Pension system
unsustainable: IMF

There is a need to unite schemes
in public and private sectors

The projected path of public pension expenditure is explosive, said the International Monetary Fund in its report: “Sustainability and Equity Challenges: Some Arithmetic on Lebanon’s Pension System.”

The IMF said the pension schemes are unsustainable because the country’s population is ageing the fastest and also has the lowest fertility rate in the Middle East and North Africa region (MENA).

With such demographic trends, consideration needs to be given to pension reform. The report projects public pension expenditure to increase from three percent of the GDP in 2014 to 5.2 percent in 2030. It would accelerate significantly beyond that date, reaching around nine percent of GDP in 2050.

The report said: “This is high by international standards, where the average projected pension expenditure for emerging market countries is estimated at eight percent of GDP by 2050.”

The cumulative cost of this projected increase is substantial. Assuming there is no reform, projected pension spending will undermine fiscal sustainability. According to the report, the projected increase of six percentage points of GDP in nominal terms pose significant challenges to fiscal policy. The increase implies taking on and financing 77 percent of additional debt.

While the projected pension expenditure for the private scheme increases in line with that for the public sector, the magnitude is much smaller. According to the report, and under the same demographic dynamics, spending increases from 0.5 percent of GDP in 2014 to almost one percent in 2030, accelerating significantly to 1.5 percent of GDP in 2050.

Given sustainability concerns, the report foresees reforms by increasing retirement age, containing benefits, and increasing social contributions. It also recommends a transition to a unified pension system between the public and private sectors. Some unified aspects of the system would be “a minimum pension guarantee, flat indemnity, wider coverage, extension of medical insurance after retirement, the provision of a contributory minimum wage, and a tax-funded non-contributory pension scheme for all citizens.”

In order for the system to be sustainable, early and gradual reform is needed before pension dynamics drastically deteriorate. “The longer adjustment is delayed, the costlier it becomes.”

Reforms in the public scheme could also include indexing benefits to inflation rather than keeping them linked to wages and eliminating additional lump-sum payments.