Chronicle of the Middle East and North Africa

Arab Social Security Funds: Major Gaps and Risks

Tunisia and Lebanon are currently facing significant social security fund crises, a common issue present in most other countries in the Arab region, albeit to varying degrees.

Arab Social Security Funds
Jenaina, an elderly Tunisian woman, takes a look through the window at the cold and cloudy weather of January before leaving her house to collect plastic bottles. Tunisia, 08/01/2019. Chedly Ben Ibrahim / Hans Lucas / Hans Lucas via AFP

Ali Noureddine

This article was translated from Arabic.

Social security funds are intended to guarantee protections for workers in dire circumstances, such as sickness, old age, workplace accidents, disability, or maternity, as well as to pay for medical and hospital expenses. The vast majority of workers in the Arab region still lack access to these protections, despite the fact that this is a fundamental right. This is because social security funds’ operations are fraught with financial risk, and loopholes, or only serve a small portion of the workforce.

Tunisia and Lebanon are currently facing significant social security fund crises, a common issue present in most other countries in the Arab region, albeit to varying degrees.

In contrast, over the past few decades many countries in Central and Eastern Europe, Central Asia and Latin America have introduced major reforms to their social security systems. They have also developed legislation and work systems that support social security fund contributions with the aim of expanding the range of services offered by these funds and including the widest possible segment of their populations.

However, according to World Bank reports, the situation in the Middle East and North Africa region appears to be significantly different. Arab countries, in particular, have not demonstrated the same level of interest as other regions of the world in reforming their social security systems.

Rather, some of these countries have witnessed a marked decline in the comprehensiveness, effectiveness and coverage of their social security funds. This decline has been so severe that these funds are now on the verge of default, as is the case in Lebanon. Likewise, in Tunisia, the value of pensioners’ contributions has eroded significantly due to inflation, depreciation of the local currency and losses accumulated in the funds’ balance sheets.

This trend can be attributed to the relatively young demographic structure of Arab countries, where the percentage of retirees is low compared to the total population. As a result, many Arab governments have reduced their interest in the role of social security funds. Additionally, a large proportion of residents in rural and low-income areas rely on family and non-governmental solidarity networks instead of government-funded social security programs.

However, this interpretation of the role of social security funds is highly problematic. It focuses solely on the compensation and pension benefits provided by these funds, while neglecting other critical roles, such as offering compensation in cases of illness, maternity, accidents, unemployment and others.

This approach also disregards the importance of guaranteeing every individual’s right to a dignified and respectable retirement, irrespective of the percentage of retirees in the total population. Moreover, this approach neglects the principle of social justice that the state is obligated to uphold by offering social protection networks to everyone, regardless of the availability of civil and familial solidarity networks in certain environments.

In addition, the birth rate in the Middle East and North Africa region has significantly decreased from 6.3 children per family in 1980 to 2.7 children per family in 2020. In some countries like Lebanon and Tunisia, this rate has even fallen to 2.1 children.

As a result, it is anticipated that in the coming decades, these countries will face the challenge of providing adequate compensation and health coverage for a larger segment of retirees in comparison to the labor force size. The migration of people toward cities will also contribute to the weakening of civil and family protection networks – once regarded as the backbone of support in rural areas.

These developments highlight the importance of examining the work of social security funds in Arab countries and addressing the associated gaps and risks, which would hamper social protection networks. It is worth mentioning that these funds are usually funded through contributions paid by the worker and/or employer as a percentage of the salaries. Additionally, countries often contribute a certain percentage to enhance the solvency of these funds.

Tunisia: Gaps in the coverage and effectiveness of social security

In Tunisia, there are currently three social security funds: The National Pension and Social Insurance Fund, the National Social Security Fund and the National Health Insurance Fund.

However, the comprehensiveness of these funds is a major issue as more than 1.5 million Tunisian workers, constituting approximately 42 per cent of the labor force, are employed in the informal sector and do not benefit from any of the three funds’ protections or legal guarantees. The exclusion of such a large segment of workers highlights the first problem facing the country’s social security system.

The second problem concerns the accumulation of deficits in the funds’ budgets, resulting from poor management and planning as well as high costs relative to revenues and contributions. For instance, the National Pension and Social Insurance Fund is projected to have a deficit of around $2.2 billion, while the Social Security Fund’s deficit is expected to reach $1.76 billion by 2030. These financial issues could impede the ability to provide adequate social protections for retirees and other beneficiaries.

In recent years, the COVID-19 pandemic has further exacerbated the financial losses of these funds. The government’s decision to grant special exemptions allowed companies to default on their subscription payments, adding to the funds’ budget deficits. The economic slowdown and recession also resulted in a decrease in private sector subscriptions, while the expenditures of the three funds remained high, creating imbalances in their budgets.

The most concerning issue is the interdependence among the three funds, which means that the failure of one fund can lead to the collapse of the entire social security system. For example, the National Social Security Fund and the National Pension and Social Insurance Fund currently owe $2.15 billion to the National Health Insurance Fund. If either the insurance or pension funds default, it would automatically trigger a parallel default in the health insurance fund.

The high deficits and interdependence of these funds pose a significant risk of default in the future, jeopardizing the compensation and health coverage of workers enrolled in these programs. Many Tunisian economists have warned about this looming threat in recent years.

Furthermore, because of inflation, the value of contributions paid to these funds has decreased, making the social security networks that these funds are intended to offer less effective. After peaking at about 8.6% in 2022, the Central Bank of Tunisia predicts that the country’s inflation rate will climb to 11% in 2023. Although the contributions to the three accounts have increased, they have not done so proportionally to the rate of inflation, and the ongoing deficits hinder any balanced growth.

Lebanon: Collapse wipes out workers’ guarantees

In Lebanon, approximately 70 per cent of workers are employed in the informal sector, which means they do not receive any health coverage or retirement benefits.

The National Social Security Fund (NSSF), which offers sickness, maternity, and old-age benefits through three different funds, covers the majority of the workers. The NSSF’s performance, however, has recently declined as a result of a reduction in the coverage percentage offered by the fund, which is currently only 2.5% of the hospital bill, for example. This decrease is due to the devaluation of the Lebanese pound and the health insurance contribution’s value being correlated with the value of the local currency (prior to the onset of Lebanon’s monetary crisis in 2019, the percentage of coverage was as high as 90%). Furthermore, the devaluation of the pound has caused the end-of-service pay to lose more than 97% of its value.

The National Social Security Fund in Lebanon is beset by a number of structural problems, such as lax government control structures and the ease with which companies can avoid their requirement to register wage earners and workers in the fund in order to avoid paying monthly payments. In addition, Lebanon suffers from a weak and flimsy labor union movement, which denies the work force of bargaining leverage when dealing with employers and governments, unlike most other Arab nations.

Due to the concentration of the bulk of its funds in investments involving the state’s sovereign debt or the local banking sector, the National Social Security Fund in Lebanon also faces a sizable risk. For more than three years, the state has been unable to pay its bills, and during that time, Lebanon’s financial sector has been plagued by serious problems. Because of this, it is uncertain what will happen to these reserves, and given these investments, the fund might severe large losses.

The model is repeated in many Arab countries

The challenges faced by Tunisia and Lebanon are not unique, as many other Arab countries are also grappling with monetary and financial pressures that affect social protection networks. For instance, in Algeria, social security funds struggle to meet their obligations to the insured, while Syrians are suffering from the repercussions of war and financial crises that have affected social protection programs. In Jordan, only 27.8 per cent of workers have access to health coverage, and more than 76 per cent of workers will not receive any compensation or pensions in the future.

To address these challenges, Arab countries need to urgently implement plans to save their social security institutions and funds. These plans should allocate adequate financial resources to address the losses and deficits that have accumulated over the years. As the number of retirees increases, the burden on these funds will become even greater, making it imperative to take immediate action to address their crises. Governments should also establish oversight and inspection frameworks to combat employers’ evasion of registering workers in these funds and ensure that workers are protected by legal work contracts.

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