The NSSF building in Beirut. (Credit: NNA/File photo)
After more than 30 years of failed attempts, Lebanon finally enacted in December 2023 a law establishing a modern retirement pension system for private sector workers. The International Labour Organization has actively supported the adoption of the new legislation, ensuring its alignment to international labor standards and good international practices. The new law has the potential to radically transform both the social protection system and the labor market in Lebanon. Attention must now urgently shift towards the implementation of the new scheme, to prevent this becoming another unfulfilled promise.
Free-falling through crisis, without a parachute
The recent years of compounded political, economic and financial crises have left a profound mark in Lebanese society. The social protection system, already hampered by fragmentation and significant coverage gaps, proved inadequate in addressing the escalating needs. Expenditures on social protection had historically favored civil servants and the military, with allocations for social assistance to the most vulnerable falling significantly short of both regional and global benchmarks.
Lebanon stood as the only country in the Middle East, along with the Occupied Palestinian Territories, not offering a regular pension system for private sector workers. The alternative lump-sum end-of-service benefits, introduced in 1964 as a “temporary” scheme, saw their real value completely eroded amidst triple-digit inflation. Families lost access to their lifelong savings due to the collapse of the banking system. Even formal workers, including those in the public sector, were left unshielded at the time the crisis hit hardest.
It comes as no surprise, therefore, that older persons have been amongst the most affected, with poverty and vulnerability rates in old age dramatically increasing and the share of older persons forced to continue working to make a living also sharply on the rise.
The adoption of the new social security law has been hailed as an important achievement by many in Lebanon. But can it really contribute to turning the tide? And what needs to happen to ensure its implementation results in tangible improvements in the wellbeing of people in Lebanon?
The right to a decent pension
At the heart of this reform is the replacement of the current end-of-service benefits with lifelong monthly pension payments, granted upon retirement, disability or death to the insured or their surviving family members.
Adequate contributory pensions can make a great difference for the welfare of older persons and the Lebanese society at large, as demonstrated by international experiences.
The law introduces two minimum pension guarantees that are designed to ensure decent standards of living for pensioners and align with minimum requirements set in ILO core social security conventions. The law also mandates automatic yearly adjustment of pensions with the cost of living to safeguard against inflation – a major distinction from the current end-of-service indemnity benefits that rapidly and irreversibly lost value during recent periods of high inflation. A simulation estimating the benefits under the new law shows that pensions will range between 3.5 and 11 times (for low-wage earners) the value of end-of-service benefits across different career and salary profiles.
However, the adequacy of the new pension cannot be taken for granted: it will depend crucially on the evolution of salaries declared to the NSSF. While employers may provide bonuses and other non-pensionable benefits to workers, the base salaries declared today to the NSSF — on which future pensions will be calculated — have mostly remained anchored to the minimum wage, currently set at $100 (22 percent of its pre-crisis dollar value). Should the practice of under-declaration of salaries continue, the new system will lack the means to deliver meaningful pension benefits.
The erosion of real value in workers’ end-of-service accounts has left the social security system for the private sector nearly completely de-capitalized. The NSSF’s depreciated assets base, mostly composed of treasury bills and cash deposits in Lebanese lira, is insufficient to meet future obligations according to the latest independent financial assessment. Under the current system, employers bear the burden of recapitalizing the pension system through settlement payments — the mechanism that requires the last employer to cover any shortfall in a worker’s end-of-service account resulting from the difference in their accumulated savings at the NSSF and their calculated defined benefit.
Most recent estimates suggest that, at today’s wage levels, employers have accrued obligations to the NSSF totalling $1 billion in due settlement payments, and these are projected to rapidly increase to unsustainable levels with further salary adjustments. Effectively, the current system plays against virtuous employers: those complying with full salary declarations to the NSSF face the direct cost of ballooning pensions settlements.
In this regard, the decision to introduce a stronger collectively financed pension pillar based on redistribution, as opposed to pure individual savings accumulation, is a key improvement of the new law compared to previous projects, and has proven to be farsighted. Solidarity among pensioners and workers, as well as across generations, a cornerstone of ILO standards, is the only way to rebuild the financial base of the retirement system in a fair and equitable manner in the aftermath of the economic crisis.
The new pension system will require a — possibly gradual — increase in the contribution rate from the current 8.5 percent for EOSI to approximately double. Workers will be called upon to participate in financing the system. As per international standards, the new law mandates that the state continues to be the ultimate guarantor of the pension system, and a possible government contribution to support those without sufficient capacity to contribute has been envisioned. However, the system can be fully sustained through workers’ and employers’ contributions along with investment returns.
Furthermore, by eliminating the vicious mechanism of settlement payments, the new law also removes disincentives for declaring actual salaries. A higher contributory revenue base will have a positive impact on the pension system, but also on the other branches of the NSSF, most importantly the medical branch. Coupled with necessary structural reforms to the medical branch, this can allow the restoration of more meaningful coverage of medical costs, reversing the current trend of privatization of health insurance, which is dangerous from both equity and efficiency perspectives.
Promoting formalization through expanded coverage
The majority of workers in Lebanon operate within the informal economy, lacking both labor rights and access to social security. The new pension system can make an important contribution to the formalization agenda. Employers, self-employed, agriculture and domestic workers, will be able , for the first time, to join into the social security system, provided they contribute at the required minimum levels. Internal instructions at the NSSF will also determine the terms of participation for part-time, seasonal and casual workers. Upon decree, mutual occupational pension funds for workers in liberal professions (such as lawyers, engineers, pharmacists), some of which face substantial sustainability challenges, could also integrate into the new national system. Extending coverage to workers in all forms of employment, reducing fragmentation in national systems, and broadening the subscribers’ base will enhance sustainability and efficiency.
Moreover, under the new law every month of contribution matters. In this regard, Lebanon is setting a benchmark in the region by adopting pension formulas that consider contributions over an entire career, a robust and direct incentive for formalization.
Rebuilding trust in social security through reformed governance and administration
Ultimately, the success of the new retirement system hinges on a more fundamental question concerning the role of the NSSF, social protection and public institutions in Lebanese society. Years of governance paralysis have prevented the modernization of the NSSF, gradually eroding trust in the institution. To rebuild trust, the starting point can only be a radical and profound reform of its governance. That’s why the new law introduces a wholly reformed board, composed of 10 expert members selected based on criteria of competence and expertise, in contrast to the current 28. Additionally, a new independent committee and administrative structure would be established to oversee investments. The law mandates the development of digital systems for registration, contribution and benefit payments, as well as essential transparency requirements, including the publication of accounts and external auditing reports.
Seizing the critical opportunity, full attention towards implementation
The new social security law marks a crucial initial step on the decadeslong journey towards achieving good governance at the NSSF and delivering a decent pension system to hundreds of thousands of workers in Lebanon. The new retirement system can be a game changer for social protection and the labor market in Lebanon, but a good law is only the starting point.
The cabinet now has until December 2024 to establish the new board, the investment committee, and draft all necessary implementation decrees. Within a maximum of 12 months thereafter, the new pension system must be fully operational. Given the flaws in the current system, expediting the transition to the new system is imperative to avoid exacerbating existing challenges. Therefore, every effort should be directed towards ensuring the full operationalization of the new system.
With the formation of the new NSSF board, government, workers and employers’ organizations in Lebanon have an unprecedented opportunity to set social security on a new trajectory in Lebanon.
This comes at a critical point in the history of social protection in Lebanon, also given the recent adoption of Lebanon’s first comprehensive social protection policy. Some are openly advocating for dismantling the NSSF entirely, proposing a shift to a system based on private insurance. This represents a dangerous path for Lebanon — one that will inevitably and irreversibly lead to more inequality, less solidarity and further weakening of state institutions vis-a-vis market forces.
For those who still believe in social protection as a matter of public concern and public policy, the new law represents perhaps the last opportunity to salvage the social security system in the country, recognizing in it a critical piece of a rights-based state building project.
For more information about entitlements and rules under the new pension law see the Questions and Answers sheet developed by the Ministry of Labor, NSSF and the ILO.
Luca Pellerano is the Senior Social Protection Specialist with the International Labour Organization regional office for the Arab States, Rania Eghnatios is the Social Protection Technical Officer with the International Labour Organization office for Lebanon, and Andre Picard is the Head of the Actuarial Services Unit at the International Labour Organization headquarters in Geneva. They have been involved in providing technical assistance to ILO constituents in Lebanon for the adoption of the new pension law.