pensions
Written by:
Munther Al-Arayedh, MBA, CPA
In 2018, we posted a series of articles discussing Bahrain’s Social Insurance dilemma. You can get up to speed by reading these articles:
Bahrain’s Social Insurance – Part 1: How Did We Get into This Mess?
Bahrain’s Social Insurance – Part 2: How Do We Get Out of This Mess?
Bahrain’s Social Insurance – Part 3: Complete Overhaul
This issue subsided for a while and has recently re-emerged, hence we believe it was important to revisit this topic and shed some light on the measures currently under debate.
3% Suspension
One of the most sensitive measures that has spurred a lot of contempt is the suspension of the 3% annual increase in pension salaries. The reason for this increase is to maintain the salary level of the pensioner in light of economic inflation. However, the economy is never in a constant state of inflation. It rather goes through cycles of inflation and deflation. Therefore, it might have been more appropriate to set the percentage according to the current inflation/deflation rate of the economy. Accordingly, a pensioner might get an increase in his salary one year and endure a decrease the next.
Retire at 60
Another measure that caused a lot of debate was the increase of the retirement age. The retirement age is now set firmly at 60 for men and women. The earliest a male employee would be able to retire according to the new measures is at 55 years old assuming that he would accept a 30% deduction in his pension salary (6% for each year he/she retires before the age of 60). If we look into this measure with a more critical eye, an employee who has worked at the age of 30 would be able to retire at the same age as an employee who would have worked at the age of 18. Sure, the pension salary would differ, but the retirement age would be the same. That does not seem fare.
One Size Fits All
To be honest, none of the measures under discussion would actually resolve the core issue which is the fact that the very structure of our Social Insurance Organization is flawed. It follows a “One Size Fits All” strategy towards providing its services which can be beneficial to some and detrimental to many.
In our article titled “Bahrain’s Social Insurance – Part 3: Complete Overhaul” we argued that the pension benefits in Bahrain, and indeed in the GCC, are very generous. Pension salaries do not cease by the passing away of the pensioner. In fact, pension payments are still made to widows and widowers, children up to the age of 21, children in full time education to the age of 26, children unable to earn a living, daughters that are unwed, fathers that were dependant on their deceased child, mothers that are divorced or widowed, brothers to the age of 21, sisters if unwed, and even grandchildren if their father is deceased. This adds multiple new dimensions to the pension plan which would make it difficult to forecast a viable contribution rate.
On the other hand, in case the employee was given the option of selecting the benefits that he wishes to extend to his family and in return set a contribution rate for himself according to these benefits, this would take a huge load off the pension fund and possibly even the employee. A participant who is an only child for instance would not need to have the benefit of pension payments made to his brother or sister and conversely, would not need to pay the additional percentage of contribution affiliated with extending such a benefit. An employee who would like to retire at the age of 45 would probably accept paying a significantly higher contribution than an employee who does not have a problem retiring at the age of 65.
The idea we are proposing here is that the Social Insurance Organization should abandon the “One Size Fits All” policy and try to provide more tailored solutions to the public.