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The retirement pain

by Maya Sioufi

When planning retirement in Lebanon, a key question one needs to ask is “Do I have enough money in my savings account for my old age?” And if not, then “do my children have enough money to pay for my old age?” If answers to both questions are a “no”, then you can still opt for renting a taxi license upon retirement to secure a source of income for the grey haired years.

Lebanon does not provide a public pension scheme — meaning regular payments upon retirement and for the rest of one’s life — to the private sector, guaranteeing instead an end-of-service indemnity (EOSI) paying retirees a lump sum at the age of 64, or earlier if demanded, with reduced benefits for those with less than 20 years labor under their belts. The amount paid is linked to the last monthly salary and the number of years toiled; if one enters the labor at age 21 and exits at 64 while remaining with the same employer throughout — a not too frequent path — then a maximum of 55 months salary is handed over at retirement. That’s equivalent to roughly four and half years spending at the same constant rate, after which the capital is depleted.

Currently the National Social Security Fund (NSSF), Lebanon’s public provider of social security for the private sector, requires from employers a monthly contribution equal to 21.5 percent of each employee’s monthly salary. Of this, 8.5 percent goes to the EOSI fund, which had tallied a surplus of $5.2 billion as of the end of last year. After taking 0.5 percent for administration expenses, the Daman — as the NSSF is commonly called — then keeps in its coffers 8 percent set aside for workers’ old age.

To work out the end of service indemnity, a complex formula needs to be applied to the last monthly salary. If requested upon retirement at the age of 64, an employee’s final salary is multiplied by 20 for the first 20 years toiled then by 1.5 times the remaining years in labor. If requested prior to completing 20 years of work, a punitive rate is then applied (see box).

What it means

Assume an employee named Karim starts work at the age of 24 with a starting salary of $1,000, receives a 5 percent raise annually until retiring at age 64; his last monthly salary would be $6,700 (see graph). The NSSF would then have to pay him a lump sum of $325,000 upon retirement. The total contributions by the employer to the Daman, however, stand at only $116,000, with the remaining $209,000* the responsibility of the employer to cough up. (Ouch.)

Now let’s theoretically assume that instead of contributing the 8 percent to the NSSF, the employer adopts a retirement savings plan with a local insurer for Karim and guarantees that he will pay him the same amount as the Daman upon retirement. Reinvested at a conservative 4.5 percent rate  (a typical rate at which a conservative local  insurance firm would reinvest today) the plan would dish out $260,000 instead of just the $116,000 raked up in the drawers of the NSSF. This means that the employer would have to top up the EOSI payment by just $65,000 upon retirement to guarantee the employee the same indemnity as the NSSF. That’s a difference of $145,000 and that’s just for one employee.

With slightly more than 50,000 private companies registered at the Daman employing an average of 8 employees per company, employers would be saving a mind boggling $58 billion based on these simplistic assumptions. That is if this calculation was always applicable, however, which it is not.

It gets a bit more complicated if one requests the EOSI payment before retirement. Let’s assume that after working for 15 years, Karim quits his job and requests his indemnity. He would then receive $17,000, whereas the total contributions by his employer to the NSSF would have reached $23,000, leaving the Daman with a tidy $6,000 in its coffers. So for the first 20 years of work during which the punitive rates are applied, the employer will not be requested to contribute additional cash when an employee quits, but will be fattening the NSSF’s wallet instead.

Once 20 years of labor are completed, the formula to calculate the lump sum payments becomes much more lucrative for the employee and punitive for the employer, as the reduced rates are no longer applied and the NSSF pays back more than the accumulated contributions. In Karim’s case, at the age of 45, his indemnity payment jumps by $17,000 in one year. Thus, employers might be happy to see their workers quit before the 20 years are completed.

Also, when the reduced rates are applied, the private insurance retirement plan generates higher returns, implying that had the employee gone for private insurance instead of the Daman — which he legally is not allowed to do — he would have secured a higher indemnity for the first 20 years of labor. It would also mean that had the employer invested the 8 percent with private insurance instead of the NSSF — which he is also legally prohibited from — and had he paid back to the employee the amount the Daman pays, he would have made money: up to $25,000 in Karim’s case for two decades work.

A flawed system

This simplistic case aims to reflect the inefficiencies of the EOSIs provided by the Daman from both the employers’ and employees’ perspective.

Retirement of Lebanese citizens is exclusively funded by corporate Lebanon as neither the employee nor the government participates in the EOSI. And it is not just a tax rate of 21.5 percent of employees’ monthly salary, as there is the additional stack of cash that employers have to cough up as a one-time payment if their workers are loyal for several decades.

As for employees in the private sector, if Karim relied solely on Lebanon’s public sector for social security he would find himself penniless within a couple of years of retirement, after which he would have to either reenter the labor force or beg for money for the rest of his life.

The punitive indemnity rate explained

If an employee works between one and five years, his end-of-service indemnity (EOSI) payment from the National Social Security Fund (NSSF) will be 50 percent of his last salary times the number of years he worked. If this employee worked between 6 and 10 years, his EOSI for the first five years will be calculated the same; the number of years he works more than five will then be multiplied by 65 percent times his last monthly salary. The rate between 11 and 15 years of work is 75 percent of the employee’s last monthly salary, and between 16 and 20 years it is 85 percent.

*Correction 23.10.2012: the figure is an overstatement as the employer is not held accountable for the half months benefit for every year of contribution beyond 20 years.

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