Generous Gulf pension benefits may soon be a thing of the past

With populations living longer and oil income expected to start tailing off, the region’s recent largesse may need adjusting, as funding for changed demographics could soon become unsustainable

AFP

A couple watch the sunset at the Red Sea resort of Jeddah in Saudi Arabia, December 20, 2023.

Generous Gulf pension benefits may soon be a thing of the past

Amer Ziab Al-Tamimi

last update on 25 Sep 2024

Gulf states have long been known for their young populations, but with longer life expectancies, the dynamics of their demographics are changing. Suddenly, there are more pensioners than ever before.

This has fostered debate in policy circles over how to pay for their retirements, with oil revenues in these resource-rich nations expected to decline over the next generation. This is a new problem for the Gulf, where the under-30s typically make up around 70% of the national population. With improvements in medicines and healthcare, people are living longer, making state pension systems more expensive.

According to actuarial estimates used by social security institutions, deficits loom in the coming years based on predicted oil revenue drops, meaning that governments may need to fill a funding gap to pay entitlements. Many pension fund managers invest in global stocks and shares, and while they tend to avoid anything perceived as higher risk, the money is nevertheless exposed to potentially volatile markets.

Time to adjust

It all adds up to an increasingly apparent need to review and rationalise elements of social security systems across the region, with government support in its current form set to become more difficult to provide. Key adjustments needed include raising the retirement age from its current level to over 65 for both men and women and rationing other benefits or implementing provisions that do not unduly increase costs.

In July, the benefits landscape shifted for Saudi nationals, with a higher retirement age for new workers, slower benefit accrual, and larger contributions.

Based on predicted oil revenue drops, Gulf states may need to fill a funding gap to pay pension entitlements

Gulf policymakers are looking beyond the region for ideas, particularly at Scandinavian pension set-ups, concluding that more prudent systems could be established to support Gulf pensioners without causing Gulf states excessive financial burdens. As the number of people covered by social security rises, more workers look to take early retirement, adding to the pressures on state pension schemes.

A history of benefits

European societies began to develop social security systems for citizens as early as the 16th century. Associations were formed, with workers from different sectors supporting members at the end of their careers. England's Poor Law, enacted in 1601, established the importance of the state providing social welfare for its citizens with a system of taxation to fund it. Later, as British and European migrants arrived in North America, they brought with them these traditions of social protection systems, enacting laws like those in England.

Although Americans have long been wary of government support for individuals, political developments and economic crises imposed obligations on the state and reinforced the importance of taxes on wealth and income to provide the necessary funds to support the livelihoods of low earners. It was not until 1935, in the aftermath of the Great Depression of 1929—and the sharp rise in unemployment this caused—that the US social security system developed, with half of America's elderly unable to meet their basic needs in 1934.

Pensions in the Gulf

As today's Gulf states gained their independence, they established pensions that have since undergone amendments. The establishment of the Gulf Cooperation Council (GCC) in 1981 led to the partial unification of the systems, and at its 20th session in Riyadh in 1999, the GCC Supreme Council went a step further.

It called for a "comprehensive and adequate" social security system in each state "to cover GCC citizens working outside their home country on the same basis as nationals of the host country or establish a joint social security fund to cover citizens working across the GCC countries."

More prudent systems could support Gulf pensioners without inflicting a financial burden on the state

In Saudi Arabia, Royal Decree No. 22 was issued in 1969 to regulate social insurance systems, including schemes for those working in the military, the public sector, and the private sector. At the age of 60, Saudis receive pensions, presuming they have a minimum working age contribution period of ten years.

The latest Royal Decree on social insurance was issued in July 2024. This sets a uniform retirement age (60) for both men and women. Workers can retire at the age of 60 unless the Council of Ministers decides to extend the working period until 65. The law provides several benefits that can improve the value of the retirement pension. The law also emphasises the right of the spouse and children to receive the pension in the event of the pensioner's death.

Pensions in Kuwait

Kuwait's pension scheme was established in 1955, and a later law (No. 3) in 1960 covered both civilian and military government employees. Law No. 27 of 1961 was enacted to independently define the retirement rights of military personnel. Decree No. 61 of 1976 adopted a comprehensive social security system, and the Public Institution for Social Security was established to provide sustainable insurance and social services.

Kuwait's social security system—which is seen as gold-plated and provides significant benefits to its beneficiaries—benefits all working citizens, whether in the public sector, private sector, or military. Men retire at 55 and women at 50, but any employee can apply for retirement after 30 years of service. Heirs of deceased retirees can also receive the pension. Furthermore, recipients can benefit from the country's Aafia healthcare system, allowing pensioners to receive treatment in private hospitals. This system relies on the state covering the cost of health insurance to provide services to pensioners. It costs the state over $1bn annually.

Looking ahead

The generosity of these systems may not be sustainable. This year, there were 350,000 pensioners in Saudi Arabia, an annual increase of about 30,000. Elsewhere, there were 169,000 in Kuwait, 78,000 in Oman, 35,000 in Bahrain, 20,000 in the United Arab Emirates, and 15,000 in Qatar. Yet only 28% of Saudi workers are still working by the age of 55, according to the General Authority for Statistics. In the rest of the rich world, that is far from the norm—the OECD average participation rate aged 55 and over is 67%.

This reflects the global changes, with those aged 60 no longer considered 'old' and those over 70 still more more than able to contribute in employment. The lesson for regional pension systems is that, as the world changes, the Gulf must change with it.

+ / -