Monday, April 13, 2015

Jordan’s public pension cost: Debunking the myth of in-elasticity.


Standing at the same amount as the budget deficit, Jordan’s bankrupt public pension system is funded solely by new debt. Rationally reducing its burden is of prime importance.

At the parliamentary discussions of the Government budget earlier this year, multiple speeches talked about the “inelasticity” of the Government’s current expenses. The rationale went thus: 85% of the total central government budget is made of current expenses of which the vast majority is salaries and pension costs. These cannot be reduced.

Lets focus on public pensions which is the legacy civil and military pension system that exited in Jordan prior to the Social Security corporation. Public pensions expenses totaled 1080 million JDs in 2014 while pensioners’ contributions only amounted to a mere 20 million JDs. Public pensions are almost solely financed by new debt since the pensions’ deficit is the same as the central government’s budget deficit after aid. Pensions total 17% of all current expenses and 15% of all expenses.

By end of 2014, Jordan had 312,000 pensioners on the civil and military public pension (219,000 alive pensioners, and 93,000 heirs to deceased pensioners). In the month of November 2014, the pensions amounted to 93 million JDs with the average pension salary being 300 JDs (monthly average of 374 JDs for the alive pensioner and 125 JDs for the heirs salary).

A preliminary look might conclude that nothing can be done. Reducing such low average salaries will cause major disruptions of social stability and hence this file is best left alone. This neglects that fact that averages are the best way to hide massive inequalities. Remember the old joke where the security guard says: The average of my salary and that of the CEO is 20,000 JDs a month!

Given the massive burden that the public pensions have on the economy and debt levels, its cost structure must be fully revealed. If one assumes that 3000 pensioners receives monthly pensions of 2500 JDs, these 1% of pensioners receive 8% of total pensions. Possibly, some 20% of pensioners in Jordan get more than 60% of total pensions by value. Government transparency on the pension costs of those at the top percentiles is much needed here.
Public pensions cost can be reduced fairly, without hurting the poor or the middle classes and without infringing on any rights. For example, salary raises allocated based on medical impairment should be audited to weed out fraudulent medical impairment claims which add to basic pension salaries. In the cases where the pensioner with a fraudulent medical impairment claim is genuinely poor, the pension can remain as a special exemption.

The Government can also pause paying any pensions for those that have not finished at least 16 years of public service and are also under 60 years of age. Under the absurd pension laws that Jordan had, MPs and ministers got generous pensions even if they only served a few weeks! The Government can resume their pensions after the reach 60 and provided they are indeed retired. This suggestion would need a retroactive legislative amendment to the law.

The government can also introduce “means-testing” for pensioners. Pensions can be “paused” (but not scrapped) for wealthy pensioners that do not need their pension. If a pensioner’s salary is a mere say 10% of his/her income, the government can pause the pension salary with a promise it to pay it back in the future. Such pensioners can be given “zero interest coupons” by the government payable when the public debt reaches 60% of GDP or lower (for example). These wealthy pensioners can also be thanked in public with their names published for lending the government their pensions at zero interest until Jordan’s public debt cost reaches more manageable levels.

Any reduction in the public pension cost is good news. Even a 10% reduction means over 100 million JDs in less extra debt annually and lower debt service burden. The reduction, which will primarily come from the rich, will also not affect the levels of private consumption in the country and will therefore have no effect on economic growth. 

If there is a will, there is a way.

No comments: