. Upon
retirement, usually at 60, individuals receive a monthly sum of
money drawn from this fund to cover basic living expenses upon their
retirement. The fund itself is considered so vital to social security
that it is excluded from the list of assets in the national budget
for fear it might encourage the government to consider spending
it.
Hisham Tawfik, adviser to the minister of finance, dismisses the
allegations that the government squandered the nation’s pension
funds, insisting that the funds are in safe hands. He explained
that all but £E 1 billion of the pension fund, which currently
amounts to around £E 33 billion, has been deposited in the
National Investment Bank (NIB). The bank in turn lends the money
to government entities for social and economic projects according
to the directives of the Ministry of Finance. This type of investment,
he argues, involves almost no risk, yet yields returns that help
augment the pension fund.
The fact is, says Tawfik, all pension money placed in NIB has been
lent out. “There is no cash involved anymore,” he says.
“The pension money has simply become a debt that the Ministry
of Finance is responsible for.”
According to Tawfik, only £E 1 billion of the national pension
fund has been invested in the stock market. “This amount has
been there for the past 10 years and I can safely say that over
this time the return rate [has been] a positive 2 to 3 percent,”
he says. As stock investment represents such a small percentage
of the fund’s application, even in the unlikely event that
all of this money were to be lost it would have a relatively insignificant
effect on the fund as a whole.
Thus, insists Tawfik, the ministry’s decision to reduce the
annual pension increase has nothing to do with the performance of
the stock market. Instead, it is simply a matter of “shifting
priorities.”
Tawfik explains that the Ministry of Finance, to which the pension
portfolio was added following last January’s cabinet reshuffle,
recognized the growing burden that pensions were placing on the
budget and decided to reorganize its priorities, giving precedence
to human development activities such as education. “The decision
was taken because this is the [financial] capacity of the government
at the current time,” he says. “I think that it was
a very courageous act by the Ministry of Finance to take this step
in order to guarantee a brighter and better future for the coming
generations.”
Omneya Helmy, senior economist at the Egyptian Center for Economic
Studies (ECES), thinks the government needs to reexamine its priorities.
She argues that pensioners should be a top priority because if the
government isn’t going to look after them, who will? Annual
pension increases help senior citizens bridge the gap between their
limited income (in many cases the pension is their sole income)
and the basic costs of living, which continue to rise. “Pensioners
should receive a fair annual increase as they are mostly old people
who cannot work anymore and are truly dependent on every penny they
get from pensions,” she says.
Pensioners have found it particularly unfair that the government
increased public sector employee salaries by the usual 10 percent
this year, while pensions only went up 7.5 percent. Tawfik, however,
says the difference is due to the fact that employees represent
a net gain for the state. “Employees have more expenses than
pensioners and they work, so that gives them the right to a higher
increase,” he says.
Right or wrong, it’s hard to refute Tawfik’s enumeration
of the three main problems that are putting a strain on the current
pension system. The first is the increase in life expectancy. In
the 1960s, the average life expectancy for Egyptians was 44 years
for men and 46 years for women. Today, it is 67 years for men and
71 years for women, which means not only are more Egyptians reaching
the age of pension, they’re collecting pensions for a longer
period.
The second problem, says Tawfik, is a flaw that has plagued the
pension system since its inception in 1936. Under the current system,
pension contributions are based on a percentage of an employee’s
current salary, whereas pension payments are based on a percentage
of the employee’s final salary at the age of retirement. As
most people’s salaries increase as they gain experience and
seniority, their contributions are less than the benefits they receive
upon retirement. For example, if a person’s salary never exceeded
£E 300 for their entire career, but was raised to £E
1,200 in their final year of employment, the pension paid would
be determined by this final amount. “The difference is paid
out of the pocket of the Ministry of Finance,” explains Tawfik.
The third problem is that the annual increase in pension payments
is paid out of the pocket of the government. Tawfik argues that
this increase is completely unnecessary and the money could be spent
better elsewhere. “The 7.5-percent increase is too generous
considering that we are a poor nation and we have to start behaving
like one and pay more attention to increasing our production,”
he says, arguing that increased production would increase wages,
which would in turn increase pensions.
Tawfik points out that European countries addressed similar defects
in their pension systems over 25 years ago. Egypt, however, has
avoided the issue and allowed the problems to grow. “The pension
system has become fiscally non-sustainable,” he says. “We
have to stop the bleeding and act fast so that we can secure the
future.”
But pensioners like Labib have a hard time swallowing the government’s
line that investing in a brighter future for Egypt’s youth
must come at the expense of the elderly. “This is not a poor
country,” he grumbles, “This is a country that has been
robbed by government officials and everyone knows it. Now they’re
just trying to cover it up.”
Tawfik insists that if the government simply wanted to take the
easy path it would have opted to keep the annual pension increase
at 10 percent. This would have kept the public happy, but it also
would have hurt future generations. “It’s very easy
for a political system to chase after short-term popularity, but
it’s very [tough] to face the people with the problems that
we will encounter in the future,” he says. “We have
to be able to differentiate between a charity system and a financial
system. The pension system is definitely a financial one so we can’t
get emotional about where to put the money.”
Helmy agrees on that point, but suggests the government should develop
a fixed formula to calculate the annual pension increase instead
of increasing it each year by an arbitrary amount. The formula should
take into consideration all factors including inflation, standard
of living and other financial variables. “The current system
lacks a set formula that can be used to calculate the percentage
increase for every year,” she says. “This is one of
its biggest drawbacks.”
For the time being, pensioners are at the mercy of the Ministry
of Finance’s policymakers. This year’s 7.5-percent increase
will be especially hard felt given last month’s 30-percent
increase in the price of gasoline, which is expected to push up
the cost of other basic items such as electricity and food. “Very
soon we won’t able to afford the price of bread and that is
the true price that we have to pay for being Egyptian,” says
Labib.
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