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 should be of prime importance.
By Jawad J. Abbassi
At the parliamentary discussions of the government budget earlier this year, much was spoken about the inelasticity of the government’s current expenses. The rationale went like this: 85 percent of the total central government budget is made up of current expenses, the vast majority of which is set aside for salaries and pension. These, common thinking goes, cannot be reduced.
Let’s take a closer look at public pensions, which is the legacy civil and military pension system that existed in Jordan prior to the Social Security Corporation. Public pensions expenses totaled JD1.08 billion in 2014, while pensioners’ contributions only amounted to a mere JD20 million. 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 percent of all current expenses and 15 percent of all expenses.
By the end of 2014, Jordan had 312,000 pensioners on the civil and military public pension (219,000 living pensioners, and 93,000 heirs to deceased pensioners). In the month of November 2014, the pensions amounted to JD93 million, with the average pension salary being JD300 (monthly average of JD374 for a living pensioner and JD125 for the heirs salary).
A preliminary look might conclude that nothing can be done. Reducing such low average salaries could lead to serious social instability, and therefore this file is best left alone. But this neglects that fact that averages are the best way to hide massive inequalities; let’s not forget the old joke where the security guard says the average of his salary and that of the CEO is JD20,000 a month.
Given the massive burden that public pensions have heaped on the economy and debt levels, its cost structure must be fully revealed. If we assume that each of 3,000 pensioners receive monthly pensions of JD2,500, then 1 percent of pensioners receive 8 percent of the total pension pot. This means that, quite possibly, some 20 percent of pensioners in Jordan get more than 60 percent of total pensions by value. Government transparency on the pension costs of those in the top percentiles is greatly needed.
The cost of public pensions can be reduced fairly, without hurting the poor or the middle classes, and without infringing on anyone’s rights. For example, salary rises based on medical impairment should be audited to weed out fraudulent medical claims which add to basic pension salaries. In 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 haven’t 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 in office. The government can resume their pensions after they 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 effectively frozen (but not scrapped) for wealthy pensioners that don’t have a pressing need of their pension to meet everyday living costs. If a pensioner’s salary is a mere say 10 percent of their income, the government can pause the pension salary with a promise to pay it back in the future. Such pensioners could for instance be given zero-interest coupons by the government, payable when public debt reaches 60 percent of GDP or lower. 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 would be beneficial. Even a 10 percent reduction would result in a JD100 million reduction in annual debt, and lower debt service burden. The reduction, which would primarily hit the rich, would also not affect the levels of private consumption in the country and will therefore have no impact on economic growth.