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Revamping social security to make it sustainable
December 22, 2018, 3:48 pm

Citizens accustomed to generous life-long pensions and other social security benefits could be up for a rude awakening in the not too distant future. There is a strong likelihood that the existing retirement scheme, which provides for up to 95 percent of a citizen’s final salary as monthly pension, may no longer be feasible in the coming years.

Kuwait’s rapidly changing demographic profile arising from falling fertility rates, ageing population and growing longevity of people, is set to skew the country’s dependency ratio and strain government’s pension system in the years ahead.

State benevolence, nourishing diet and good healthcare since independence has led to more people living better and for longer. Life expectancy in Kuwait, which was around 59 years at the time of the country’s independence in 1961, rose to 74.8 years by 2016. Increasing lifespan has led to a steady increase in retirees, as well as the number of years that they continue to receive retirement benefits.

Today, those aged over 60 account for 5 percent of the population, while the working-age group, between 20 and 59 years of age, is 49 percent. It is projected that the ratio between the two groups will surge to 15 percent by 2035. Also, according to the World Health Organization (WHO), the average global life expectancy is increasing by about three years every 10 years. This means that while someone born in 1947 could live until the age of 85, someone born in 2007 can expect to live until 103.

If people continue to retire at the age of 60, in future, they are going to be in retirement for over 40 years. The jump in ratio of retirees to the working-age population, and increase in years of retired life, will add pressure on the state’s retirement scheme, as young workers are ongoing contributors to the pension plan, while retirees are beneficiaries of the scheme.

Kuwait began implementing a pension system that covered all government, civilian and military personnel following the country’s independence in 1961. With the establishment of the Public Institution for Social Security (PIFSS), a more integrated social security law was introduced in 1977 to provide, in addition to basic retirement benefits, insurance for illnesses, senility or death. Since its inception in 1975, the PIFSS has been successfully fulfilling its mandate of managing and administering the entire pension scheme for citizens.

However, in order to ensure an efficient pension system and its long-term sustainability there has to be a balance between the pensions being paid out and the funding that goes into maintaining the system.

Over the years, this complex balance has been gradually skewing with funding falling and pensioners rising. It is obvious that in the immediate future the government will have come up with additional sources of income for PIFSS if it is to sustain retirement benefits for citizens. Stress on the pension system is not unique to Kuwait, elsewhere in the Gulf the ratio of retired people to the working population is predicted to treble in the future.

In the United Arab Emirates, in the year 2000 there were 24 people of working age supporting each retiree; today there are only five supporting each retiree. Similarly, in Saudi Arabia and Kuwait where currently each retiree is currently supported by 11 and 9 workers respectively, the numbers are steadily declining as the number of retirees increase. Growing youth unemployment in the region is also adding pressure to the pension plans.

In 2000, the average age of contributors to the pension plan in the UAE was 29 years, by 2012 it had grown to 39.6 years. According to available figures from the international Monetary Fund (IMF) aggregate unemployment across the region grew by 4 percent to reach 16 percent in 2016.

Some of the options before the government to fund a financially secure future for its retirees, include increasing the monthly contributions made to pension scheme by employees, increasing the retirement age of employees in line with changing life expectancy, or at least decreasing or stopping the annual increments in payouts made to retirees.

None of these options are likely to be palatable to citizens long accustomed to state largesse. An initiative by the government to introduce reforms to the pension plan is still languishing in parliament where there is a general disdain for any form of entitlement reforms. A more viable option for the government would be to consider including the large expatriate population in the state retirement system.

Figures from the Public Authority for Civil Information (PACI) show that at the end of 2017, there were 1.7 million expatriates employed in Kuwait, accounting for 81 percent of the country’s total workforce. Currently, this large segment of working population is not part of the state’s pension scheme. Expatriate workers are generally entitled to only an End of Service Benefit (EoSB), even if they work in the government sector.

The EoSB is largely calculated by multiplying the last monthly salary of the employee by the number of years they were employed, and is usually paid out as part of the golden handshake at the end of the employee’s tenure. The EoSB is in most cases insufficient to maintain a retired life.

Moreover, among most expatriates, especially those employed in blue-collar jobs, the savings rate is low or non-existent. The cost of living and other expenses to meet the obligations that made them seek a job abroad in the first place, curb many expatriates from accumulating enough savings to support a decent retired life.

A recent survey showed that a quarter of GCC expatriates are unable to make any long-term saving, while a further 55 percent said that they saved less than 10 percent of their income for future. A further cause for concern about the lack of a retirement scheme for expatriates is the not so infrequent bankruptcy of businesses in the region.

When a business that employs them shuts down, claims insolvency or defaults on payments, there is very little the employees can do to obtain their indemnity and other dues, other than pursue lengthy and costly legal procedures that are usually unsuccessful.

The government could without any additional financial burden introduce a retirement scheme for expatriates modeled on those existing elsewhere for expatriate workers. In the current ‘defined benefit’ retirement scheme being offered to citizens by PIFSS, a percentage of the employee’s final salary — as much as 95 percent of the salary of a citizen who puts in 30-years’ service — is paid to them each month when they retire for the rest of their lives.

The government could offer an alternate model, the ‘defined contribution’ scheme, for expatriate workers. In the defined contribution system, the employer or employee pays a regular contribution, fixed as an amount or percentage of the employee’s salary into the pension fund. Benefits on retirement are determined based only on contributions paid into the scheme, as well as investment returns on those contributions.

The scheme could also include the cost of buying an annuity at retirement. But the government would not be burdened by the prospect of long-term retirement annuity, as all expatriates will eventually return to their country and prefer to purchase a retirement annuity there.

It is understandable that a government mandated to protect and look after the welfare of citizens would ignore retirement benefits for expatriates. But, by continuing to ignore the elephant in the room, the government is missing out on the lucrative opportunity of sustaining its pension scheme by appreciably widening the contributor-base.

By excluding expatriates from the pension plan the government is not only overlooking the potential economy benefits of their inclusion and contribution to the real economy, but also shirking its moral and humanitarian responsibility to expatriates who are helping build the country.

Reforming the retirement scheme with a more pragmatic approach — raising mandatory retirement age, increasing contributions made by employers and employees and widening the funding base by including expatriates — should be a priority for the government. Increasing pressure on public finances from volatile oil prices, consecutive budget deficits, growing debt-to-GDP and rising youth unemployment, along with changing demographics, means the need for reforms to existing pension systems will soon no longer be an option, but a necessity.

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