Bill on retirement: urgency to reform pension plans . . .

It is that time again of the State Pension Review at all levels in Algeria.  A Bill on Retirement schemes is currently under discussion; it is about the review and reform of the State Pension national plan prior to be voted in and applied as of January 1st, 2017.

Because of the demographic structure, and the prevailing rentier type of economy of the country, the pension funds are entirely dependent on this legislation.  It is a very sensitive issue whereby the importance of transparency in the decision process and especially of a supporting social dialogue that should be maintained at all times.

The value of the currency, the Dinar and the employment rate that are for more than 70% dependent on public expenditure mainly supported by hydrocarbons and their derivatives exports revenues, are making it for the State Pension Funds somewhat difficult to meet the demand.  Due to a drop in the oil price, 2 years back, these Funds were reported to be on the brink of collapse.  Although the troubles that plague the State Pension Funds system get the most attention, similar dangers now threaten many other kinds of Social Security funds.

Employment Structure

The Algerian population was 40.4 million on January 1st, 2016.  In the local ‘Office National des Statistiques’ (ONS), a study published as at end of 2015, the active population was 11.932 million inhabitants.  The unemployed population in the same period was 11.2% with a rate of 29.9% for the youth; 9.9% for the male and 16.6% for female.  Still according to the ONS, the structure of employment by sector of activity brings out a third sector (trade and services) in progress at 59.8% of the total workforce, followed by Construction at 16.6%, Industry at 13.0% and lastly Agriculture 10.6%.  The breakdown according to the legal divide highlights a dominance of the private or mixed sectors, with a relative share of 58.8% of total employment, including the informal sphere which, according to the Department of Labour would concern 25 to 30% of the country’s population.  Salaried manpower is the dominant form of employment with 65.3% in the formal private and public sectors but with wage disparities and also significant observed differences between genders.  Female employment is characterized by a greater concentration in the public sector (61.2% of total employment).

What is the share of the Public Service ?

According to the Public Service directorate, the number of officials as at January 1st, 2015 is 2.020.296 comprising 1.608.964 full-time (79,64%) and 411.208 (20.30%) contractual agents.  Central administrations of the State is made of 313.171 agents or 15.50%, decentralized services 813.725 agents or 41,57%, 312.009 territorial administration agents or 15.4%, the public administrative bodies have 449.268 agents or 22.24% and scientific and technological institutions 105.999 agents or 5.25%.

The youth or the under 30 years old represent 274.074 agents, the 30 to 40 years 735.756 agents and 41 to 50 years 668.725 agents, the 50 to 59 years 92,580 and the more than 60 years only 20.944 agents.

By sectors, the Interior represent 29,22%, Education 29,34% with a number of 297.394 on a total of 592.831 agents, Public Health 13.19% with a number of 138.581 out of 266.525 agents, Higher Education 8.50% with a number of 95.118 out of 171.761 agents, 4.15% for Finance, 2.80% for Vocational Training, Justice with 2.16% and all other sectors are of 10.64%.

In comparison, Morocco had in 2015, 900,000 functionary staff for 35 million inhabitants, (ratio 25.7), Tunisia for 11 million inhabitants had 630,000 officials (69.3) that according to the IMF, for 2013, Tunisia had 44 employees for every 1,000 people, while Morocco had a ratio of 27 staff for the same number of inhabitants.  Algeria unlike its neighbours had a ratio for 2015 of 50.5 far behind the European standards.  But a global ratio that can veil effectiveness must therefore calculate the optimisation of the value of public service, which creates no value, except in education and health however indirectly according to a recent UNDP report and this in order to bring the State to the citizen.

What is the situation of pensioners before the current law?

Under the current system, any person who has cumulated thirty-two years of activity may, if he or she so choses, go into retirement without waiting for the legal age of 60 years.  According to figures of the national State Pension Fund, 246,503 Algerians have benefited from this pension regardless of age, out of a total of 1,740,281 recipients as at December 31, 2015.  So Algerian insurance plans other exceptions at the start in 60 years, as older people more than 50 years old with 20 years of activity that can benefit from a ‘proportional retirement’, or women who may apply for their retirement at age 55.  The amount of the retirement pension cannot be less than 75% of the guaranteed national minimum wage (DZD18,000 per month since January 1ST, 2012).  There is however some exception in so far as senior functionaries of the State and all former members of governments and the armed forces who could benefit from a pension up to 100% after a minimum of 10 year service.

Nevertheless, the base of calculation for a normal superannuation in Algeria is based on the last five years, or on the best five years.  According to some other source close to the Ministry of Labour, the annual payments of the State Pension Fund in 2015 reached approximately 2,700,000 beneficiaries, of which 1,700,000 receiving pensions and allowances, and the remaining 1 million concern reversions, i.e. post-decease of this type of benefit recipients.  The Executive Decree on non-employees working for their own account and affiliated to the National Fund of Social Security (CASNOS) does not change regarding the age of retirement for this category of workers.  Article 9 of the Executive Decree of November 14, 2015, stipulates that without prejudice to the provisions of articles 8 and 21 of the July 2nd Act, the base used for the calculation of the retirement pension is constituted by the calculated average plates of assessment of the best ten years.  And according to this Decree, the non-salaried person engaged in an activity for his own account and having not met  “the working conditions and contribution required by the regulations and the legislation, is entitled to a validation of years of insurance within the limit of five years, in return for cash contributions.  Future of sustainability of pension plans is linked to a new model of growth creating value; including the segments are a new policy of employment, management of the social security and taxation.  With regard to employment policy past and present has been to prefer the distribution of employment income (wages paid without productive counterparties) employment, that is to say implicitly helping raise unemployment.  Such plans can slide along for years hiding their growing internal deficits with accounting tricks.

As for the new project of pension funds, the Government sees a way to counter the risk of bankruptcy of credit unions, others some see it as a social injustice, by the fact that there is no standardization of different pension plans.  For the Government, the proportional retirement without age requirements constitutes a threat to the financial equilibrium of the State Pension Funds and must, therefore, make its transformation.  For the Department of Labour, employment and social security between 1997 and 2016, nearly 890,000 retirees were the beneficiaries of retirement before age 60, or 52% of the total number of direct pension served by the national system of retirement, with an annual financial burden of over DZD405 billion.

The ratio of the number of workers contributing to a pension is currently at 2 for 1 while the standard to ensure the viability of a pension system is at least 5 paying asset for 1 retirement.  The national pension system serves more than 3 million pensions for an annual global expenditure of more than DZD870 billion.  According to Prime Minister A. Sellal, in a statement to the Algerian Press Service, said: “The number of contributors to a pension has declined significantly since 1980, a situation that required a reform of the national pension system, with the review of the age of retirement.  In 1980, seven workers contributed to one retired person.  Today, they are less than three to contribute to each pensioner”.  To the Government, the pension system is based on the principle of intergenerational solidarity, which can ensure that the more than 3 million pension and that the concern of the State, through these new legislative measures, is to ensure the right of future generations to the retirement pension and the sustainability of the financing of the State Pension Fund.  As such, the amending and supplementing of certain provisions of the 1983 July 02 Bill essentially, is concerned with the maintenance of the minimum age of retirement of 60 years for men and for women at 55, to allow workers to voluntarily pursue their activity beyond the age of 60 years, within the limit of 5 years.  As a matter of fact, these plans did presumably hide for years their growing internal deficits with accounting tricks.

What for the independent unions that oppose the project,

Beyond the deficit of the State Pensions Funds, which seems to be in the chronicity, the financial situation of the CNAS is not as pretty and if reimbursements are not revised downward by taking drastic measures the Social Security fund risks bankruptcy.   The unions highlight the ONS data, according to which more than 4 million employees (mainly from the private sector are not reported to social security, which would give 10 million employees affiliated with CNAS, and not 6 million as is the case at present but don’t advocate not operational solutions to integrate the informal sphere which paradoxically with the housing crisis acts as a social valve).  

Social Security, which seems to be paying out more than it takes in, the Minister of Labour, efforts are made in this direction where in 2015, 153,000 employers meet their obligations with Social Security and have respectively reached 1,600 and DZD300 billion.

Moreover, these unions advocate reviewing the Special Pension Fund (FSR) for the former ‘Executives of the State’.  A list, however “limited” was drawn with initially the Presidency, Ministries, Heads of Military Regions, Members of the Supreme Court, Ambassadors, Heads of public enterprises, etc.  This will now incorporate also the Deputy Directors of Departments, Judges, and other Executive Directors and Secretaries General of regional governorates.  The status of a Member of Parliament for instance stipulates that a subscriber, who completed 20 years of service, could claim, regardless of age, a pension equal to 100% of compensation perceived in his capacity as an MP or of the more favourable remuneration, indexed to inflation rate.

Without going into controversy on such a sensitive topic, and taking into account both the financial situation of the country and that of the new global changes, it is to rearrange the collective practices and reduce the nock-on effects on employment by increasing income inflexibility and working conditions by continuing training programmes so as to allow adaptation to new techniques and organizational arrangements.

It is desirable that a decentralisation of the management of education in a comprehensive way in order to play the regional competition and its adaptation to the needs of society, with four major centres of excellence and avoid this myth of one University per one governorate.

The other axis of social cohesion is that of a new social security management. The financing of social protection continues to be sitting largely on social contributions absorbing the gains of productivity at the expense of employment and direct wages.  To recognize that with the decline of the employee due to the increase in unemployment, this weighs on behalf of social security, the deficit being covered by medium-term loans that will be supported by future generations.

Also the sustainability of the system may be threatened in the medium term and requires deep structural reforms.  In case of the sharp drop in the price of oil continuing and development being hampered further, one must think of long-term and not short-term measures.  Equity has changed and access to employment should be a priority because the current social protection tends to increase unemployment.  It is therefore not a change in the type of contributions that will solve the problems but instead in the mastery of both total expenditure and in the reimbursed one.

Also the whole of social security spending should not grow in volume, faster than the growth of the Gross Domestic Product (GDP).  This rationalisation of expenditure does not mean blind restriction in order to cover the needs of the targeted poorest.  As for the tax system, the level of direct tax in a company could be a way of measuring the degree of membership of the population; there is in any case an urgent need for a new policy, because the tax system is at the heart of the notion of fairness in the country.

The fact that to date, no precise time quantified survey did highlight the links between the distribution of national income between social classes, the evolution of the inflationary process and the consumption model, would be essential information.  An effective tax system must find the way to collect revenue with disrupting the least possible the mechanisms that lead to an economic optimum, assuming a mutation of the welfare state.

In summary, the purpose of the pension funds is not unique to Algeria, globalization would require of many countries to wrench out turnarounds as a factor of adjustment to international competitiveness.  Urgent reform for the benefit of future generations is needed, putting by the emergence of productive businesses for its sustainability.  And most importantly, austerity must be shared; the officials leading by example.

Therefore, the long-term solution would definitely involve a new social model and thus a profound revision of the current political, social and economic policies that with the drastic fall in the price of oil are now threatening the sustainability of the current State Pension Funds model.  The reality is to reconcile a deep social justice, while not sacrificing any economic efficiency.

See (1) – Finance Act 2017-“what are the impacts on the economy and the purchasing power of the Algerians.

-Interview of Dr A. MEBTOUL, International Expert by the Spanish Press Agency (agencia EFE) at its request on 27/11/2016 (the EFE, founded in 1939, is the main news agency in Spanish and the fourth largest worldwide).  The interview will also feature in the American Herald Tribune in due course.