2024-04-29-IMF-Towards_an_Inclusive,_Equitable_and_Sustainable_National_Pension_System_in_Iraq_73页_2mb

Summary of Toward an Inclusive, Equitable, and Sustainable National Pension System in Iraq

Core Content

This document outlines the urgent need for pension reform in Iraq, emphasizing the system's fragmentation, inequity, and inefficiency. It presents a collaborative analysis by the International Monetary Fund (IMF), the International Labour Organization (ILO), and the World Bank, aiming to address the challenges of the current pension architecture and propose a more inclusive, equitable, and sustainable system.

Main Views

The current pension system in Iraq is highly fragmented and fails to provide adequate income protection to the majority of the old-age population and other vulnerable groups, such as survivors and persons with disabilities. It is also financially unsustainable, with fiscal costs expected to remain close to 4% of GDP annually for the next 80 years. The system disproportionately benefits formal workers and creates an uneven playing field between the public and private sectors, which hinders economic diversification and private sector growth.

The proposed reform seeks to align the pension system with international standards and best practices, reduce fiscal costs, and improve coverage and adequacy of benefits. It emphasizes the importance of a multi-stage, gradual reform process that involves stakeholder consultation and addresses political economy and administrative constraints.

Key Information

Current Pension System in Iraq

• Public Sector Pension Scheme: A contributory, pay-as-you-go system introduced in 2006, managed by the State Pension Fund (SPF). It includes legacy pensions for those who retired before 2006, funded by the government budget. The system has generous rules and benefits but faces sustainability challenges due to high benefit ratios and demographic shifts.
• Private Sector Pension Scheme: A contributory scheme, reformed in 2023, with lower coverage and benefits than the public sector. It includes voluntary participation for self-employed and informal workers.
• Budget-Financed Pension Schemes: Cover beneficiaries of the contributory system before 2006, families of martyrs, victims of terrorism, and politically persecuted individuals. These schemes are not linked to contributions and are funded entirely by the government budget.

Challenges of the Current System

• Coverage Gaps: Only 9% of private sector workers are effectively covered by the contributory scheme, with significant gaps for women and informal workers.
• Financial Sustainability: The system is at risk due to structural imbalances and increasing fiscal pressures. Public sector pension reserves are expected to decline rapidly, and private sector reserves are also under threat due to demographic changes.
• Pension Adequacy and Labor Market Implications: Current pension benefits are insufficient, and the system's design creates labor market distortions by favoring the public sector and discouraging private sector growth.

Principles of Pension Reform

• Inclusivity: Expand coverage to include informal workers, women, and vulnerable groups.
• Equity: Ensure fair benefit replacement ratios and reduce the disproportionate benefits to better-off workers.
• Sustainability: Reduce fiscal costs and improve the long-term financial viability of the pension system.
• Harmonization: Align the public and private pension systems to create a more level playing field.

Proposed Reform Plan

• Parametric Reforms: Include adjustments to contribution rates, benefit levels, and retirement ages to improve sustainability and equity.
• Institutional Reforms: Propose administrative realignment and the establishment of a more efficient and transparent pension management structure.
• Pillar 0 Pension: Introduce a noncontributory pension scheme to cover those without income in old age, ensuring broader social protection.

Impact of Proposed Reforms

• Fiscal Impact: The proposed reforms are expected to reduce the total fiscal cost of the pension system to around 0.7% of GDP by 2075, and further to between 0.1 and 1% by 2100.
• Equity Impact: Align replacement ratios between public and private sectors and ensure that vulnerable groups receive adequate support.
• Coverage Impact: Expand private sector coverage and introduce a Pillar 0 pension to cover the remaining uncovered population.

Closing the Coverage Gap

• Private Sector Expansion: Encourage voluntary participation and improve administrative procedures to increase effective coverage.
• Pillar 0 Introduction: Establish a government-financed scheme to provide pensions to those not covered by contributory schemes, particularly those without income in old age.

Financing and Fiscal Considerations

• The reform requires careful sequencing and gradual implementation to manage political and administrative constraints.
• Public communication and stakeholder engagement are essential to build support and ensure successful implementation.

Conclusion

The paper concludes that a comprehensive pension reform is necessary to address the systemic issues in Iraq's pension system. It advocates for a multi-stage process involving all relevant stakeholders and emphasizes the importance of aligning the system with international standards to ensure long-term sustainability, inclusivity, and equity.

Appendices and Supporting Information

• Appendix 1: ILO Convention No. 102, which Iraq has ratified.
• Appendix 2: Projected demographics and macroeconomic environment in Iraq.
• Appendix 3: Public Sector Pension Scheme Assumptions.
• Appendix 4: Private Sector Pension Scheme Assumptions.

Boxes

• Box 1: Highlights the labor market and demographic context in Iraq, emphasizing low participation rates and high informality.
• Box 2: Summarizes the main reforms introduced under the 2023 Social Security Law for private sector workers.
• Box 3: Discusses the sensitivity of baseline projections to civil service reforms.
• Box 4: Explains the multi-pillar approach to pension reform.
• Box 5: Reviews pension reforms in the Middle East and North Africa (MENA) region.

Figures

• Figure 1: Illustrates the structure of Iraq's national pension system and other social support for older persons.
• Figure 2: Shows the number of beneficiaries and fiscal costs of legacy and budget-financed pensions.
• Figure 3: Compares the projected support ratio of the SPF with cross-country benefit ratios and public pension spending.
• Figure 4 and 5: Provide baseline projections for benefit ratios and fiscal costs of the public sector pension scheme.
• Figure 6 and 7: Show baseline projections for private sector scheme reserves and fiscal costs.
• Figure 8: Illustrates partial integration and harmonization of pension systems.
• Figure 9 and 10: Present reform projections for benefit ratios and fiscal costs of public pensions.
• Figure 11 and 12: Highlight the projected cumulative budget support under harmonization.

Tables

• Table 1: Current and long-term stable contribution rates for public and private sectors.
• Table 2: Summary of the current pension systems in Iraq, 2022.
• Table 3: Proposed parametric reforms for contributory pension schemes.
• Table 4: Description of institutional reform options.
• Table 5: Risks and advantages of institutional reform options.
• Table 6: Scenarios for private sector coverage expansion.
• Table 7: Advantages and disadvantages of noncontributory pension options.
• Table 8: Cost of different scenarios of noncontributory schemes (percent of GDP).
• Table 9: Summary of required government fiscal expenditure on the pension system under current policies and reform options (percent of GDP).