ILO criticizes “fragmented and inequitable” pension system in Iraq

Shafaq News/ The International Labour Organization (ILO), a specialized agency of the United Nations, described Iraq's pension system as “highly fragmented, inequitable, and inefficient” in a report released on Wednesday.

The report highlighted that “despite significant legal reforms, weak implementation and inconsistencies between the public and private sectors render Iraq's current pension system severely fragmented and inequitable.”

“The gap in pension coverage for the elderly, especially women outside the labor market and those in informal employment, is expected to widen rapidly,” the report predicted. It also forecasted that under current policies, the overall financial cost of public and private pension benefits funded by the budget would remain close to 4% of the annual GDP over the next eight decades.

The report elaborated that financial expenditures on pension benefits disproportionately benefit the relatively well-off organized labor force participating in existing public and private contributory programs. Consequently, the current system creates an uneven playing field between the public and private sectors, contributing to an already bloated civil service and hindering economic diversification and private sector growth, which are urgently needed.

The policy note “Towards a Comprehensive, Equitable, and Sustainable Pension System in Iraq,” published by the ILO, the International Monetary Fund (IMF), and the World Bank, highlights the need for comprehensive reforms to enhance the equity, adequacy, and sustainability of contributory programs while expanding protection to excluded groups, particularly women.

This note stems from the global partnership between the ILO and IMF on social protection to achieve Sustainable Development Goals (SDGs), particularly targets 1-3 and 3-8, by ensuring adequate and sustainable financing for social protection systems, including social spending floors, and expanding social protection coverage to all. Iraq was identified as a leading country in this effort.

To address the current pension system's flaws and pave the way for a more sustainable and equitable old-age income protection solution, the policy note recommends several parametric reforms. These reforms aim to enhance intergenerational and intragenerational equity, reduce labor market distortions, and ensure the sustainability of the national pension system. They also seek to curb the deficit of the Public Employees' Pension Fund before its financing becomes unmanageable, significantly alleviating the financial burden.

Additionally, the reforms aim to improve benefit adequacy and coverage, prevent long-term deficits in the private sector, direct contribution support to the most vulnerable workers, and align pension parameters across sectors.

The proposed reforms strive to achieve multiple interconnected goals. Firstly, they aim to expand coverage for private-sector workers, ensuring incentives to participate in pension programs during employment and fostering economic participation and a shift towards a formal economy. Simultaneously, the reforms seek to align income replacement rates more closely between the public and private sectors and among future retirees. This is particularly critical for Iraq, where significant disparities in benefits between sectors adversely affect labor mobility and private sector growth. Moreover, the proposed reforms would substantially reduce the overall financial costs of the pension system while reallocating public funds to extend pension protection to the most vulnerable segments of the population.

Implementing the proposed parametric reforms is expected to reduce financial costs to approximately 0.7% of GDP by 2075 and further to between 0.1% and 1% of GDP by 2100.

The reforms also allow for regular pension adjustments to ensure benefit adequacy over time. However, adopting parametric reforms alone for both programs may not be sufficient to guarantee long-term pension system equity. Over time, various political pressures could lead to parameter divergence, potentially reintroducing current system flaws.

This risk can be mitigated by combining parametric reforms with measures to reduce institutional fragmentation, either through partial integration or alignment. To close the coverage gap in old-age income protection, the policy note suggests options for designing a non-contributory pension within the zero pillar.

The first option is a universal non-contributory pension, granting all individuals above a specified age a pension regardless of their income level, receipt of other income support, or other criteria.

The second option is a means-tested non-contributory pension, provided to all elderly individuals except those receiving a contributory pension from public and private sector employment.

The third option is a means and wealth-tested non-contributory pension targeting the "missing middle." This would exclude high-income or wealthy individuals, based on a broader range of income or assets, in addition to those excluded under the means test.

To ensure the effectiveness of the non-contributory pension program, it must adhere to the fundamental principles outlined in international social security standards, including ILO Convention No. 102. Firstly, the value of the non-contributory pension must guarantee a "decent life" for the beneficiary's family.

In all outlined options, it is proposed that the transfer value be set based on a fixed percentage. Regular adjustments to pension levels are also essential to keep pace with rising living costs. Secondly, it is crucial to ensure payment predictability, meaning that payments should be made regularly to enable beneficiary families to budget and plan effectively.