A holistic approach needed for reforming Iraq’s pensions system in line with international labour standards

A pension system is at the heart of social protection. By ensuring income security for older persons and other vulnerable groups, it prevents poverty, reduces inequality, and smooths consumption. A pension system also affects the working population’s labour market choices and has important fiscal implications. 

In spite of important legal reforms, poor implementation and asymmetries between public and private sector make Iraq’s current pension system is highly fragmented, inequitable, and inefficient. The pension coverage gap in old age is projected to rapidly widen, particularly for women outside the labour market and workers in the informal economy. Moreover, under current policies, the total fiscal cost of the public, private, and budget financed pensions is expected to remain close to 4 percent of GDP annually for the next eight decades. Fiscal spending on pensions would continue to disproportionately benefit relatively better off formal workers participating in public and private contributory schemes. The system, therefore, creates an uneven playing field between the public and private sectors, contributing to the continued expansion of an already outsized civil service and holding back much needed economic diversification and private sector growth.

The policy note “Towards an Inclusive, Equitable and Sustainable National Pension System in Iraq”, jointly published by the International Monetary Fund (IMF), International Labour Organization (ILO) and the World Bank, emphasizes the need for comprehensive pension reforms in Iraq that enhance equity, adequacy, and sustainability of the contributory system, while extending protection to those who remain excluded, especially women.

The paper was produced as part of the global partnership between the ILO and the IMF in the area of social protection to promote the achievement of the SDGs and related targets, especially targets 1.3 and 3.8, through the promotion of adequate, sustainable and sound financing of social protection systems, including social spending floors and extending social protection to all, where Iraq was identified as one of pilot countries.

A mosaic of schemes: an overview of the pension system in Iraq

Iraq’s pension system is a mosaic of fragmented schemes shaped by the country's complex political history. A contributory pension scheme serves public sector employees, characterized by high coverage and relatively generous rules and benefits. This includes public sector workers who retired before 2006 and their survivors, whose pensions are funded from the government budget. 

Alongside this, there is a contributory pension scheme for private sector workers, recently reformed through legislative changes introduced by the Law on Pension and Social Security for Private Sector Workers No 18 of 2023, supported by the ILO. Regardless of its strong alignment with the ILO Social Security (Minimum Standards) Convention, 1952 (No. 102), it yet features low coverage and less generous benefits compared to the public sector. The private sector pension scheme is estimated to effectively cover about 500,000 workers. 

A third component of the pension system includes budget-financed schemes for beneficiaries of the contributory system before 2006, as well as non-contributory benefits for families of martyrs and victims of terrorism and political persecution. 

Despite the deeming extensive coverage, the majority of the elderly population does not receive individual pensions. Instead, they rely on other parts of the household-based and poverty-targeted Social Safety Net (SSN) programme, personal savings, intra-household financing, and other informal support mechanisms.

The SSN program provides support to households living below the poverty line who are not covered by the contributory pension system, including elderly individuals. Approximately 225,000 older persons benefit from cash transfers through this national program. 

The collaboration that led to this joint paper is a unique global example, bringing together perspectives and mandates from the International Labour Organization (ILO), the International Monetary Fund (IMF), and the World Bank (WB) on the topic of pensions. The paper underscores the centrality of international labour standards and social dialogue in advancing complex social security reforms. The principles outlined in ILO Convention No. 102, which Iraq ratified in March 2023, will go a long way in guiding the government, workers, and employers' organizations in their efforts to realize the universal right to social protection. 

Shahra Razavi. Director, Social Protection Department at International Labour Organization. International Labour Organization.

Towards a holistic vision: coupling parametric reforms with institutional restructuring 

To address imbalances in the current pension system and pave the way towards more sustainable and equitable solution for income protection in old age, the paper recommends parametric reforms driven by multiple considerations. These reforms aim to enhance both inter-generational and intra-generational equity, reduce labour market distortions, and ensure the viability of the national pension system. They seek to address the State Pension Fund's deficits before they become unmanageable, significantly reducing the fiscal burden. Additionally, the reforms focus on improving benefit adequacy and coverage, preventing long-term deficits in the private sector, targeting contribution subsidies to the most vulnerable workers, and aligning pension parameters across the public and private sectors.

The proposed reforms aim to achieve several interrelated objectives. First, they expand coverage for private sector workers, establish incentives for contributions throughout one's working life, and promote economic participation and formalization.  The reforms also ensure better alignment of replacement ratios between the public and private sectors and across future cohorts of pensioners. This proves particularly critical for Iraq as current benefits distortions across the two sectors adversely affect labour mobility and private sector growth.

Furthermore, the proposed reforms seek to significantly reduce the overall fiscal costs of the pension system while reallocating public funds to extend pension protection to the most vulnerable segments of the population. Implementing the suggested parametric reforms is expected to lower the fiscal cost to approximately 0.7 percent of GDP by 2075, and further to between 0.1 and 1 percent of GDP by 2100. The reforms also introduce a system of regular pension indexation to maintain benefit adequacy over time.  Adopting parametric reforms for both the public and the private sector schemes may not fully ensure the long-term equalization of the pension system. Over time, various political pressures could lead to divergent parameters, potentially causing the reemergence of the current system's shortcomings. This risk can be mitigated by combining parametric reforms with measures to reduce institutional fragmentation through either partial integration or harmonization. 

Partial integration involves a unified administration of one pension scheme for private sector participants and new public sector entrants, managed through a single fund. Existing public sector employees and pensioners would remain as a closed group, administered separately. Under the harmonization option, separate funds are maintained for the public and private sectors. In both options, a common set of parameters would apply to all public and private sector participants, with partial application of reforms to currently registered workers.

© ILO/Apex Image/2009/06, Iraq, Baghdad

Pillar 0 pension: establishing general social protection for older persons to reduce old-age poverty

Efforts to expand the contributory system alone will not provide income protection for all older individuals, even in the long term. As coverage extension progresses, there are still unmet needs for income support among the current cohort of elderly persons in Iraq and those retiring in the short to medium term, who will likely not be entitled to contributory pensions. Additionally, the expansion of social security coverage only benefits those who are employed. In Iraq, the majority of the working-age population, particularly women, are not in the labour force and are therefore not covered by contributory pension schemes. Demographic changes will lead to a rapid increase in the number of older persons without contributory pension coverage, even under optimistic scenarios with the expansion of legal and effective coverage through the new Social Security Law.

To fill the remaining coverage gap in old age income protection, the paper proposes options to design a Pillar 0 non-contributory pension. The first option is a universal non-contributory pension that is provided to all individuals above a specified age, regardless of income level, receipt of other income support, or any other criteria. The second is pension-tested non-contributory pension that is paid to all elderly individuals except those receiving a contributory pension for public and private sector workers. The third option is pension- and affluence-tested non-contributory pension, aiming to cover the "missing middle". By applying a broad range of income and as the basis to identify eligible individuals, it sets a threshold to identify high-income or affluent persons who would be excluded from the non-contributory scheme, along with those excluded under the pension test. 

Nevertheless, to be effective, the non-contributory pension must adhere to several core principles outlined in the International Social Security Standards, including ILO Convention No. 102. Firstly, the pension's value should be "sufficient to maintain the family of the beneficiary in health and decency." In all proposed options, the transfer value is suggested to be set at a flat rate. Regular (preferably automatic) adjustments of the pension level are essential to ensure it keeps pace with changes in the cost of living. Secondly, the predictability of payments is crucial, meaning they should be made regularly to allow recipients to budget and plan effectively. 

Furthermore, to guarantee the right to social security in line with the International Social Security Standards, the interaction between the SSN, where entitlements are at the household level, and Pillar 0 pension, which is an individual entitlement, needs to be considered. While enrolment in one scheme should not lead to an automatic exclusion from the other, the value of non-contributory pension received may be considered in the calculation of households’ income for participation in the SSN. 

The immediate costs of closing the coverage gap through a government-funded Pillar 0 pension range from 0.71 percent of GDP under the universal approach to 0.44 percent of GDP under the pension- and affluence-tested approach. The pension‑tested approach lies in between, at 0.58 percent of GDP. If a Pillar 0 pension is introduced, the long-term overall fiscal costs of the pension system is projected to be between 0.8 and 1.8 percent of GDP.

Reforming the pension system in Iraq is both complex and urgent. It requires a comprehensive vision for the long term and an integrated approach involving both private and public sector. The paper charts a possible way ahead for these important reforms, balancing objectives of adequacy, equity, financial sustainability and coverage expansion to deliver income protection in old age for all.

Luca Pellerano, Senior Social Security Specialist for the Arab States Region, ILO

Strategic Phasing and Stakeholder Engagement for Successful Pension Reform

Implementing a comprehensive pension reform in Iraq should be approached as a gradual, multistage, and multi-year process due to various political, economic, and capacity constraints. To alleviate some of them, it is essential to sequence the reforms appropriately. A broad consultative process is necessary, involving key stakeholders (including representatives of currently uncovered groups) to build consensus on the reform measures. Given the complexity of the political economy surrounding pension reforms, effective communication with the public about the chosen reforms will be crucial.

A holistic approach to pension reforms should integrate efforts to enhance the equity, adequacy, and sustainability of the contributory system, while also extending protection to those who are currently excluded, particularly women. This approach can garner broader political support for the reform package and aligns with the recent commitments of the Government of Iraq under ILO Convention No. 102. It is essential for national stakeholders to determine the optimal allocation of government resources across various pillars and components of the social protection system—contributory, tax-financed, and other social protection instruments—to maximize protection for the most vulnerable.

Rethinking Public Spending: Addressing Long-Term Structural Challenges and Expanding Coverage

Long-term structural challenges facing Iraq's pension system, especially considering the ongoing demographic transition, necessitate a fundamental rethinking of the role of public spending on pensions. General budget resources would be better allocated to extending adequate pension coverage to the growing number of uncovered individuals, particularly informal workers and women outside the labour force. This deems more preferable to providing implicit or explicit subsidies to formal workers, which pose issues in terms of both fiscal efficiency and equity. Achieving this requires a more effective allocation of public spending between the contributory and non-contributory pillars of the pension system.

By using a portion of the fiscal gains from the proposed contributory reforms, the government could finance a universal, benefit-tested, or affluence-tested Pillar 0 pension scheme. This scheme would provide coverage to the majority of older persons, particularly older women, who will remain excluded from contributory pension schemes for several decades. The feasibility of expanding coverage through a Pillar 0 pension depends on stakeholders' commitment to adopting the parametric reforms proposed in this paper, along with broader fiscal reform plans that can create the necessary fiscal space.