12/23/09Pension systems, in any country, confer three potential benefits. One is the social benefit that allows well-to-do retirees to maintain their pre-retirement consumption and saving habits and, for the less well-off, provides a safety net against poverty. The second is the financial benefit. Pensions, after all, involve liabilities that accrue over decades and require long-term investments, which in turn can decrease the volatility of financial markets and deepen a country’s capital markets. The worldwide financial crisis has reminded the world, if a reminder was needed, how important this is. The third benefit of a pension system is economic: giving people another—for some a key—incentive to work, and thus bolstering the labor market and making the country as a whole more competitive. In effect, a country with a strong pension system signals that it supports the rights of laborers, and as a result attracts workers for the long term.
Not every country’s pension system produces all three benefits, but pension systems in highly developed countries tend to provide benefits in most areas. In the GCC, however, the pension systems work primarily toward a social goal, and do little to further the economic and financial goals of the region. And although the systems are fully sustainable now, with 25 working people contributing
to pension funds for every one person who pulls money out of them, by 2050 this dynamic will change dramatically. The ratio of contributing workers to retirees will drop to approximately three-to-one in some countries. The GCC’s pension funds will not be solvent if changes aren’t made. Pension reforms are needed to strengthen the financial underpinnings of these funds, preserve their role as safety nets for citizens, develop the region’s capital markets, and deepen the efficiency of labor markets throughout the region.
Among the most important reforms is opening up the GCC’s pension systems to foreign-born workers and to the self-employed. This would substantially increase the size of the pension pool, making the system more financially secure and giving the region’s capital markets a shot in the arm. A second fundamental reform—related, in some ways, to the first—is reducing government’s role in administering pensions and taking care of workers in their retirement. It would be better for the economy if the GCC had a vibrant industry of financial-services companies, the kind that exists in many other parts of the world, to handle part of this work.
A third critical reform is the introduction of voluntary retirement savings, so that workers have the option of saving money above and beyond the mandatory amounts that their employers and the government set aside for them. Besides giving workers a convenient way to automatically help increase their savings, such a reform would also set the stage for governments to ask workers to share more of the responsibility for their retirement savings. A fourth big reform would be to make workers’ retirement accounts portable, so they wouldn’t face the prospect of losing their pensions if they switched jobs or left the country. This would be a particularly useful policy change in a world in which business is global and mobility is here to stay.
The opportunity exists for the GCC countries to make reforms to their pension systems that would contribute to the development of the region’s capital markets and deepen the efficiency of labor markets. Done right, these reforms could help the GCC’s pension systems advance from their rudimentary state and become among the best in the world.
