The reform of Lebanon’s pension system is necessary as the country already faces fiscal sustainability risks, which will be compounded in the future by significantly higher pension-related spending and liabilities, mainly reflecting adverse demographics, according to the IMF.
The country faces the least favourable demographics among MENA countries, with the highest life expectancy and the lowest fertility rate, translating into the highest current and projected dependency ratio in the region.
In a working paper released recently, IMF said that in addition to sustainability issues, the pension system also suffers from equity shortcomings – Lebanon is the only MENA country that does not offer social security for retirees in the private sector. While several reform proposals have been formulated since the early 2000s, none has been implemented to date. Costs are mounting with every year of delay.
Lebanon’s population is ageing the fastest among MENA countries and its social safety net for the elderly is considered highly inadequate by international standards. Beyond ageing, the starting fiscal position and sustainability outlook for Lebanon are already weak, with public debt at above 130% of GDP in 2014 and projected to exceed 140% by 2020.
In addition, the working paper pointed out that Lebanon has the highest life expectancy in the region—it was 80 years in 2012 and is estimated at 86 years in 2050—and the lowest fertility rate was 1.5 children per woman in 2012 against 2.7 on average in MENA. With greater life expectancy and lower fertility, the dependency ratio is projected to exceed 30% for Lebanon by 2050. This would be the highest in the MENA region, for which the average is around 20%.
Reform options
Various options, including partial reforms and a transition to a unified pension system, could help address sustainability and equity challenges. “For the public and private sectors these could include an increase in retirement age—particularly relevant given the country’s relatively high life expectancy—as well as an increase in social contributions. 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,” the paper said.
Tackling both sustainability and equity would however require a unified pension system, with related transition costs, said the paper. “Important aspects of a unified 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. These are difficult reforms that require political consensus. While the latter is currently lacking, continued inaction will only turn a difficult problem into an intractable issue.”