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A Look into the Bahrain SIO Pension Reform

With the recent news about our pension fund, I thought I’d do a bit of background research on the issue. There’s not much publicly available data (or at least I couldn’t find it) so I was kind of forced to piece together a lot of loose ends and make a lot of assumptions. Although I’m very much a numbers guy (data > people) I had to accept that I wouldn’t be able to come up with precise forecasts – and that’s okay. The purpose of this whole exercise is not accuracy, it’s understanding. A ballpark figure is enough to give you a sense of the situation, and the situation does not look great.

With that disclaimer, let’s start with the basics. The Social Insurance Organization (SIO) is primarily responsible for three things: pensions, work injuries and unemployment. As a fund, its income comes in the form of contributions from workers, and its expenses are (mainly) the benefits paid to pensioners and the unemployed and injured.

Contributions (feel free to skip this part to the more important stuff below):

So you and your employer pay in a chunk of your gross salary every month to the SIO, and you are insured against unemployment, disability and old-age. Also, the maximum "taxable" wage is BD 4,000 - so if you earn anything about that, the amount you contribute doesn't increase. We’ll be talking about the pension component specifically because that’s the biggest component and the one that is applicable to pretty much every Bahraini. By the time you hit the ripe old age of 60, you are eligible for retirement, which is calculated as:

Your average wage in the past 2 years * number of years of contributions (capped at 40 years) * 2.0%

So, as an example, if you earned BD 1,800 in year 58 and BD 2,200 year 59, that’s an average of BD 2,000. If you worked 30 years, that’s 2,000 * 0.02 * 30 = a monthly pension of BD 1,200, which would then grow by 3% annually.

Early pension: The pension is reduced by 20% if the insured retires before age 45, by 15% if aged 45 to 49, or by 10% if aged 50 to 54. You can also buy an early retirement, which was only available to public sector workers until only recently.

I do want to mention that receiving up to 80% of your previous salary (called the replacement rate) by age 60 is very generous - the OECD average is is 63% if you retire at or above that age.

Okay, now that critical part.

The way the SIO fund works is that the money you put away today is being used to pay for retirees’ pensions today. Your (and my) pensions will depend on future generations being able to pay for them at that time, assuming that the system is still functioning. This is similar to public funds all over the world, and, well, they’re all going to go to shit if they aren't reformed. For example, the US’s Social Security Fund is expected to become insolvent by 2034 (and we’re not far off from that).

If you look at the SIO's annual financial statements (you can find them on their website), you'll see that, up until 2016, the contributions from workers have always been higher than the payments to retirees every year. Since the SIO has had a surplus, its assets have been growing and it could invest these to make even more money. So far, so good.

But then, hello demographics. Bahrainis are getting older, not to mention that they retire fairly early (the average retirement age is 50) and they're living longer. In 2011, for every pensioner, there were 5.06 Bahraini workers. In Q1 2018, that number has fallen to 2.71. By 2030, I think there will be around 1 retiree for every 2 workers, if the average retirement age remains unchanged.

That shit just can’t work. Also, keep in mind that people at age 50+ have built up their salaries over their lifetimes, so their pensions are based on higher wages than those of the younger workers, who are paying money into the fund. So, as we move forward, thing will look more like this:

Looking at the SIO’s net profit (basically the annual surplus we just talked about) from 2010-2016, it’s been whittled down to almost nothing. It's partly because of labor costs and low asset returns, but a huge component of it is just population numbers. Net profit has gradually come down from BD 234 million in 2013 to BD 14 million in 2016. Based on the trend, I expect that the SIO will post a loss for 2017, whenever they release their financials.

And to add to that, the financials have mentioned a growing actuarial deficit. This means that a bunch of actuaries have looked into the future (probably 75 years like the US Social Security calculations), made a bunch of assumptions about the population of workers and retirees, figured out what the expected profit / loss would be every year, then discounted that back to today. That number, in 2016, was a cumulative net deficit of BD 10.4 billion, which is really large. I mean, the total assets of the fund are only BD 3.6 billion.

On, I found a breakdown of the population by age for 2010 and 2011, so I kind of stretched those out and made my own Bahraini population projections. I looked at people age 20-49 as working-age population and 50+ as retirees. I also had to make a few odd assumptions (e.g. taking 53% of the working-age population to be contributors) to get the numbers to sort of fit with the existing actual data, but I managed to get them within ballpark range.

The SIO had BD 3.6 billion net assets in 2016. Whenever it has a profit, this accumulates. Whenever it has a loss, this eats away from it. From 2017, the SIO will probably be posting a loss which will grow every year. Based on my rough-cut assumptions, the SIO’s assets will be depleted and it will be insolvent by around 2034 (I previously thought 2031, but after refining my calculations a bit, we managed to gain a few extra years). Again, however, I do have to stress that this is just an approximation. Nonetheless, even if I’m 5-10 years off (which I really don’t think I am) that’s still less than 20 years away. That means, barring any external involvement, by then, pensions will HAVE to be cut by at least 40%, since once the fund is insolvent it could only pay out what it collected during each year.   

This needs to be avoided, obviously. Well, there’s only so many things you can do:

  1. Increase fund inflows – either by increasing the social insurance contributions worker pay (so that 6% you pay might go up to 8%) and /or upping the retirement age. You can also raise the maximum taxable amount and cap the benefits at a lower amount. 
  2. Reduce fund outflows – reducing the pension benefits Any by the way, this is not new, if you go at least back to 2014, the financial statements explicitly said that the way to fix the actuarial deficit was (note that the actuarial deficit back then was quite a bit smaller too):

So what do I think we need to do? Well, recently, there was a proposed law that "gives absolute jurisdictions that are related to the pensions of the employees of both the military and public sectors, in addition to members of the Legislative Authority (Shura Council and the House of Representatives), to the Social Insurance Organisation (SIO)."I don't think that should be the case obviously. The first step that's needed is public awareness and transparency about the issue. People need to understand how the system operates and what the risks are. These things need to be out in the open, not hidden away and decided about under the cover of darkness.

From there, I'd say the next steps would be to remove the BD 4,000 taxable cap and reduce the maximum pension amount. The SIO is underfunded. The people who should be plugging that gap first are the rich - not only is it fair, but it is just too. Another thing is that retirement ages should be gradually increased; people are living longer and it would only make sense. That being said, I also think that people are retiring early because the system itself (in the public sector) discourages impactful work, so people are just being rational. Why would I keep working another five years if there was no real point to it? Incentives need to change. The whole culture needs to change.

And then, yes, the pension system needs to be reformed, in one way or another. And the longer we wait, the bigger that deficit becomes. 

Anyway, just to note, This isn't just a Bahrain issue, many countries around the world are facing similar issues. The US, for example, (today in fact) announced that its Social Security fund would become insolvent by 2034 if reform isn't enacted. It's a goddamn global shitshow.

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