“Pending the institution of an old-age insurance scheme, an end-of-service indemnity (EOSI) Fund shall be set up.” So begins article 49 of the 1963 Social Security Law. Run by Lebanon’s National Social Security Fund (NSSF), the public provider of insurance for the private sector, the EOSI still pays retirees a lump-sum payment upon retirement but its conversion into a pension — with regular payments during retirement guaranteeing social security for old age — has not yet seen the light of day.
With developed countries and even developing countries establishing functional old-age pension schemes, Lebanon’s lack of reforms is alarming. Over the past four decades, several draft bills were put forth to the Lebanese Parliament aiming to reform the current retirement system and adopt a pension scheme, yet none have passed. The majority of the proposed reforms aimed to address the numerous drawbacks of the EOSI system, such as the large one-time payment as opposed to much smaller regular monthly payments, the lack of social security coverage for the self-employed and workers of the informal sector and the low employer contribution to the EOSI fund, which currently stands at 8 percent of the employee’s monthly salary.
Two paths through retirement
When designing any social security scheme, there are essentially two polarized approaches. The first is to define the benefits of the scheme — such as the payments during retirement — and subsequently determine the cost of those benefits, paid in the form of contributions by the employer, the employee and the government. These are known as defined benefit (DB) schemes. The second is to set the contributions to be paid by the participants of the scheme, which ultimately determine the level of benefits at the point of retirement. These are known as defined contribution (DC) schemes. Recent history has seen hybrid plans that combine both DC and DB schemes.
Back in 2004, the World Bank initiated a project supported by former Prime Minister Rafiq Hariri to implement a DC pension scheme. The cabinet voted in favor of it, but it was shelved after Hariri’s 2005 assassination and has since been collecting dust.
The folder is now being discussed again and amendments are being considered, following the 2008 financial crisis that significantly hit DC schemes. As pension funds witnessed their asset values dwindle, their benefits, which are not guaranteed, plummeted.
Parliament is currently considering either implementing the 2004 law with some caveats or implementing a proposal crafted by my actuary services firm calling for the establishment of two major funds at the NSSF to care for old age: ‘Fund A’, providing old-age pension coverage that would replace the EOSI and a new fund, ‘Fund B’, providing health care coverage for retirees.
Fund A combines the characteristics of a DC and a DB scheme by setting a level of financing to be paid to the NSSF by employers and employees. The employer contributes 12.5 percent and the employee contributes 4 percent of the employee’s monthly salary. The fund also guarantees a one percent accrual rate for every year of contribution as a minimum level of benefits for retirees, which ensures a decent standard of living. The design of Fund A aims to facilitate the NSSF’s work by linking the level of minimum benefits, contributions and the ceiling on contributable salaries to the average wage of covered employees.
It is worth noting that currently, the EOSI contribution is applied based on the full salary. In the current law, contributions to the health indemnity and the family allowance fund are capped to a percentage of a fixed salary that does not take into account rising wages.
Fund A would also accommodate a gradual expansion of coverage to all informal sector employees and employers, as well as self-employed persons who currently do not benefit from NSSF coverage.
The introduction of Fund B aims to provide healthcare to those most in need of it in our society: the elderly.
It calls on the government, employers and employees to contribute 2.5 percent, 0.5 percent and 0.4 percent, respectively, of the employee’s monthly salary. It also calls on the retirees to pitch in, through their pension, by providing 0.6 percent of their last monthly salary.
This proposal, currently being discussed in Parliament, aims to alleviate the burden on the Lebanese through a just social protection scheme.