1. Lebanon pension system is generous towards the happy few whom it covers: civil service employees accounting for some 20% of the labor force. Yet it is an unfair system that excludes the other 80% consisting of private sector workers – formal and informal employees, and most of the self-employed – let alone the unemployed.
  2. Workers in the formal private sector are entitled upon retirement to an “end of service indemnity” – a lump sum payment roughly equivalent to one month of salary for every year of service. Those retiring today between the ages of 60 and 64 get an average payment of US$15-20,000. Retirees also lose their health coverage since employers cease contributing their share of the health insurance premium.
  3. This sharply differs from the public sector retirement regime, almost unique to Lebanon, where:

(i) – Replacement rates (ratio of pension to the last salary) can reach 85%. As retirees no longer contribute a share (6% today) of their salary to the funding of the pension scheme, and as pensions are exempt from income tax, the effective replacement rate becomes closer to 100%, which means that net take home pay is hardly altered upon retiring.

(ii) – Pensions keep being adjusted upwards in line with salary increases granted to those in active duty. This is a unique feature not found in any other country as the common practice is to provide, if at all, only cost of living adjustment to the pension.

  1. These two features combined imply that there is little or no cost saving to the Treasury resulting from the retirement of a government employee. This introduces a structural inflexibility that effectively prevents government from optimizing the size and cost of civil service, or rejuvenating the public administration through mere attrition, or in offering incentives for early retirement.
  2. Moreover, surviving spouses of retirees keep 100% of their deceased spouse’s pension. Unmarried, divorced and widowed daughters of retirees keep their pension benefits for life. Today, with close to 80,000 public sector retirees, some 13,500 widows and 9,500 daughters have pension entitlements. A rough calculation taking into consideration such parameters as life expectancy for men and women, standard age difference between husbands and wives in the Middle-East, and daughters’ claims on pensions, shows that a pension may continue to be drawn for 30 years following retirement from active duty.A civil servant with 40 years of tenure ends up effectively staying close to 70 years on the public payroll.
  3. A standard measure of the economic cost of a pension scheme is represented by the ratio to GDP of the “net present value” of the scheme, where it is assumed that: (i) all retirees are paid today their future monthly entitlements throughout their expected life; and (ii) active workers are reimbursed all the contributions – and the return thereon – they have made so far to the pension scheme. In Lebanon, despite a youthful population, and only 20% of the labor force entitled to pension, the ratio of “Pension/GDP” is in the order of 45%. Were pension benefits to be extended to cover 90% of the labor force as in advanced economic and social systems, the Pension/GDP ratio would rise, under the present configuration of the scheme, to 200%.This represents a financial commitment from the state to the pensioners (a so-called “contingent” liability) which in sound macro-economic analysis is normally added to the stock of public debt outstanding. This ratio is exceedingly high when viewed against international comparators and standards.
  4. For private sector workers, the Government intends to introduce a new pension scheme that would provide regular monthly payments to retirees, and which in the medium-term would replace the current end of service indemnity. Such a reform would have a fundamental impact on the social protection and financial security of workers by offering them a predictable and stable pension income, and would bring them more in line – although with a far less generous financial package – with the retirees of the public. To this end, the government is assessing the potential fiscal and financial implications of implementing such private sector pension scheme, and its long-term sustainability. In parallel, reforms would need also to ensure, both for sustainability and fairness that, over time, the two pension schemes converge in terms of the compensations and coverage it offers to beneficiaries.



/SEl Daher

November 2012