Republic of Djibouti Pension System Reform

Transcription

Report No. 22087-D3i
Republic of Djibouti
Pension System Reform
Strategic Note
December 2001
MidcIle EastancdNorth Africa Region
Human Development Sector
Document of the World Bank
REPUBLIC OF DJIBOUTI
Currency equivalents as of November 2000
Currency Unit - Djiboutian Franc (DF)
US$1.00=DF 177.7
Main economic indicators
Gross Domestic Product (1999) = DF 94.4 Billion
Population (1999)= 653,130
ACRONYMSANDABBREVIATIONS
CMR:
Caisse Militaire de Retraite (Military Pension Fund)
CNR:
Caisse Nationale de Retraite (National Pensions Fund)
GNA:
Groupement Nomade Autonome (Autonomous Nomad Association)
MOFP:
Ministry of Finance in Charge of Privatization
MLNS:
Ministry of Labor and National Solidarity
NCSS:
National Council on Social Security
OPS:
Organisme de Protection Sociale (Social Protection Organism)
Vice President:
Country Director:
Sector Director:
Task Team Leader:
Jean-Louis Sarbib
Mahmood Ayub
Jacques Baudouy
David Robalino
ACKNOWLEGMENT
This document was prepared by David A. Robalino (MNSHD). The report benefited from
comments and inputs by Jacques Baudouy (Director MNSHD), Pedro Alba (Sector Manager
MNSED), Ide Gnandou, Kouassi Soman, Mark Dorfman, Anita Schwarz, Aniruddha Bonnerjee,
Osman Ahmed, Denis Chemilier and Allexandre Collard (IEM-ACTUARIA), Dimitri Vittas
(Pensions Advisor), and was supervised at different stages by Zafiris Tzannatos (Adviser to the
Managing Director Human Development) and George Schieber (Sector Manager SP and Health,
MNSHD). The main simulationspresented in the paper were conducted using the PROST model.
Eduard Bos generated the necessary demographic projections and Montserrat Pallares and
Alexandre Collard prepared the baseline data. The document has been prepared at the request of
the Govemment of Djibouti and will guide the pension reform program within the context of the
Structural Adjustment Credit. Special thanks to Djiboutian authorities for their support and active
collaboration. Particularly, His Excellency Yacine Elmi Bouh, Minister of Economy and Finance
and His Excellency Ohamed Barkad Abdillahi, Minister of Labor and National Solidarity.
3
Table of Contents
EXECUTIVE SUMMARY ........................................................
6
I. INTRODUCTION .........................................................
8
II. CURRENT SITUATION OF THE DJIBOUTIANPENSION SYSTEM ..........................................8
1. GENERAL
CHARACTERISTICS
...................................
2. SHORTANDMEDIUM-TERM
FINANCIAL
SITUATION
....................................
.............
8.....................................
8
12
3. INSTITUTIONAL
CONSTRAINTS
..........................................................................................
4. THE PROBLEMOFARREARS.........................................
.. 17
18
III. RECOMMENDATIONSFOR POLICY REFORM.........................................
19
19
9.............
1. SHORT-TERM
REFORM
PROGRAM
.......................
1.1. Improvinggovernanceand management:
preparingthe mergerof OPSand CNR.19
1.2. Improving institutional capacity.20
1.3. Improvingfinancial sustainability.22
Options for parametric reform in the case of OPS.24
Options for parametric reform in the case of CNR.27
Options for parametric reform in the case of CMR.28
. 2...............
29
2. MEDIUM-TERMREFORMPROGRAM
..............................................................................
2.1 Consolidating the merger of OPS and CNR..............
2.2 Promoting contractual savings ..............
2.3. Towards a thirdpillar ..............
29
29
29
IV. SEQUENCING AND MANAGING REFORM ACTIVITIES .31
V. POLICY MATRIX.33
VI. TECHNICAL APPENDIX .36
Tables
Table 1: Demographic Composition of the Pension Funds
Table 2: International variation of dependencyratios .10
Table 3: Basic structure of obligations and benefits.11
Table 4: International comparison of basic pension systems parameters.12
Table 5: Financial situation of Djibouti's Pension Funds.13
Table 6: Government arrears with OPS and CNR.18
Table 7: OPS financial impact of alternative parametric refors .26
Table 8: CNR financial impact of a reduction in the accrual rate.27
Table 9: Costs of implementing institutionalreforms.32
.9
Figures
Figure 1: OPS evolution of new retirees.14
Figure 2: Deficits in OPS under alternative scenarios.14
Figure 3: CNR Age distribution of contributors and new retirements.16
Figure 4: CNR projected deficits.16
Figure 5: CMR projections of total wages and pensions (DF billion) .17
Figure 6: Organizational structure of the NCSS.20
Figure 7: The core management and information system.21
Figure 8: Fiscal cost of wages and contributionsto OPS and CNR.23
Figure 9: OPS: Current balances under alternative parametric reforms.26
Figure 10: CNR balance under alternative parametric reforms
..
Figure 11: CMR total wage and pension expenditures under alternative reforms
Figure 12: Evolution of age pyramids and the dependency ratio in Djibouti
.
28
.
.28
.30
4
Definitions
Annual Accrual rate. The marginal increase in the replacement rate per year of
contribution. The accrual rate times the number of years of contribution equals the
minimum replacement rate (see ReplacementRate).
Old age dependency ratio. In this document, this ratio is defined as the number of
persons over 65 divided by the number of persons aged 15-64.
Pay-as-you-go. Mechanism which finances current pensions on the basis of current
revenues resulting from a payroll tax or an earmarked tax.
Replacement rate. The value of a pension as a proportion of a worker's wage during
some base period (e.g., last year or the average of the last 10 years). It also denotes the
average pension of group as share of the average wage of the group.
System dependency ratio. The ratio of persons receiving pensions from a certain
pension scheme divided by the number of workers contributing to the same scheme
during the same period.
Vesting period: The minimum amount of time required to qualify for full ownership of
pension benefits.
5
EXECUTIVE SUMMARY
The Government of Djibouti has committed to reform its pension system in order to restore
financial sustainability and improve management. To this end, it requested the World Bank to
elaborate a Pension Reform Strategy that identifies the major financial and institutional
constraints facing the pension funds and explores restructuring options. This policy note
summarizes the major diagnosis and policy recommendations of the study.
Current situation
The Djiboutian pension system was set up before independence according to the French pay-asyou-go model. It currently comprises three pension funds: i) the Caisse Nationale de Retraite
(CNR) that covers civil servants, police, ministers and parliamentarians and the ancient
combatants of GNA (Autonomous Nomad Association); ii) the Organisme de Protection Sociale
(OPS) that covers private sector employees, non-regular civil servants, and public enterprises];
and iii) the Caisse Militaire de Retraite (CMR) designed for the military personnel. The system
covers 8% of the population older than 55 and 15% of the labor force. Since Djibouti's
population remains relatively young, the overall system dependency ratio (21.4%) is low
compared to other countries in the region.
Today the funds face two major problems:
-
institutional capacity is weak;
*
!systemsare notfinancially sustainable
Institutional capacity. A recent audit of current information systems and administrative and
management practices within the funds identifies problems at three levels: i) administrative
processes are inefficient and lead to the duplication of efforts and high administrative costs; ii)
integrated and updated information systems are lacking; and iii) management and analytical
capacity are weak and hamper the implementationof any reform program.
Financial situation. All pension funds have an operational deficit and reserves have been
depleted. The reasons behind the weak financial position of the funds are diverse. In the case of
OPS, the problem is more in terms of a low collection rate for private sector and SOE workers,
and to the Government's moratoria in the payment of contributions. In CNR, on the other hand,
the problem results from high dependency ratios and overgenerous benefits. The financial crisis
is also explained by the non-compliance of the Government to repay loans contracted with the
pension funds. Preliminary estimates suggest that Government's arrears with the pension funds
could amount to DF 7.1 billion or 8% of GDP.
OPS. The deficit of OPS (including administrative costs) observed in year 2000 approximated
DF 197.6 million or 0.2% GDP. These numbers do not take into account the 773 contractual
workers who have been forced to delay retirement as a result of the Government's moratoria.
Their pensions are estimated at DF 202.7 million per year (an average pension of DF 261,669 per
year), while their late contributions for the period 1995-2000 amount to DF 553.6 million. OPS
is currently covering its deficit with the surpluses of the health and family services branches
which approximate DF 173.8 million and DF 241.7 million respectively. Actuarial projections of
the pension branch show that under the status-quo, the present value of the deficit accumulated
during the period 2001-2015 could approximate 4-6% of GDP, depending on the assumptions
about coverage and economic growth.
CNR. Only the Police regime is currently generating a budget surplus; both the regime for
functionaries and parliamentarians have a deficit of DF 37.8 million (0.04% of GDP) and DF 26
'OPS has alsoa healthbranchanda familyservicesbranch.
6
million (0.03% GDP) respectively. Part of the financial problems of CNR are due to the current
practice of parliamentarians and ministers to "accumulate" benefits simultaneously in their
regime and in the regime for functionaries. This leads to replacement rates of over 100%.
Projections of expenditures and revenues conducted in the case of the regime for functionaries
show that its deficit would continue to increase reaching DF 124 million in 2005. The present
value of accumulated deficits for the period 2001-2015 could approximate 1.5% of current GDP.
CMR. This fund has an operational deficit of DF 271 million that is being financed by the
Government. Thus, total transfers from the central budget (including contributions from the
Government and military personnel) amount to DF 675 million (0.7% of current GDP). Given a
small number of contributors per beneficiary, the financial crisis of the fund is severe. Actuarial
projections suggest that pension expenditures would continue to increase and would have doubled
by year 2010. The present value of accumulated deficits between 2001 and 2015 could reach
0.7% of GDP.
Policy recommendations
The problems facing the pension funds in Djibouti are by no means particular to the country.
Similar issues are observed in other parts of the world. In fact, pension systems reform is likely
to be one of the most important elements in the development agenda of governments in the years
to come. In the case of Djibouti, a two-stages reform program is proposed. A first stage, which
is the focus of the current Structural Adjustment Credit operation, would concentrate on
consolidating a modest pay-as-you go system. This involves executing three major activities:
-
implementing institutional reforms to improve governance and management (through the
creation of the National Council for Social Security, NCSS, and the preparation of a
multi-year plan to merge CNR and OPS), and to generate efficiency gains that enhance
service delivery and reduce administrative costs (by streamlining administrative
processes, improving the allocation of human resources, and implementing an integrated
management and information system);
*
addressing short-term financial needs by normalizing government contributions, defining
a plan to refinance government arrears, and introducing a ceiling for the replacement
rate in the regime for parliamentarians;
*
and improving the medium-term financial situation of the pension funds by aligning
contributions and benefits while introducing a minimum pension to protect low-income
workers.
The NCSS would be jointly attached to the Ministry of Finance and the Ministry of Labor and
National Solidarity. The NCSS would have authority over the two pension funds CNR and OPS,
and in a period of 3 to 5 years it would constitute the new social security system that integrates
OPSand CNR
A second stage of the reform program would focus on:
*
consolidating the merger of OPS and CNR;
*
and introducing/reinforcingincentives to promote contractual savings.
The latter would pave the way for a possible third stage that would focus on addressing long-terrn
challenges for the current pay-as-you-go system. These include expanding coverage and
addressing the financial problems associated with the aging of the population through the gradual
introduction of a mandatory funded pillar with individual accounts.
7
I. INTRODUCTION
1.
The Government of Djibouti has committed to reform its pension system in order to restore
financial sustainability and improve management. The reform has been introduced as a key
component of the Government's Structural Adjustment Program aimed at restoring fiscal
discipline, promoting competitiveness, reviving growth and strengthening social protection
systems.
2.
The Government has requested the World Bank to elaborate a Pension Reform Strategy
that identifies the major financial and institutional constraints facing the pension funds and
explores restrucluring options. To this end, a World Bank team, in collaboration with the
consulting firm IEM-ACTUARIA contracted by the Government to advise in the reform process,
conducted a detailed study of the pension funds. The team has worked closely with the managers
and technicians of the different funds and has benefited enormously from their institutional
knowledge.
3.
This policy note summarizes the major diagnosis and policy recommendations of the study,
reflecting commentsfrom government officials and the Bank's technical experts during the internal
review meeting held on March 15, 2001. As new data has become available, financial projections
have been updated from previous versions of the note.
4.
The note is organized in three sections. Section 2 is concerned with a diagnosis of major
institutional and financial constraints. Section 3 presents reform alternatives and Section 4
discusses implementation issues.
II. CURRENT SITUATION OF THE DJIBOUTIAN PENSION
SYSTEM
1. General characteristics
5.
The Djiboutian pension system was set up before independence according to the French
pay-as-you-go model. It currently comprises three pension funds: i) the Caisse Nationale de
Retraite (CNR) that covers civil servants, police, ministers and parliamentarians and the ancients
combatants of GNA (Autonomous Nomad Association); ii) the Organisme de Protection Sociale
(OPS) that covers private sector employees, non-regular civil servants, and public enterprises2 ; and
iii) the Caisse Militaire de Retraite (CMR) designed for the military personnel.
6.
The system covers 8% of the population older than 55 and 15% of the labor force, a
relatively high percentage by international standards, given the country's level of income. As
shown in Table 1, there are close to 35,000 contributors who represent 35% of formally employed
workers or 15% of the labor force. This level of coverage is expected in countries with a per-capita
income of US$2,5003 , more than two times the current per capita income of Djibouti (close to
US$1,000). In terms of beneficiaries, 8% of the population older than 55 years of age are receiving
a pension from one of the three funds.
2 OPShas also a healthbranchanda
familyservicesbranch,financedrespectivelyby a 6 and 5.5%tax on
wages.
3 SeePalaciosR. 1994. "International
Patternsof PublicPensionCoverage."Workingpaper.WorldBank
PolicyResearchDepartment.WashingtonDC.
8
Table 1: Demographic Composition of the Pension Funds
Contractual
Contributors
4,122
Average wage (DF)'
658,975
Total beneficiaries
983
523
Old age pensioners
Survivors
460
Average old age pension (DF)
290,208
Average pension survivors(DF)
145,004
Old age dependency ratio
12.7%
Overalldependency ratio
23.8%
Functionaries
2,866
Average wage(DF)
1,445,851
rotal beneficiaries
1,190
Old age pensioners
546
Survivors
644
1,078,680
Average-old-age pension(DF)
Average pension survivors(DF)
301,796
Old-age dependency ratio
19.05%
41.5%
Contributors
OPS
Public enterprises Private sector
4,834
19,338
1,190,256
987
1,268
653
914
334
354
469,652
611,062
241,352
255,432
13.5%
4.7%
20.4%
6.6%
CNR
FNP
Parliamentarians
74
1,417
3,629,455
944,561
140
855
74
439
66
416
1,174,248
413,696
460,803
170,262
100%
30.9%
189.2%
60.3%
CMR
Military
Total
1,758
2,381
Total
28,294
1,112,857
3,238
2,090
1,148
486,589
207,087
7.4%
11.4%
GNA
0
Total
4,357
660
256
404
279,137
132,659
2,845
1,315
1,530
455,770
228,230
30.1%
65.3%
n.a.
Gendarmerie
623
Contributors
I '002'442
Average wage(DF)
I1,419
ITotalbeneficiareis
476,020
Averagepensions(DF)
59.6%/
Totalpopulation
653,000
Totalcovered
42,534
6.51%
Totalold-agebeneficiaries
4,405
7.7%
Population>=55
57,129
35,032
15.30/o
Laborforce
228,900
Totalcontributors
a: Pensionsand averagewagesareexpressedin DjiboutianFrancsper year.
b: Thereis no informationabouttheaveragewagein SOEsseparatedfromthe averagewagein the privatesector.
Source:Individualrecordsof OPS,CNRandCMR,andMinistryof Finance.
9
Table 2: Internationalvariation of dependencyratios
Country
Pensioners/
Population 60+/
Pensioners/
Contributors
Population 20-59
Total Population
(percenta,ge)
Selected countries in Africa
Benin
Burkina Faso
10.0
9.5
Burundi
Djibouti
Nigeria
23.4
21.4
0.4
Selected countries in Middle East and North Africa
34.0
Egypt
Iran
21.7
31.0
Israel
Jordan
29.7
Turisia
20.4
Turkey
50.3
46.9
OECD
11.5
12.5
11.4
11.5
10.2
0.2
0.1
0.4
1.0
0.0
14.6
6.1
15.4
21.7
10.7
14.7
14.1
34.4
1.9
10.1
3.3
2.9
3.4
19.7
Patternsof PensionProvision"by PalaciosandPallares-Miralles,1999.
Source: "International
7.
Djibouti's population remains relatively young and the overall system dependency ratio
(21.4%) is low compared to other countries in the region. In Djibouti the ratio between the
population over 60 and the population aged 20-59 is close to 11.5%, more or less in line with other
countries in the region (see Table 2). On the other hand, the ratio between pensioners and
contributors from all systems (21.4%) is relatively low. Nonetheless, as discussed below, the
majority of contributors belong to OPS and therefore dependency ratios in CNR and CMR are
above the average. Moreover, in OPS a low collection rate increases the effective dependency
ratio.
8.
By far, the largest system is OPS with close to 28,300 contributors and an 11.4% nominal
dependency ratio (9 workers per beneficiary). Contributors in OPS are contractual workers hired
by the central administration (15%), workers from public enterprises (17%), and workers from the
private sector (68%). Not all these workers, however, are effectively contributing. In the case of
contractual workers, while the Government retains their contributions, these are not remitted to
OPS. As a consequence, retirements of contractual workers have been suspended. For workers in
public enterprises and the private sector the collection rate is estimated at a low 46%. Thus, the
effective collection rate for the overall system is only 42% and as a result the effective dependency
ratio increases to 28.9%.
9.
CNR is a relatively small fund in terms of the number of contributors and has a high
dependency ratio (65%Y). In CNR there are approximately 4,357 contributors and 2,845
beneficiaries. The majority of contributors, 66%, belong to the regime for functionaries, 32%
belong to the Policy regime, and only 2% to the regime for parliamentarians. In terms of
beneficiaries, including old age pensioners and survivors, 42% are part of the regime for
functionaries, 30% are in the Police regime, 5% are ex-parliamentarians, and 23% are ex-soldiers
of GNA.
CMR has also a high dependency ratio (60%) given that most militarypersonnel retire at a
10.
relatively young age (35-45years). Indeed, the regime has flexible retirement conditions with only
a minimum vesting period and no minimum retirement age. Today, there are 2,381 contributors
and 1,491 beneficiaries.
10
11.
The parameters used to compute contributions and benefits vary widely across and within
funds and tend to deviate from international standards. Contribution rates vary from 8% in the
case of OPS to 34% in the regime for parliamentarians within CNR (see Table 3). The latter is
high when compared to the average contribution rate in Sub-Saharan Africa and the Middle-East
and North Africa regions (10%) and even the 16% observed in OECD countries (see Table 4). In
terms of the retirement age, it ranges between 40 years (in the case of the Police regime) to 55
years in the case of OPS and the regime for parliamentarians. The average retirement age for
countries in Sub-Saharan Africa, where most pension funds are also facing financial difficulties, is
55 years, while the average for countries in the Middle East and North Africa region is 60 years.
As for vesting periods, the shorter is 10 years in the case of the regime for parliamentarians, while
the longest is 26 years for the Police. OPS has a contribution period of 15 years, which is similar
to the average of the Sub-SaharanAfrica and Middle East and North Africa regions.
Table 3: Basic structure of obligations and benefits
OPS
CNR
Functionaries
Ministers
17%
13%
17%
13%
340/o
10
55
15
Employers'contribution
40/o
6%
12%
Total contribution
Contribution period
Minimum retirement age
8%
15
55
18%
25
50
20%
26
40
3%first10
3% first
Workers' contribution
Accrual rate per year of contribution
40/
2
%
years, 2/ after 10 years,
____________
CMR
Police
7%
20/ after
GNA
0
7%
3% first
4%
15, 2%
after
Reference salary
Average 10
Last
Last
Last
Last
years
Implicit minimum replacement rate
30%
60%
62%
40%
45%
Collection rate
42%
100%
100%
100%
n.a.
100%
Effective overall dependency ratio
28.9%/
41.5%
60.3%
/
89.20/a
59.6%
Observed average replacement rate
44%
45.5%
31.3%
23.1%
(including survivors)
Equilibrium replacement rate for a
27.7%
43.3%
33.10
180
non-funded system(a)
Equilibrium replacement rate for a
15%
22%
25%
18%/a
funded system
(a): Adjustedby theeffectivecollectionrate.
Source: Authorscalculationsbasedon infornationprovidedbythe pensionfunds. Methodsusedto deriveequilibriumreplacement
ratesare describedin the TechnicalAppendix.
12.
In general, observed and implicit average replacement rates are above the level that could
be financed with current contribution rates and dependency ratios. In the current pay-as-you-go
system, the affordable replacement rate depends on the number of workers supporting each retiree
(the dependency ratio) and the contribution rate of each of these workers. In the case of OPS, with
the current contribution and effective dependency rates (8 and 28.9% respectively), an average
replacement rate of 28% could be financed. While the basic replacement rate (30%) is more or less
in line with this level, the observed average replacement rate (close to 44%) is considerably higher,
as a majority of workers retire after 18-20 years of work instead of the required 15. In CNR, the
observed replacement for the police regime (31.3%) is below the equilibrium (33.1%), but for the
functionaries and parliamentarians regimes within CNR, both implicit and observed replacement
rates are above equilibrium rates. Not surprisingly, in all funds current contribution rates are below
the level that would need to be observed to finance the targeted basic replacement rate in a system
with individual capitalization.
11
Table 4: International comparison of basic pension systems parameters
Retirement age
Vesting period (years)
Contribution rate (%)
Middle-East and North
Africa
59
5
13.1
311.
10.6
Sub Saharan Africa
56
13.8
9.1
Asia
56
10.4
13
Eastem Europe and
former Soviet Union
67
25
25.5
and
59
13.9
10.5
63
18.3
16.3
Latin America
Caribbean
OECD
Source: World Bank. 1994. Averting the OldAge Crisis
2. Short and medium-termfinancial situation
13.
While little is known about the financial history of the pension funds, the financial
situation seems to have started to deteriorate during the 90s; today all pension funds have an
operational deficit and reserves have been depleted. The reasons behind the weak financial
position of the funds are diverse. In the case of OPS the problem is more in terms of a low
collection rate for the private sector and to the Government's moratoria. Indeed, with the current
contribution rate (8%) and a nominal dependency ratio of 11.4% the system could afford to pay its
retirees an average replacement rate of 70%! In CNR and CMR, on the other hand, the problem
results from high dependency ratios and overgenerous benefits. In all cases, the mismanagement of
reserves has aggravated the situation.
OPS
14.
In OPS the deficit (including administrative costs) observed in year 2000 approximated
DF 197.6 million or 0.2% GDP. OPS has revenues of DF 1,068 million from contributions. With
an average covered wage of DF 1.1 million per year, the system could receive revenues of DF 2.5
billion. However, the Government is not remitting contributions equivalent to DF 217.4 million
and evasion in the private sector costs the system an additional DF 1.2 billion. Hence, the effective
collection rate is only 42%. On the other hand, expenditures on pensions are close to DF 1.2
billion (DF 218.5 million correspond to retired contractual workers), leaving an operational deficit
of DF 197 million (USD 1.1 million) after including administrative costs. These numbers do not
take into account the 773 contractual workers who have been forced to delay retirement. Their
pensions are estimated at DF 202.8 million per year (an average pension of DF 216,669 per year),
while their late contributions for the period 2001-2015 amount to DF 553.6 million.
15.
OPS is currently covering its deficit with the surpluses of the health and family services
branches that approximate DF 173.8 million and DF 241.7 million respectively; given growing
demands for health services (in part due to the HIV/AIDS epidemic), this financing strategy is
unsustainable. The health branch (which also covers work accidents) and the family services
branch are financed respectively by a 6.2 and 5.5% tax on wages. Thus, OPS receives
contributions amounting to DF 2.6 billion, 40% of which concentrate on pensions. Because the
health and family services branches generate a surplus, the overall balance of the system has
averaged DF 286 million (US$1.6 million) between 1998 and 2000. Despite these relatively large
surpluses, OPS has accumulated reserves (non-related to the pension funds) amounting to only DF
150 million. The managers explain that the current stock of reserves is smaller than the flows due
12
to the payment of debts that had accumulated up to 1998 in regimes such as work accidents. These
debts were refinanced in 1997 (in that year the system generated a deficit of DF 387 million) and
1998. Moreover, in 1999 a large operation to reduce the number of employees was put in place;
4
close to 180 OPS workers received retrenchment packages4.
Table 5: Financial situation of Djibouti's Pension Funds
(DF 000)
oPS
Legal contributions
Observed contributions
Other income'
Benefits paid
Other expendituresb)
Legal balance
Observed balance
Contractual
217,304
SOE
218,481
387,294
Private sector
2,301,669
1,068,002
Total
2,518,973
1,068,002
73,702
1,254,708
648,933
84,580
-1,177
-218,481
1,265,442
31,775
1,253,387
-197,584
CNR
Other income
Benefits paid
Observed balance
Functionaries Parliamentarians
745.521
91,317
783,316
-37,795
117,307
-25,990
Gendarmerie
Military
FNP
267,689
GNA
125.(53'
252,441
15,247
125,053
0
Total
1,263,044
36.175
1,296,664
-15,889
CMR
Total
Legal contributions
404,362
0
Government subsidies
675,472
Benefits paid
675,472
Legal balance
-271,110
Observed balance
0
a: Includespaymentsof latecontributions
and revenuefromthe purchaseof earlyretirement.
b: Includesreimbursement
of contributions
to workerswho leavethesystem.
c: Thesearegovernmentsubsidies.
Source:Contributions
have beencomputedon thebasis of the averagewage. Pensionshavebeencomputedfrom individualrecords.
Otherexpendituressuchas thoserelatedto thepaymentof disabilitybenefitshavebeenexcludedgivenlackof data.
16.
Actuarial projections of the pension branch show that under the status-quo the present
value of the deficit accumulated during the period 2001-2015 would reach DF 4 billion, depending
on theassumptionsaboutcoverageandeconomicgrowth5. Projections have been conducted under
the assumption that retirements are normalized. Thus, in year 2002, 870 workers would retire
(including 773 contractual workers). Between 2003 and 2010, close to 250-400 new retirements
would take place each year (50-100 from the public sector). After 2010, the number of new
At the time of writing this report the documents supporting these transactions were not available.
5 We have evaluated the financial position of OPS in the case of two-scenarios: a low-growth/low-coverage
scenario (we refer to this scenario as the low-case) and a high-growth/high-coveragescenario (the high-case).
The low-case assumes that the number of covered workers grows very slowly, at 0.5% per year (below the
population growth rate of 1.6%), and that GDP expands at a modest 2% per year. The high-case considers
that the population of contributors grows at 2% per year (above the population growth rate) and the GDP
growth rate converges to 3%. Differences in the GDP growth rate are given by differences in productivity
growth (see the Technical Appendix for a more detailed description of the scenarios).
4
13
retirees would start to increase fast, as the generation of 35-45 years old, starts to retire (see Figure
1). It is expected that pension expenditures would double between 2001 and 2010, reaching DF 2.5
billion. Regarding revenues, the low-case and high-case scenarios suggest that contributions would
not suffice to cover expenditures (even when government contributions are included). Thus, by
2015, the deficit of the system would have reached DF 1.2-1.8 billion, if the Government does not
normalize its contributions,or DF 0.5-1.2 billion if it does (see Figure 2).
Figure 1: OPSevolutionof new retirees
3000
2500 .!
2000-
C
1500-
E 1000
/
500
2001
2006
2011
2016
2021
2026
Source: author's calculations
Figure2: Deficitsin OPSunderalternativescenarios
1.0
-199.0 4e
-399.0-599.0
°-799.0
U
LA
_
-__
_
__
_
-999.0 -1199.0 -
Stus-quo/Law
Status-quo/GovConULow
-
1399.0 _
Stabs-quo/High
Status-quo/GovCont/High,
l
159.
-1799.0
2000
2005
2010
2015
Note: "Low" and "High" refer to the growth scenarios. "Gov. Cont" indicates that
the Government pays contributions to OPS.
Source: author's calculations
CNR
17.
In CNR only the Police regime is currently generating a budget surplus; both the regime
for functionaries and parliamentarians have deficits of DF 37.8 million (0.04% of GDP) and DF
26 million (0.03% GDP) respectively. In contrast to OPS, the Government has been remitting
contributions to CNR on a regular basis (DF 1.26 billion in year 2000). While delays are often
observed, as a general rule by the end of the fiscal year 100% of legal contributions have been
remitted to CNR. These contributions, however, are not sufficient to cover pension expenditures in
the case of the regimes for functionaries and parliamentarians that have a joint deficit of DF 63.8
14
million. Part of this deficit is covered with the surplus of the police regime (DF 15.2 million) so
that the overall deficit of CNR amounts to only DF 15.8 million. In GNA there are no
contributions from workers (since all members of GNA are either retired or deceased) and the
Government transfers the resources required to cover current pensions amounting to DF 125
million.
18.
Part of the financial problem of CNR is due to the current practice of parliamentarians
and ministers to "accumulate" benefits simultaneously in their regime and in the regime for
functionaries, thus leading to replacement rates of over 100%o. Even if parliamentarians also
contribute to both regimes, since current replacement rates are already unsustainable, cumulating
benefits aggravates the problem. As an illustration, if a parliamentarian contributed during 15
years to the regime for functionaries and then 12 years to both regimes simultaneously, at
retirement the replacement rate would be equal to: 3*15%+12*2% = 69% in the regime for
functionaries, and 12*4% = 48% in the regime for parliamentarians. Thus, the total replacement
rate would reach 117%!
19.
Projections of expenditures and revenues conducted in the case of the regime for
functionaries show that the deficit of CNR will continue to increase; the present value of the
deficits accumulated during the period 2001-2015 would reach DF 1.4 billion6 . In the simulations
we have assumed that within the next 5 years no new hiring in the Public Administration would
take place, as part of the fiscal stabilizationprogram. At the same time, close to 70 workers would
retire each year, thus reducing the total number of functionaries from 2,866 today to 2,489 in year
2006 (see Figure 3). The total number of contributors is assumed to stabilize afterwards. Under
these assumptions, expenditures on pensions (old age and survivors) could go from 783 million
today to 1 billion in year 2010, while revenues reach DF 906 million and the deficit of the fund
increases to DF 178 million or 0.1 % of GDP (see Figure 4).
Dueto the lackof data, actuarialprojectionsforthe parliamentariansand policeregimeshavenotbeen
conducted.
6
15
Figure 3: CNR Age distribution of contributors and new retirements
(Regime for functionaries)
0.14
100
0.12
90
0.1
X
-__
0.08-
-
.
___ _ ___
** *
780
~~~~~~~~~~~70
/
~~~~~~~~~~~~60
* *
0.06-
__\
**.50
X0.04 6_*
_------*
40
.
G~~~~~~~~~~~~~E
30
0.02
*
*
~~~~~~~~~~~~~20
Z
0
0
-
10
20
30
40
50
60
10
0
70
Age
2000
2005
2010
2015
2020
2025
2030
Source: Author's calculations
Figure 4: CNR projected deficits
0.0
-
-1_0.0
°
-100.0
-200.0
_
____
~
__
_____________ _._
___
.2-200.0
-250.0 -
_
_
_
_
-_
-300.0
-350.0-
.
-403.0
soO.o--450.02003
__\__
2002
2034
2W8
\
____
__
_,_
20E
2010
_
2012
2014
CMR
20M CMR has an operational deficit of DF 271 million that is being covered by the
Government. Workers and employer (the Government) contributions to CMR amount to DF 404
million. Total pensions paid, however, reach DF 675.5 million. The 271.1 million deficit is
currently being financed by the Government. Thus, total transfers from the central budget
represent 0.7% of current GDP. The actuarial analysis conducted by the consulting firm IEMACTUARIA indicates that pensions expenditure would continue to increase from DF 680 million
in 2002 to DF 1.2 billion in 2015. The present value of these expenditures could reach DF 3.3
billion (see Figure 5).
16
Figure 5: CMR projectionsof total wages and pensions (DF billion)
3,0- - - - - -
- - -- ---
- - - -
- - - - - - - - - - - - - - - -
aD
zo
-
1,5
~~~~~~~~~~~~~~~~~~PL-:iotn
-
1,0
MasseSajuijale
0,5
net-ects
2mi
20M
__0
209
___
211
2013
2015
Source: IEM-ACTUARIA
3. Institutional constraints
21.
A recent audit of current information systems and administration and management
practices within the funds reveals weak institutional capacity. A report by the consulting firm
IEM-ACTUARIA identifies institutional problems at four levels: i) administrative processes are
inefficient and lead to the duplication of efforts and high administrative costs; ii) integrated and
updated information systems are lacking; iii) accounting and auditing practices do not have
appropriate standards; and iv) management and analytical capacity are weak and hamper the
implementation of any reform program.
22.
Administrativeprocesses are inefficient. There are a series of administrative processes that
operationalize the functions of the pension funds. These include: registration of new contributors
and their employers, follow-up of life events, collection of contributions, liquidation of new
retirees, payment of benefits, and management of funds reserves. IEM-ACTUARIA's report
shows that the execution of these processes is highly inefficient as: i) procedures remain
cumbersome; ii) there is little or no coordination between the different units in charge of
implementation leading to the duplication of efforts; and iii) appropriate information systems that
could reduce or eliminate manual processing are lacking. To date, databases of contributors and
retirees remain outdated, there is almost no information on employers making it difficult to track
contributions, and theoretically simple operations such as calculating the benefits of future retirees
can take several days. In addition, revenues and expenditures are not properly monitored which
often leads to cash-flows problems.
23.
Appropriate information systems are lacking. While most units within the funds have
access to basic information technologies, both in terms of hardware (computers, printers, faxes)
and software (word processor, spreadsheet, database managers), these are not operating in the
context of an integrated information system which supports management and streamlines
administrative processes. Each fund, and within each fund different units, have designed
spreadsheet or databases to support daily tasks. Unfortunately, without coordination, the resulting
databases are considerably different in terms of structure and in the absence of a unique identifier
code for each contributor and beneficiary, it is impossible to create links. Moreover, because the
maintenance of the databases is not explicitly integrated into the execution of the different
administrative functions, the majority are outdated. In terms of cash-management, a system able to
generate short-termforecasts of revenues and expenditures (e.g., new retirees) is not available.
24.
Administrative costs are high in part due to inefficient human resources management.
Administrative expenditures reach 6% of total expenditures in the case of OPS, reflecting high
17
expenditures in wages. Indeed, preliminary evaluations suggest that the actual number of
employees, particularly support staff, is high compared to real needs. In terms of management
staff, they are highly motivated but a majority of them lack appropriate training in areas such as
business administration, finance, and actuarial analysis.
25.
While a detailed analysis of accounting and auditing practices has not been conducted,
current systems do not have appropriate standards. All pension funds have developed their own
computerized accounting system. Again, in the absence of an integrated infornation system, its
maintenance is cumbersome and time consuming. Transactions such as the payment of benefits
and the collection of contributions are processed and registered manually by the responsible units.
The accounting department then receives hard copies of the registered transactions that are entered
manually into the accounting system. Delays are often experienced, and reports are limited and are
not generated on a periodic basis. While guidelines in terms of auditing procedures exist, these are
not followed systematically.
4. The problem of arrears
26.
The current financial crisis is, in part, explained by the non-compliance of the
Government to remit required contributions and repay loans contracted with the pension funds.
Preliminary estimates suggest that government arrears with the pension funds could account for 8%
of GDP. The majority of these arrears (89%) are related to late contributions while arrears related
to loans account for 11% (see Table 6). These numbers, however, vary depending on how interests
and late fees are handled. For instance, in the case of OPS, total arrears excluding interests amount
to DF 4,310 million and increase to DF 4,778 million or 4.8% of GDP when interests and penalties
are included. Similarly, in the case of CNR, arrears without interests approximate DF 2,666
million and reach DF 3,038 million (3.9% of GDP) when interests and penalties are included.
These estimates have not been validated. Moreover, information on arrears with the private sector
is not available, yet given high evasion rates it is likely that these arrears are considerable.
Table 6: Government arrears with OPS and CNR
(DFMillion)
Arrears
Credit
Net
Arrears
Interests
Arrears
including
interests
Late fees
Arrears
including
interests
and late
fees
4,049
899
4,948
639
639
3,410
899
4,309
218
3,628
899
4,527
198
52
250
3,826
951
4,777
2,663
2
2,665
7,613
-
2,663
2
2,665
6,974
-
2,663
2
2,665
7,192
370
3,033
2
3,035
7,812
OPS
Government
Pubhc enterprises
Total
CNR
Government
Pubhc enterprises
Total
General total
-
639
-
218
-
218
-
370
620
Source: Actuaria on the basis of numbers provided by OPS and CNR. These numbers differ from those provided by the Ministry of
Finance. As discussed in the text, differences can be explained by the way interests and late payments are handled.
18
III. RECOMMENDATIONS FOR POLICY REFORM
The problems facing the pension funds in Djibouti are by no means particular to the
27.
country, similar issues are observed in other parts of the world. In fact, pension systems reform is
likely to be one of the most important elements in the development agenda of governments in the
years to come.
28.
In the case of Djibouti, a two-stages reform program is suggested. A first stage, which is
the focus of the current Structural Adjustment Credit operation, would concentrate on consolidating
a modest pay-as-you-go system. This involves executing three major activities:
*
implementing institutional reforms to improve governance and management (through the
creation of the National Councilfor Social Security, NCSS, and the preparation of a multiyear plan to merge CNR and OPS), and to generate efficiency gains that enhance service
delivery and reduce administrative costs (by streamlining administrative processes,
improving the allocation of human resources, and implementing an integrated
management and informationsystem);
*
addressing short-term financial needs by normalizing government contributions, defining a
plan to refinance government arrears, and introducing a ceiling for the replacement rate
in the regimefor parliamentarians;
=
and improving the medium-term financial situation of the pension funds by aligning
contributions and benefits while introducing a minimum pension to protect low-income
workers.
29.
A second stage of the reform program would focus on:
consolidating the merger of OPS and CNR;
*
and introducing/reinforcingincentives to promote contractual savings.
The latter would pave the way for a possible third stage that would focus on addressing long-term
challenges for the current pay-as-you-go system. These include expanding coverage and
addressing the financial problems associated with the aging of the population through the gradual
introductionof a mandatory funded pillar with individual accounts.
1. Short-term reform program
1.1. Improving governance and management: preparing the merger of OPS and
CNR
30.
In order to improve governance and generate efficiency gains in management, it is
recommended to create the National Council on Social Security (NCSS). The NCSS would have
authority over the two pension funds, CNR and OPS, and in a period of 3 to 5 years it would
constitute the new social security system that integrates OPS and CNR. The NCSS would be
responsible for developing and implementing a multi-year plan to merge administratively and
financially OPS and CNR (only the regimes for functionaries and parliamentarians), thus
improving dependency ratios. The NCSS would also manage and coordinate the other aspects of
the pension reform strategy (see Section IV). The NCSS would be jointly attached to the Ministry
of Finance and the Ministry of Labor (see Figure 6). Its Board of Directors would include a
representative from the Ministry of Labor, a representative from the Ministry of Finance, a
representativefrom the Direction of the Treasury, the directors of OPS and CNR, 3 representatives
from the private sector selected by the Chamber of Industry and Commerce, and 3 representatives
19
from contributors and beneficiaries of the pension funds. The Executive Director of NCSS would
be elected by the Board of Directors on the basis of a list of candidates jointly presented by the
Ministry of Labor and the Ministry of Finance. The law creating the NCSS would give the Board
of Directors the power to replace the Executive Director when considered necessary. The budget
of the NCSS would be financed from the revenue of the pension funds (OPS and CNR) in shares
that would be determined jointly by the Ministry of Finance and the Ministry of Labor. Initially
the NCSS could operate in OPS's premises.
Figure 6: Organizationalstructure of the NCSS
|Ministry of Laborand ||
NationalSolidarity
l
Ministryof
Finance
_ 0~~
LoP
NCSS
l
X
CNR
Source: Author's design
31.
The multi-year (3 to 5 years) plan to merge OPS and CNR would ensure that over time
administrative processes, accounting systems, and the structure of contributions and benefits
converge. The plan would first require that OPS and CNR coordinate the implementation of
institutional reforms (see Section 1.2), so that they start sharing similar administrative and
management procedures. While initially OPS and CNR accounts would continue to be separated, it
is desirable that both move to similar accounting, auditing and reporting systems. Parametric
reforms in OPS and CNR (see Section 1.3) would need to be coordinated as to ensure that
contributions and benefits converge over time.
1.2. Improving institutional capacity
32.
A necessary condition to improve the financial situation of the pension funds is to improve
institutional capacity. To this end, 3 major interventions are required: i) streamlining
administrative processes and developing an integrated information system; ii) adopting appropriate
accounting, reporting and auditing standards; iii) rationalizing human resources management and
reducing administrative expenditures; and iv) identifying mechanisms to ensure that reserves, if
accumulated, are managed prudently.
33.
Streamlining administrative processes and developing an integrated information system.
As previously discussed, the Government is conducting a comprehensive study of current
administrative processes in the pension funds7. For each process, the study evaluates tasks and
information flows and recommends actions to improve efficiency. The study also presents the blue
print of an integrated information system along with an implementation plan. This system would
operate within a shared network, thus allowing different units (executing different administrative
processes) to maintain simultaneously a single set of databases (see Figure 2). The structure of
these databases has been defined and would need to be used across funds to facilitate future
7See:Actuaria2001. "Djibouti:InstitutionalReformof the PensionFunds". Paris.
20
exchanges of information. The challenge is now to implement the different recommendations of
the report. Not all processes can be streamlined simultaneously and therefore priorities need to be
established. It is recommended to concentrate on: i)finalizing the process of gathering information
about employers, contributors, and retirees on the basis of the new database structures; ii)
streamlining and computerizing the registrationprocess so that the new databases remain updated;
and iii) given high evasion rates, improving the collection processes. The NCSS would be in
charge of the implementation of the new system, thus allowing coordination across funds.
34.
Improving cash-management. As part of the new management and information system, it
is recommended to develop a simple cash-management tool that will allow funds accountants to
perform short-term forecasts of revenues and expenditures. Given data on contributors and
retirees, the system will generate short-term projections of new retirements and associated
expenditures. A spreadsheet-based system would be probably the most cost-effective solution.
The technical personnel have also requested instruments and training to perform medium-term
actuarial analysis. A model such as the World Bank PROST could be installed in-house and
personnel trained on its use.
Figure 7: The core management and information system
..........-........................
''...........''....
... ...............-.-...................
Registrationsof
new affiliations
Employers
Collectionof
Contributions
........................................................
....
.........................
t.I
..
.-.............. /........
Followup of
life events
rContributors
Contributions
| Dependents
| ............. ~~~~~~~~~~~~~~~~~~~~..........
....
............................
Liquidations
| Retirees
Monitoringuse of
familyservices
Fail
<
b
Payments
.....................................................
..............................
.......
......
Process
LI
Database
-
o Information
flow
Source:Author'sdesign
35.
Rationalizing the use of human resources and reducing administrative expenditures. The
new administrative processes will have implications for human resources policies. In particular, as
productivity increases, the number of workers required to execute the different tasks could be
reduced. The other components of administrative expenditures would also need to be evaluated.
To this end, it is recommended to conduct an audit of administrative expenditures in OPS
(including the health and family services branches). On the basis of this audit unit costs could be
computed and eventually adjusted.
21
Improving accounting and auditing practices. There are three main objectives: i) to
36.
promote transparency in the management of the pension funds' accounts; ii) to improve the quality
of the information and the timing of the reports; and iii) to standardize accounting systems across
funds in order to facilitate the future merger of OPS and CNR. To this end, it is recommended to
conduct a detailed study of current accounting and auditing practices. The study should identify
major weaknesses and propose recommendations along with an implementation plan. In the case
of OPS, it is necessary to separate the accounts of the three branches (health, family services, and
pensions), and to eliminate cross-subsidies.
37.
Adopting mechanisms to ensure that if reserves accumulate they are managedprudently.
International experience suggests that public pension funds reserves rarely generate positive rates
of return8 . The recommendation in the case of Djibouti is to minimize the stock of reserves to
levels required to cover liquidity needs. In terms of their management, the current practice in OPS
of investing reserves in a savings account could be maintained. If higher levels of reserves are
accumulated, an appropriate regulatory framework for their management would need to be put in
place. The funds would need, for instance, to set-up an investment committee and define
investment policies, asset allocation procedures, and appropriate reporting and auditing
mechanisms. The management of reserves could also be contracted-out, but appropriate
regulations are also required in this case. Areas that would need to receive attention include the
selection and evaluation of fund managers, and guidelines to limit the range of possible
investments as a function of their expected return and risk. Given the complexity of the issue, it is
recommendedto command a study that identifies the best option(s) for reserves management in the
case of Djibouti and the associated institutional requirements.
1.3. Improving financial sustainability
38.
The proposed strategy to address the financial dfficulties of the pension funds considers
actions that will have an immediate impact and actions that will mostly affect the finances of the
funds over the medium-term. In the short-term, there are four key interventions: i) normalize
government contributions to OPS (this will allow the retirement of the 773 contractual workers
who despite verifying retirement conditions remain in the payrolls; ii) adopt a refinancing plan for
government arrears with the pension funds that would ensure that the operational deficits of OPS
and CNR are covered; iii) introduce a ceilingfor the replacement rate of CNR that applies to those
workers who accumulate benefits in multiple systems; and iv) increase collection rates in the
private sector through a better monitoring system and a reduction in labor charges. In terms of
policies that will improve the medium term financial position of the funds, it is recommended to
gradually adjust the parameters defining contributions and benefits. To protect low-income
individuals from the impact of these adjustments, a minimumpension should be introduced.
39.
Normalizing government contributionsand retiring the 773 contractual workers who verify
retirement conditions. One of the main objectives of the fiscal program developed by the
Government with the support of the IMF and the World Bank is to stop the accumulation of
arrears. Hence, the FY02 budget includes allocations to cover the payment of wages and
contributions to all pension funds. Its implementation is linked to the observance of a treasury plan
that monitors weekly revenues and expenditures. In the case of OPS, over the next 10 years,
government contributions are expected to average 0. 16% of GDP (including workers
contributions). The normalization of government contributions would bring important fiscal
s SeePalaciosR. "Avertingthe Old AgeCrisis:TechnicalAnnex". WorldBank.PolicyResearch
Department, Washington, DC; and Iglesias A. and Palacios R. "ManagingPublic Pension Reserves.
Evidencefromthe InternationalExperience",in NewIdeasaboutOld Age Securityeditedby HolzmannR.
and StiglizJ. The WorldBank. Washington,DC.
22
savings. These savings result from the fact that total contributions are in the order of DF 217
million today and could decrease to DF 200 million by year 2005, while wages paid to the 773
contractual workers are in the order to DF 443.7 million (net of the 4% contribution that the
Government discounts on wages and does not remit to OPS). In the case of CNR, current
contributions represent 0.7% of GDP and could be reduced to 0.5% by the end of the decade (see
Figure 8).
Figure 8: Fiscal cost of wages and contributions to OPS and CNR
|_8.00°h
7.009/
__-_--
6 00%
_-
5.00
_
_
3.400°/
1.00%
-
Wages
contractual
workers(netof
confibubons)
Vs-- Consributons
fDncionaries
_
__*--
Contibutons
contractual
workers
.
_
-_
2.00%
+
____
-b-
Wages
tanctionanes
(excludes
police
iand
military
_0
*- -Total
0.00*%
2000)
2002
2004
2006
2008
2010
40.
Increasing the collection ratefor private workers through a better monitoringsystem and a
reduction in labor charges. We have seen that OPS is a young system with a nominal dependency
ratio of only 11.4%. Its main problem is that the effective collection rate is too low given the
Government's moratoria and evasion in the private sector. If in addition to normalizing
government contributions the collection rate among private workers could increase from its current
46 to 55% within the next 10 years, the financial situation of the fund would improve dramatically
(see Table 2, last scenario). This could be possible as a result of the implementation of the new
information system that would facilitate tracking of workers and employers contributions.
Collection rates are also expected to increase as workers' expectations about the long-term
situation of the pension fund improve given the reform program. However, higher collection rates
may be hampered by currently high social charges (19.7% of wages). It is therefore necessary to
consider reducing the contribution rate for the health and family services branches, on the basis of
an actuarial analysis.
41.
Adopting a ceiling for the replacement rate in the regime for parliamentarians within
CNR. The fact that high rank functionaries within the central administration can simultaneously
accumulate benefits in two funds leads to high replacement rates (sometimes over 100%). It is
recommended to introduce a ceiling that is as close as possible to the current equilibrium
replacement rate of 40% (see Table 2). This measure is expected to generate savings of close to
DF 40 million or US$250,000 per year (assuming that 50% of retirees in the parliamentarians
regime accumulate benefits in both funds), over two times the current operational deficit of CNR.
42.
Refinancing government arrears. This activity needs to be undertaken within the context
of the global program to restructure arrears that the Government is implementing through the
current Structural Adjustment Credit. The goal of the refinancing plan is not to provide pension
funds with additional resources to invest, but simply to generate cash-flows which ensure that
operational deficits are covered. The first step would be to validate the current estimate of the
23
value of government arrears (US$7,812 million). To this end, figures from the Ministry of Finance
need to be reconciled with figures from the pension funds. In the case of loans that have
appropriate documentation this should be a simple task. However, in the case of loans with
incomplete documentation or in the case of arrears related to workers contributions, an agreement
in terms of interest rates and late fees is needed. It is recommended to hire an internationally
respected auditing firm to assist in this process. Once the total amount of arrears is known, the
simplest refinancing mechanism would consist of registering the arrears as a formal Government's
debt and agreeing on a payment schedule (e.g., quarterly payments) that takes into account the
pension funds financial needs as well as the Government's payment capacity. More complex
financial instruments, such as bonds, could be considered, but given the absence of a market for
these bonds in Djibouti, the value added of these instruments is nil at this point.
43.
Introducing parametric reforms and implementing a minimum pension. Improving the
financial position of the different pension funds over the medium-term required gradually adjusting
contributions and benefits within the context of a sustainable fiscal framework. There are four
basic principles that should guide these adjustments: i) adjustments should be gradual; ii) acquired
rights should be honored; iii) changes in contribution rates should not harm the competitiveness of
Djiboutianfirms; and iv) mechanisms should be adopted to protect low-income groups. Extensive
discussions with government officials have taken place to define plausible parametric reforms to
improve the medium-term financial position of the fund while minimizing short-term social
impacts. The focus has been on the vesting period, the marginal replacement rate (accrual rate),
and the retirement age. Given the highly unequal distribution of pensions9 , authorities have also
suggested examining the implications of taxing the pension of individuals in the top deciles of the
pension distribution. However, because Djibouti's taxation rate is already high (close to 25% of
GDP), this measure is controversial. Authorities have also agreed to introduce a minimum pension
to protect low-income workers. This minimum pension could range between DF 150,000 (roughly
equivalent to 2 dollars per day) to DF 170,000(the poverty line in Djibouti).
Options for parametric reform in the case of OPS
44.
In this section we summarize the results of the simulations of alternative parametric
reforms in the case of OPS. The proposed reforms capture the range of plausible choices by
combining different targets for the vesting period, the accrual rate, the option of a tax on high
pensions, and the option of a minimum pension. These reforms are analyzed in the context of the
two scenarios previously introduced: low-case (low labor productivity growth and low expansion
of the system), and high-case (high labor productivity growth and fast expansion of the system).
For illustration purposes, we have also simulated an increase in the collection rate among workers
in the private sector.
45.
The simulations show that the normalization of government contributions combined with a
gradual increase in the vesting periodfrom 15 to 25 years, and a reduction in the accrual rate to
1.2-1.5% would generate important reductions in the deficits of OPS (betweenDF 3.8 and 4 billion
in present valuefor the period 2001-2015, or US$21-23 million, depending on the scenario). The
present value of the deficits for the period 2001-2015 could be reduced to DF 1.3-1.5 billion
(US$7.8-9 million). These deficits could be covered by refinancing part of the Government's
arrears with the pension fund. The normalization of government contributions alone can reduce the
present value of the deficit by DF 2.4 billion. The parametric reform would generate additional DF
1 billion (US$5.6 million) in savings (see Table 7 and Figure 9 for a summary of the main
9In the caseof OPS,for instance,whilethe averagepensionin year2000 was closeto DF 486,000,the
averagepensionof the highestdecilewasDF 1.4millionwhilethe averagepensionof the lowestdecilewas
onlyDF 143,960.
24
simulations). We notice that within the next 15 years, the difference between a parametric reform
targeting a 1.5 accrual rate and a parametric reform targeting a 1.2 accrual rate is minimal (in the
order of DF 100 million in present value). Within a longer horizon (30 years), however, the
difference can be significant (in the order of 3.5% of GDP in present value).
46.
Within the context of the parametric reform, a minimum pension of DF 170,000 could be
financed. Today, there are no retirees with a pension below DF 140,000. Ten percent of retirees,
however, have a pension below DF 150,000(2.3 dollars per day). The poverty line in Djibouti is
close to 3 dollars per day, or DF 170,000 per year. The calculations show that this level of
minimum pension could be supported by the system. Its cost during the period 2001-2015 would
approximate DF 280 million (0.3% of GDP). It is important to keep in mind, however, that under
some circumstances (e.g., when workers do expect major increase in wages or when there are
opportunities to work in the informal sector after retirement) the introduction of a minimum
pension could provide incentives for retiring as soon as the vesting period has elapsed (see
Technical Appendix. Section A4). Thus, individuals who would have continued to contribute in
the absence of a minimum pension (today individuals contribute an average of 20 years when the
vesting period is 15 years) would prefer to retire. This could increase pension expenditures in the
short term. To avoid this situation, policymakers could consider linking the minimum pension to a
higher vesting period and ensure that beneficiaries do not have other sources income in the formal
sector.
47.
A tax on high pensions could generate importantfinancial resources (and therefore reduce
the need to refinance government arrears), but the social and political impacts should be carefully
assessed. If a tax on pensions is introduced, it is important that it does not affect low and middleincome retirees. In the simulations, for instance, a 15% tax was applied only to pensions equal or
above DF 500,000. For pensions between 500,000 and 800,000, only 50% of the pension was
taxed. For pensions above 800,000, 100% of the pension was taxed. This type of arrangement
could generate resources equivalent to 1.7% of GDP during the period 2001-2015. The present
value of the accumulated deficits during this period would be reduced to DF 100-300 million
(US$1-2 million), even after taking into account the cost of the minimum pension. If the tax is
managed with prudence, then it could be a powerful mechanism to solve the short-term financial
problems of the system. It is important to notice that the introduction of the tax reduces or
eliminates the need to refinance government arrears. Policymakers therefore need to evaluate, on
the basis of fiscal, political, and social considerations, which is the best combination of these two
instruments.
25
Table 7: OPS financial impact of alternative parametric reforms
Scenario
a
GovernmentVesting Accrual Tax' MinimumPresent %GDP Present %GDP
Contributionperlodc rated
Pension Value
Value
(FD000 (2000(2000-2030)
Deryear) 2015)
Low-case
Low-case
Low-case
Low-case
Low-case
Low-case
Low-case
High-case
High-case
High-case
High-case
High-case
High-case
High-case
withincrease
inthecollection
rateof
theprivatesectorb
No
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
15
15
25
25
25
25
25
15
15
25
25
25
25
2%
0%
2%
0%
2J1,8/1,2 0%
2/1,8/1,2 0%
2/1,8/1,2 15%
2/1,8/1,5 0%
2/1,8/1,5 15%
2%
0%
2%
0%
211,8/1,2 0%
2/1,8/1,215%
211,8/1,5 0%
211,8/1,515%
0
0
0
170
170
170
170
0
0
170
170
170
170
Yes
25
2/1,8/1,5 15% 170
($5,466) -5.6%
($2,558) -2.6%
($1,581) -1.6%
($1,867) -1.9%
($345) -0.4%
($1,910) -1.9%
($384) -0.4%
($4,379) -4.4%
($2,395) -2.4%
($1,650) -1.7%
($107) -0.1%
($1,696) -1.7%
($148) -0.1%
$834
($27,659)-28.1%
($21,603)-21.9%
($9,923) -10.1%
($10,254)-10.4%
($8,507) -8.6%
($13,604)-13.8%
($11,849)-12.0%
($16,517)-16.8%
($22,785)-23.1%
($10,353)-10.5%
($8,577) -8.7%
($14,048)-14.3%
($12,263)-12.5%
0.8% ($8,171) -8.3%
a: Refer to the Technical Appendix for a description of the scenarios.
b: Assumes collection rate increases by 10 percentage points between 2002 and 2020.
c: The vesting period reaches the new target within a period of 10 years.
d: The accrual rate issetto 1.8%between 2002 and2007, 1.5%between 2007 and 2010, and 1.5 or 1.2% afterwards.
e: The tax applies to pensions equal or above DF 500,000 per year. For pensions between DF 500,000 and 800,000 only 50% is
taxable. For pensions above 800,000 100% is taxable.
Source: Author's calculations.
Figure 9: OPS: Current balances under alternative parametricreforms
400.0..
200.0
0.0
-200.0
_
,,
----600.0 _
Stbtus-quoIGov/Low
- ReforrmGovMRRl.2ILow
800.0
-1000.0
ReJorm/GovMRR1.2Taxe/Low
-*-
-1200.0
Refrrm/GovMRR1.
2High
___
K- Reform/GovMRR1l2Taxe/Hihh__
_
a-a- Refrm/GovMRR1.5TaxePrivatatHigh
2000
2002
2004
2006
2008
2010
2012
2014
Note: "Low" and "High" refer to the growth scenarios. "Gov" indicates that the
Govemnent pays contributions to OPS. "MRR" is the targeted marginal
replacement rate (accrual rate). "Tax" indicates a 15 tax is introduced. "Private"
indicates that the collection rate of the private sector increases by 10 percentage
points ova a 20 year period.
26
Options for parametric reform in the case of CNR
48.
Given data constraints, we have analyzed parametric reforms only in the case of the regime
for functionaries. The range of options for parametric reform in this regime is more constrained
than in OPS, since the vesting period is already high (25 years), the Government is remitting
contributions, and workers are already retiring at age 55 instead of 50 as required by law. The
focus is therefore on gradually adjusting the marginal replacementrate (accrual rate) to 1.2%.
49.
The results show that reducing the accrual rate would not suffice to eliminate the
operational deficits of the system during the period 2001-2015, nonetheless, these deficits would be
significantly reduced After adjusting the accrual rate, the deficit of CNR would continue to
increase, reaching DF 300 million in 2015 (0.15% of GDP, compared to 0.05% today). The
present value of accumulated deficits, however, could be reduced from DF 1.4 to 1.2 billion, that is
a reduction equivalent to 0.2% of GDP (see Table 8). During the period 2001-2030 savings
generated by the parametric reform would approximate 2% of GDP.
Table8: CNRfinancialimpactof a reductionin the accrualrate
Present %GDP
Minimum Value
GovemmentVesting
contributions period
Yes
Yes
Yes
25
25
25
Accrualratea
Tax pension (2000-2015)
3%/2%
0%
1.8%/1.5%/1.2%0%
1.8%11.5%I1.2%J6
15%
0
170
170
($1,447)
($1,246)
($265)
Present %GDP
Value
(2000-2030)
-1.47%
-1.27%
-0.27%
($4,090)
($2,404)
($1,315)
-4.15%
-2.44%
-1.34%
a: The accrual rate is set to 1.8% between 2002 and 2007, 1.5% between 2007 and 2010, and 1.2% afterwards.
50.
Like in the case of OPS, the short-term deficits could be financed by a tax on pensions and
the partial repayment of government arrears. A 15% tax would be sufficient to eliminate the
deficit of CNR until year 2007 (see Figure 10). This tax could generate resources equivalent to 1%
of GDP. The present value of accumulated deficits could therefore be reduced to 0.27% of GDP.
This deficit could be financed with the repayment of part of the Government's arrears. In the
medium-term, the merger with OPS will also contribute to reduce financial pressures resulting
from high dependency ratios.
51.
While the regime for parliamentarians has not been analyzed in depth, it is clear that it is
financially unsustainable due to a high dependency ratio; a merger with the regime for
functionaries is recommended This implies that new parliamentarians would accumulate the same
benefits as functionaries. Any additional benefits would be financed outside the public system.
This would also, by default, solve the problem of accumulation of benefits in multiple funds.
52.
The regime for the police is still generating an operational surplus, but given current
trends, the financial situation of the fund is likely to deteriorate within the next 3 to 4 years. The
data required for conducting an actuarial analysis of the fund need to be collected. On the basis of
this analysis, corrective measures would be implemented. As suggested by the Ministry of Labor,
an alternative to consider is the merger of this regime with the regime for the military (see next
section).
27
Figure 10: CNR balance under alternative parametricreforms
50.0
0.0
-50.0
-100.0
-150.0
-200.0-250.0
-300.0
-_
300.0- + Staus-quo/Low
-ie RelornVMRR1.2
400.0RefornlMRR1
.2/Tax
450.0 -
_
_
_
_
_
_
_
I
2002
2000
2004
2006
2008
2010
2012
2014
Note: "Low" indicates low-case scenario. "MRR" is the marginal replacement rate
(accrual rate). "Tax" indicates that a 15% tax on pensions is introduced
Options for Parametric reform in the case of CMR
53.
The recommendation in the case of CMR is to include pension expenditures as an
additional line in the budget, similar in nature to the line for wages. Indeed, given the special
characteristics of its population, it is unlikely that CMR could operate as a regular pay-as-you go
fund. A study conducted by the consulting firm IEM-ACTUARIA shows that to balance the
finances of the system the contribution rate would need to increase by 10 percentage points, while a
30% tax on all pensions is introduced. Even in this case, the improvement in the financial situation
would be temporary (3 years). By year 2005, the system would again generate an operational
deficit that would need to be covered by the central budget. Under these circumstances, it is
recommended to treat pension expenditures as wage expenditures. The study of IEM-ACTUARIA
shows that under appropriate changes to the formula used to compute benefits, total wages and
pensions expenditures could remain below DF 2.5 billion during the next 15 years (see Figure I1).
Figure 11: CMR total wage and pension expenditures under alternative
Reforms (billion DF)
2,9
Stotu
q.
2RCO.
2,5-3
.30%
R,
2.3------------
[.Pit
('oCtl S.i
-
2~~~~~~~~~~~~~~~
2,1
2000
i10%
l t;
2002
2004
St.t.
l
2008
quo
Rferme
l
R~~~1,9
i~~~~~.
R D rnit
lR
+10%
R ,It%
I
8,1%CoCIo,
2008
nor--lisaon
.I 030%
2010
des co.ta
Jimmuohun graduf.li§sopAts
otis
Riforn-
SolO
3 0 %
i
dr
s
Rdtoron-d
9o
2014
uRils
+ pu's-gs
hop
IS RSr.es*
Aql
2019
de I'EtSt
de- 1-ux d n ut I
RSForma.+inspossSion
Aoqsi.
(Cott,
2012
ian,
D --
Insp6i
30%
-+mp6t
I5%
(0 sc o.etobl.)
dolMs axc ifs
de7 7.,17'S
S1('
de
Impblb
zI.iiUr.r
box
cot.,
S
Source: IEM-ACTUARIA
28
2. Medium-term reform program
2.1 Consolidating the merger of OPS and CNR
54.
As administrative processes, information, accounting, and auditing systems, and the
parameters determining contributions and benefits start to converge, the administrative and
financial merger of OPS and CNR could take place. Ideally, within a period of 3 to 5 years, the
institutional reforms discussed in Section 1.1 would have prepared OPS and CNR for a merger.
The merger would imply leaving NCSS as the head of the new Social Security system. This
system would have three branches: i) health; ii) family services; and iii) pensions and disability.
The latter would merge the administrative structure of the OPS's pension branch with CNR, as well
as the respective accounts. A cutting date would need to be established after which all new
workers in the public administration would join the new system. At the time of the merger, CNR
contributors and beneficiaries would transfer their acquired rights. The financial and legal
implications of the merger would need to be carefully assessed.
2.2 Promoting contractual savings
55.
While in the case of Djibouti little is known about the development of occupational pension
plans, these should be considered as important means to substitute earnings in old age. Both
occupational and personal savings schemes enable workers who earn more during their active years
to accumulate larger pension rights for their retirement years.
56.
Even though promoting long-term personal savings and occupational plans will require
structural reforms to create a more dynamic and diversified economy, along with an efficient and
properly regulated financial sector, in the short-term, different types of incentives can be
considered. For instance, countries such as Singapore, Korea and Malaysia have established postal
savings systems that offer greater security and accessibility, highest interest (often tax-free), and
lower transaction costs, especially, in the case of rural areas. The development of occupational
plans can also be encouraged by making contributions tax deductible and deferring taxes on
investment income. This type of incentives have been common to most countries and have made
occupational programs suitable substitutes for higher wages, thus encouraging their diffusion. In
the developing world, occupational pension programs have been growing in countries such as
India, Indonesia, Mexico, Brazil and Zimbabwe. While there is a gradual tendency to make these
programs mandatory, particularly in the case of OECD countries, Djibouti should initially adopt a
flexible stance, given the still frail situation of the economy. Nonetheless, a minimum regulatory
framework should be in place to require that the programs are appropriately funded and of
sufficient portability. Incentives would need to be carefully designed to ensure that benefits do not
concentrate on high-income households who would have saved in any event.
57.
Within the context of the reform program it is recommended to conduct a study that
evaluates the potentialfor the development of occupational pension plans and personal savings in
Djibouti, and presents recommendations in terms of incentives and the necessary regulatory
framework. This study would start by preparing an inventory of existing occupational plans and
incentive systems to promote personal savings. It will then present recommendations to promote
the developmentof these programs, on the basis of best practices at the international level.
2.3. Towards a third pillar
58.
As in other countries, population aging in Djibouti will ultimately put pressure on the
financial performance of the pay-as-you go system. To date, the support ratio in Djibouti (the ratio
between the share of the population aged 60 and older to the population aged 20-59) is close to
11.5%, which is relatively low for international standards (as a reference, the support ratio in
29
OECD countries is close to 35%). Over time, however, this ratio is expected to increase reaching
20% by year 2050 and 35% by year 2075 (see Figure 12).
59.
One alternative that the Government could consider to reduce financial pressures on the
pay-as-you go system, is the introduction of a mandatory funded pillar with individual accounts.
In a funded system, the ratio between the active population and the retired population no longer
affects its financial position, as the benefits received by workers when they retire are a function of
the savings they have accumulated during their working lives. For equity purposes, the current
pay-as-you-go system would continue to operate, but it would not longer be the main source of
income for retirement. Its function would be to redistribute income from high-income to lowincome workers by guaranteeing a minimum pension.
The transitionprocess to a multi-pillar system, however, is a delicate process and should
60.
be carefully designed and evaluated. Lessons from other countries suggest that the costs of the
transition are lower when the pay-as-you go system is still relatively immature, while the benefits
depend, in part, on the degree of development of capital markets. Indeed, high rates of return on
savings will require efficient capital markets. The proposed system of incentives to promote
voluntary savings (see Section 2.2) would smooth the transition process. Ultimately, the
introduction of a multi-pillar system should be based on a thorough analysis of fiscal cost, and
macroeconomic and social impacts.
Figure 12: Evolution of age pyramids and the dependency ratio in Djibouti
I
.........
f~~~~~~~~~~~~
_
0i4
-
035
0.3
0.25
0.2
j0.15
:0.1
100
2000
2010
2020 2030
2040 2050
200
27
Source: PROST demographicprojections
30
IV. SEQUENCING AND MANAGING REFORM ACTIVITIES
61.
The first activity in the reform program would be the creation of the NCSS; the NCSS
would be responsible for managing and coordinating the reform program at the technical and
political levels. In the short-term it would focus on the following activities:
Institutional reforms
*
Develop a multi-year (3 to 7 years) plan to prepare the merger of OPS and CNR.
*
Coordinate the design and implementation of the new information system (including a cashmanagement system) for OPS and CNR. This would imply: i) reviewing the recommendations
of the study of administrative functions and information needs conducted by lEMACTUARIA; ii) preparing terms of reference for the procurement of consultants who will
advise in the implementation process and preparing the procurement of information
technologies; and iii) monitoring implementation.
*
Prepare terms of reference for an evaluation of current accounting and auditing systems.
*
Prepare terms of reference for an audit of the Government's arrears with the pension funds.
*
Prepare terms of reference for a study to improve the regulatory framework for reserves
management.
*
Prepare terms of reference for an audit of the administrative expenditures of OPS and the
actuarial analysis of the health and family services branches.
*
Prepare terms of reference for a study on the development of contractual savings in Djibouti.
Reforms to improvefinancial sustainability
*
Coordinate with the Ministry of Finance the normalization of government contributions and the
retirement of the 773 contractual workers who verify retirement conditions
*
Introduce a ceiling for the replacement rate in the regime for parliamentarians.
*
In coordination with the different stakeholders, prepare a final package of adjustments to the
parameters of the pension funds, evaluate financial implications, and prepare necessary legal
amendments'°.
*
Ensure that a minimum pension to protect low-income workers is introduced.
*
Coordinate with the Ministry of Finance the design and implementation of a plan to refinance
arrears that would generate sufficient cash-flows to cover the operational deficit of the pension
funds.
'° Legaltextsfor OPS,CNRand CMRhavebeenreviewedandstreamlinedby IEM-ACTUARIA.Changes
requiredfor implementingalternativeparametricreformshavebeenidentified.
31
62.
The NCSS would also be in charge of informing civil society and in particular workers and
beneficiaries about the objectives and the content of the reform program. Looking forward, a
major challenge is to build consensus for reform. Some of the short-term and medium-term
measures to be introduced (e.g., reducing pension benefits) may face high political resistance. The
success of the reform process will depend on the Government's ability to promote dialog with
different stakeholders, create awareness about the current problems of the system, and explain the
pros and cons of alternative reform proposals. The major risk is that fixing the short-term financial
position of the pension system delays medium-term reform. It is important, therefore, that shortterm reform is analyzed and discussed within a medium term planning horizon. The long run
implication of current financial decisions should be made explicit to policymakers and
stakeholders.
Table 9: Costs of implementinginstitutional reforms
Activity
Design and
implementationof the
inforrnation system
Update and audit of
databases
Resources
DAYS Daily
Rate
800
Consulting firn to conduct 75
audit of the system and
prepare a development and
implementation plan (in
progress)
Total
fees
60,000
Travel Subsistence Total
costs
cost
6,000
3,000
69,000
I Information-systems
specialist to program and
test the system and train
technical staff
Infornation technologies
180
600
108,000
6,000
6,000
120,000
I Auditor
60
500
30,000
6,000
3,000
39,000
3 Technicians in charge of
updating records
180
40,000
Review of pension funds I specialist on pension
management regulations funds reserves
management
Study on the viability of I specialist on contractual
Contractual savings
savings
25
800
20,000
6,000
2,000
28,000
30
800
24,000
6,000
2,000
32,000
Audit of Government's
Audit firm
arears with the pension
fnds
Auditof administrative Audit firm
expendituresof OPS
Actuarialanalysis of the Actuary
iealth and family services
pranches
30
800
24 000
6 000
2 000
32 000
20
800
16,000
6,000
2,000
24,000
30
800
24,000
6,000
2,000
32,000
Grand total 416,000
Source: Authors calculations
63.
Implementation costs. The Government has already committed US$69,000 for the current
audit of the information system. Additional resources to complete reforms to improve institutional
capacity could approximate US$347,000 (see Table 11). The resources of the PATARE project,
prepared for technical assistance, could finance part (50%) of the activities. Mobilization of
additional resources, preferable grants, would be necessary. The costs of the study to audit the
current estimate of Government's arrears and define a fiscally sustainable refinancing plan could
approximate US$100,000. The European Union (EU) has manifested its interest in financing this
study. The EU is currently financing a study on Government's arrears with the private sector. In
terns of the costs of evaluating and implementing parametric reforms, the Government has already
spent US$150,000 in a study to retrieve and update necessary legal texts. The actuarial analysis of
the impact of alternative parametric reform, on the other hand, has been in charge of the World
Bank. No substantial additional financial resources are expected. The other activities (e.g.,
creation of the NCSS) will mostly require resources in terms of Government staff time.
32
V. POLICY MATRIX"1
Policy Objectives
Actions
Unit
Date of
Implementation Responsible
A. Improvin Governance and Management Capacity
*
*
Improve governance
Improve institutionalcapacity
Set up the National Committee November 2001
for Social Security (NCSS) in
charge of coordinating the
reforms across pension funds.
MOFP/MLNS
Prepare a multiyear plan to
merge OPS and CNR
January 2002
NCSS
Implement new management
and information system.
June 2002
NCSS
Update and audit databases of
contributors and beneficiaries.
June 2002
NCSS
Study to evaluate appropriate
level of reserves and identify
mechanisms to improve
reserves management.
June 2002
NCSS
Audit of the administrative
expenditures of OPS and
actuarial analysis of the health
June 2002
NCSS
and family services branches.
B. Improve the short-term financial situation of the funds
*
*
Adoption of a sustainable plan for
refinancing arrears with the
pension funds in the context of
the global arrears settlement plan.
Regularization of retirement and
government's contributions to the
pension funds.
Inventory and audit of arrears
and cross-debtsbetween the
Government and the pension
funds.
January 2002
MOFP/NCSS
Adoption of a refinancing plan
of governmentarrears which
allows to cover the short-term
deficit of the pension funds.
November 2001
MOFP/NCSS
Retire all eligible workers
(liquidations), in particular the
773 contractual employees
who have delayed retirement.
January 2002
MOFP/NCSS
Ensure the regular payment of
government contributions.
November 2001
MOFP/NCSS
The policy interventions/actionspresented in this matrix, are not necessarily board conditions for the
StructuralAdjustment Credit that Djibouti is currently preparing.
t
33
Policy Objectives
Actions
Date of
Unit
Implementation Responsible
C. Improve medium-termfinancial sustainability
Parametric reform to improve the
medium-term financial
sustainability of the pension
funds.
Adoption by the Government November 2001
of a plan to gradually adjust
vesting periods, the retirement
age, and the accrual rate of
CNR and OPS, on the basis of
proposed scenarios.
MOFP/MLNS/
NCSS
Introduction of a minimum
pension.
November 2001
MOFP/MLNS/
NCSS
Introduction of a maximum
replacement rate in CNR and
elimination of the practice of
cumulating benefits in
multiple funds.
November 2001
MOFP/NCSS
D. Prepare the Ground for Medium-TermReform
*
Identify and implement incentives
to stimulate the development of
contractual savings
Conduct a study to of current
contractual savings
arrangements and identify
institutional and financial
constraints to their
development. Present
recommendationsin terms of
the required regulatory
framework and incentives.
December 2002
NCSS
34
Documents used to prepare the Pension System Reform - Strategic Note
Averting the Old Age Crisis (A World Bank Policy Report)
Budget de l'Etat pour l'Exercice 2000: Republique de Djibouti
Country Assistance Strategy, Memorandum of the President - The Republic of Djibouti
(World Bank Document)
Education Sector Strategy Note - The Republic of Djibouti (World Bank Document)
Interim-PovertyReduction Strategy Paper and Joint IDA-IMF Staff Assessment - The
Republic of Djibouti
New Ideas about Old Age Security toward Sustainable Pension System in the 2 1lt
Century (The World Bank, Washington, DC)
Recueil des Textes de Securite Sociale - Republique de Djibouti:
R6forme des Regimes de Retraite Djiboutiens : Reforme Institutionnelle- Republique de
Djibouti
R6sultats de l'Enquete Demographique Intercensitaire : Republique de Djibouti: (Mars
1991)
Un Carrefour dans la Come de l'Afrique - Evaluation de la Pauvrete
35
VI. TECHNICAL APPENDIX
Al. A model of growth to ensure internal consistency in macroeconomic projections
We operate along a growth path that maximizes inter-temporal social welfare. We postulate that
social welfare can be approximated by a value function V(.) which depends on consumption per
capita. Given a constant risk-aversion utility function and a Cobb-Douglas production function,
the inter-temporal optimization problem to be solved can be written as:
max: V(C,)
(+
=
r)T- {N
1
(N
,'
}
(1)
s.t.
Y = (A, N, ); 8K,
K,+I = K,(1- 3k) +(Y - C,)
logA, =logA,-
+
(2)
Yaexp(-45.t)+o-YaEI
where r is the discount factor, C is consumption, r captures consumers risk aversion (i.e., defines
the curvature of the utility function), Y is GDP, K is the stock of produced capital, N is labor, gk
is the depreciation rate of capital, A is labor productivity, Ya is the growth rate of labor
productivity that decays at a rate S., E are random shocks, and ca is the variance of these shocks.
The solution to this problem can be approximated by:
K,+ - K,I
-(1_k)
i,
[A ln(K,+, /N,+I)= a,
,
+ a2
(3)
(ln(K, / N,)- In(A)
where a, and a2 are functions of ik, 0, the rate of time preference (r), and the coefficient of risk
aversion (T). It can be shown that the coefficients al and a2 are given respectively by:
a, = Ya -a
2
lnk and
f. = exp(ya+ Yn) +
a2
KCkk + Kkc(k
f2
= Vexp(y. + v) + Kkk
f3
= 2exp(y- + yn)
Kk
- f2
)/f
3
-1, where:
/ T)
+ KCC (Kk
/ T)-
4 exp(y. +,Y,)Kkk
=-ck
KCk =
Kkk
= (f
(I + p)- 1
(
-
1)60-1 exp(- yar)
= (I + p)exp(y,r)
36
c
+(k
(I
-a
- exp(yv. + YX
K(1+ p)exp(ar.z)-
(I -,5k
))10]0'-
The model was first calibrated to reproduce an exogenously defined steady state growth rate of
3% per year (the current IMF/World Bank forecast). We then used the model to explore the
growth impact of changes in parameters. Economic growth rates are more sensitive to changes in
the growth rate of the labor force, labor productivity, and the elasticity of output with respect to
capital. We notice that a given interest rate, r, can accept alternative steady-state growth rates,
depending on the value of the other model parameters.
For simulation purposes, two scenarios were retained: a low-growth scenario where GDP grows
at 2% per year, and a high growth scenario where the economy expands at 4% per year (see Table
1). The difference in growth rates is given by expectations about productivity growth. In the
case of the high growth scenario labor productivity would need to grow at 4% per year.
Table 1: Macroeconomic Scenarios
Parameters
DeltaK
DeltaA
DeltaN
LambdaA
LambdaN
R
Thau
Theta
Alfal
Alfa2
COR
Implied average economic growth rate
for the period 2002-2075
Source:Authorscalculations
Scenario
Change
Low growth High growth
in
parameter
0.04
0.04
0.01
0.01
0.01
0.01
0.01
0.01
0.01
0.015
0.03
0.01
0.015
0.015
0.01
0.05
0.05
0.01
0.8
0.8
0.1
0.4
0.4
0.1
0.241237 0.25814
-0.07146
-0.11186
4
4
1
2%
Sensitivity
Change
in
growth rate
-0.280%
-0.110%
-0.130%
0.730%
0.940%
-0.280%
-0.040%
0.860%
-0.650%
3%
A2. Simulatingthe financial position of the pension funds
Core simulations were conducted using the World Bank PROST. To improve the short-term
accuracy of the projections, flows of contributors and retires are based on transition probabilities
between states, instead of population shares. In this mode, PROST requires the following data: i)
the distribution by sex and age of the population of contributors and retirees of a given system; ii)
the distribution of wages by sex and age; iii) the distribution of pensions by sex and age; vii) the
average wage and the total pensions paid in the base year; iv) average number of years of
contribution at retirement; v) mortality rates; and vi) retirement probabilities for different ages.
The methods and sources used to generate the necessary information are described in this section
37
for OPS and CNR. We emphasize that the data received from the pension funds are of poor
quality. Records remain incomplete and have not been audited. Assumptions at different levels
have been therefore necessary. While the major recommendations of the analysis appear robust
with respect to changes in these assumptions, the results of the simulations should be interpreted
with caution.
The case of OPS
Data. The model for OPS was calibrated on the basis of three datasets: contributors from the
private sector and state enterprises (18,116 records after checking for consistency); contractual
workers (3,068 records after checking for consistency); and beneficiaries (2,878 records after
checking for consistency).
Sex and age distributions of contributors and beneficiaries. Since the databases are incomplete,
we assumed that missing records were random and used available records to derive the
distribution of contributors and retirees by sex and age (see Figure 1). These distributions were
then applied to the "correct" populations (see Table 1 in the main text), derived from OPS
accounting system.
Figure 1: Age distribution of contributors and beneficiaries
.1C2711.190402
0
la
20
3'0
4
50
60
-
70
e0
0
90
50
0Go 70
au
90
Source: Authors calculations givenOPS records
Wage distribution. Since PROST does not allow for differentiation between workers from the
private and pubic sector, individual records were merged to estimate a joint distribution of wages
(see Figure 2). The average wage for contractual workers (DF 658,975 per year) represents
55%of the average wage for workers in the private sector and public enterprises (DF 1,190,256
per year). Current distributions are modified over time to ensure that the steady-state distribution
is upward sloping in the support [15-65]. The implicit assumption is that in the steady-state,
wages are proportional to labor productivity which increases up to age 65 and decreases
afterwards.
38
Figure 2: Wage distribution by age and sex
1500/D
. ............
........ . ..... ..........
140%/-
~
130%-..............
E 120%
-
o 110%
100%
iE.
Males(2000)
__
-
___
a90%
-a-t Mates
(2075)
_
R(
I' 80% ________
___
Females
t _ (2000)
_
._______
---
-
Females(2075)
70%
a
6%50%
-__
15
35
-_-
55
75
Source: Authors calculations given OPS records
Pension distribution. The database of beneficiaries was used to derive the distribution of
pensions by age (see Figure 3) and income decile (Figure 4). The latter is needed to evaluate the
impact of introducing a minimum pension. We observe that the distribution of pensions is highly
unequal. The average pension received by the first decile represents 10% of the average pension
received by I 0h decile. We use this distribution, to estimate the number of individuals who
would have a pension below an exogenously defined minimum. The distribution is also used to
compute revenues resulting from a tax on pension above a given minimum. The distribution is
assumed to be constant over time. Indeed, attempting to project shifts in these distributions with
the type of data available, would simply obscure the results of the actuarial analysis.
Fi!ure 3: Pensions distribution by age
140%/
120%
__
i: -
_
wo>
20%
_
55
__
60
65
70
__
75
80
85
90
Age
39
Figure 4: Pension distribution by decile
90.0%
80.01%
0 !
70.0%
_/
_
_
-
_
60.0%___,C
50-0%
o
4000%
*
30.0%/o
20.0%
-
-
X
10.0%
0.0%
0%
-
-
-_
_
20%
40%
60%
80%
100%
Populationshare
Source: Authors calculationsgiven OPS records
Total pensions paid and total contributions. Since the individual records are incomplete, they
cannot be used to compute total revenues and total pensions paid. Thus, the income statement of
OPS was used to derive the structure of revenues and expenditures. In the model, the collection
rate of the system was adjusted to replicate the current level of revenue. With an average covered
wage of DF 1.1 million per year, the system could receive revenues of DF 2.5 billion. However,
the Government is not remitting contributions equivalent to DF 217.4 million and evasion in the
private sector costs the system an additional DF 1.2 billion (the distribution of these arrears
between state enterprise and private sector firms is unknown). Hence, the effective collection rate
is only 42%. In terms of pensions, PROST internally adjusts the average pension to replicate
observed expenditures.
Demographic projections. Demographic projections have been developed by the World Bank
Health Sector Anchor on the basis of past mortality data (the last census in Djibouti was
conducted in 1990). Figure 5 displays life expectancies and the implied population growth rate,
which decreases as fertility rates drop faster than mortality rates. New mortality rates and their
future dynamics are supposed to take into account the impact of the FHV/AIDS epidemic.
Nonetheless, given high levels of uncertainty in terms of the current HIV prevalence rate, the
projections and associated results should be interpreted cautiously.
Flows of contributors and beneficiaries. A critical determinant of the financial situation of the
system are enrollment and retirement pattems. In the case of contributors, the population of each
age group at time is given by:
r
C = (Cai (1 -ra)
M(Ca-, ,a,t)) +±sg , NC,
,
(4)
where r, is the share of contributors of age a who retire, M(.) is the mortality function, g is a
parameter defining the growth rate of the stock of total contributors (NC), and sa is the share of
new contributors of age a.
40
Figure 5: Life expectancies and population growth rate
Males
Females
LibExpecancy:
At
B..........................
irth
-
80.0
70.0
60.0
_
50.0
.-
*-
UbExpectaicy:Al
E&
Al Age 20
AlAge60
000
AtAge60
AtAge65
50.0
tAger65
40.0
400
30.0
30.0
20.0
.............
.......................
... ..............
70.0
-u-AtAge 2D
_
-
80.0
20.0
-
tO.O
0_
2000
10.0' E<
2020
2040
2000
2060
2020
2060
2060
lAl
1.2%
.4%
1.0%
.2%
2001
2011
2021
2031
2041
2051
2061
2071
Year
Similarly, in the case of old age pensioners, the population at each age group a is given by:
Ra =(Ra,i - M(Rai-))+raCa-,
(5)
Unfortunately, in the case of Djibouti, there are no data available to rigorously estimate the
parameters g,, s0 and r0 . In order to generate plausible enrollment and retirement patterns, we
have operated under the following assumptions.
Expanding coverage (g, ). We consider two scenarios. A low-case (which is associated with the
low growth scenario, see Section Al) assumes that within the next 15 years the number of
covered workers will grow\ very slowly, at 0.5% per year (below the population growth rate of
1.6%). Under this assumption, during the period 2001-2015 the share of the population aged 15
to 55 covered by the system decreases to close to 7%. This scenario is consistent with current
low levels of coverage, which suggest that historically the system has expanded slowly. The
high-case, on the other hand, considers that the population of contributors grows at 2% per year
(above the population growth rate). Thus, the share of the population aged 15 to 55 covered by
the system remains close to 8.5%.
41
Figure 6: Age compositionof new enrolled in OPS (Contractual workers) and average
enrollment age by year
12
c6
4
0.
2
0
10
20
30
40
50
60
70
Age
1
00~~~0
Sl29.34?j
1980199
year
Age distribution of new contributors. We also assume that the distribution of new retirees is
triangular in the support [15,40] and uniform in the interval [41,50]. Moreover, we impose the
constraint that the cumulative distribution in the interval [15,40] be equal to 85%. We base these
assumptions on data for contractual workers. For this group, 86% of all workers enrolled before
the age of 40. The mean enrollment age has been declining over time (see Figure 6), from 50 in
1980 to 30 in year 2000. In the case of workers from SOE and the private sector, data on age of
enrollment is not available. Nonetheless, the individual records suggest that contributors are
relatively young. Today 50% of contributors are less than 35 years old and 65% are less than 40
years old.
Retirement. The individual records for private sector/SOE workers show that 95% of workers are
bellow age 55 and that 99% are below age 60. This suggests that the majority of workers retire
between ages 55 to 60. Retirement probabilities for these workers were approximated using 2000
data (see Figure 7). The data show that 65% of new retirees in year 2000 were aged 55 to 60.
Moreover, 99% of the contributors are aged 65 or less. We assume that gradually that the
probability of retirement after age 55 increases gradually, reaching 100% in year 2020.
42
Figure 7: Retirement patterns for private sector/SOE workers
I
0.9
-_/
0.8 0.7
L
-_
_
0.2 0.1
0
55
57
59
Age
61
63
_
65
Source:AuthorscalculationsgivenOPSrecords
In our simulation we also take into account the special case of contractual workers who have
delayed retirement despite verifying retirement conditions. There are 773 workers in this
situation (see Table 2).
Table 2: Distribution of contractualworkers who have delayed retirement
Yearly
pensions USD
919,222
123,624
102,865
55
54
65,957
Total
1,211,668
Late contributions
USD
Total wages per year (1995-1998)
2,785,401
2,506,862
Total wages per year (1998-2000)
Total contributions
3,127,728
Source: Authorscalculationsusingdatabaseof contractualworkerspreparedby Ministerof Finance.
Age
>56
56
Number
571
84
68
50
Retire
2001
2001
2001
2002
Vestingperiods. To explore the relationship between retirement age and contribution years we
use the database of retirees, which keeps track of retirement age and vesting periods. The data
show that among workers who retired in year 2000 there was an inverse correlation between age
and contribution years (see Figure 8). While a 35 year old would have contributed, on average,
20 years, a 60 year old would have contributed 18. In the simulation we use the 2000
distribution of contribution years by age. Based on the data, we also assume that the average
contribution period will increase by 0.5 each year (see Figure 8). We impose the constraint that
vesting periods for all ages converge to 25 years by 2030. Since the retirement age remains at 55
and retirement probabilities converge to one for ages above 55, this implies that on average
workers will enroll OPS at age 30.
43
Figure 8: Vesting periods and retirement age
Y-bb
~~~~~~~~18.7625
FlftdVAM
_
_
15-
0
0
A.227
0
0
Source:AuthorscalculationsgivenOPSrecords
When changing required vesting periods, retirement probabilities are affected as the share of
workers meeting the new condition decreases within each age category. As an illustration of this
effect, Figure 9 presents the reduction in the number of new retirees among contractual workers
(the figure was derived under the assumption that all workers meeting retirement conditions
retire) resulting from an increase in the vesting period from 15 to 25 years at an annual rate of one
year and two years respectively. We observe that the percentage reductions are sizeable (in the
order of 20-50%) and increase over time.
Figure 9: Changes in the absolute number of new retirees resulting from an increase in the
vesting period from 15 to 25
0.000%
1938
-10.000%-
200
2002
2004 2006
30.000%
2010
_I_
, -20.000%
20
e
2008
2 2
e
2
\
1 year peryear
speyear
____
-40.000%
-50.000%
-60.000%
To handle this problem we assume that vesting periods across ages are normally distributed. The
probability that a worker of age a ill retire is given by:
pr(R, = 1) = D(v;'aF.,
oa )IP(a),
(6)
where R&=1indicates retirement, >(.) is the cumulative normal density with mean and standard
deviation Va,or, that gives the probability that a worker has contributed at least v years (v is the
vesting period), and T'(a) is the unobservable probability of retirement given that retirement
44
conditions are met. Under these assumptions, the growth rate of the probability of retirement can
be expressed as a change in the vesting period and is independentof T (a):
apr(R,
pr(Ra
=1)
a(v;V,,aj
=1)
aT(a)
D(V;V.a,a0a)'P(a)
C-((V; Va"ga)
(D(v;V,)
'
(7)
Using data on contractual workers (excluding those who delayed retirement) we estimated the
standard deviation of vesting periods by age (see Figure 10). We can then infer for each year the
share of workers who would have retired under the "old" vesting period, who cannot retire under
the "new" vesting period.
Figure 10: Standard deviation of contribution periods by age group
04.5
0
X s
01.
*~0.5
0
<55
55-65
>65
Age
groups
The case of CNR
Data. We used individual records for contributors and beneficiaries. Given the quality of the
data, we limited our analysis to the regime for functionaries which accounts for 66% of CNR's
total contributors and 42% of its retirees. We have included individuals within categories B to E
and excluded individuals within category A equivalent to ministers and parliamentarians.
Sex and age distributions of contributors and beneficiaries. As in the case of OPS, we assumed
that missing records in the database of contributors were random and used available records to
derive the age distribution (see Figure 11). Given that the field sex is not available in the
database, the distribution by sex was not derived. In the case of retirees, the fields sex and age
are missing. Hence, we used as a proxy of the current age distribution the steady-state
distribution given past and current mortality rates and assuming that all new retires are 55 years
old (this seems to be the case as indicated by CNR administrators). Figure 12 summarizes the
resulting age distributionof the populations of retirees.
45
Figure 11: Age distribution of the population of contributors
0.14.-.
0.12
~0.1
LI0.08
.
_
_
__
0.06
c*, 0.04-
0.02 0
0
10
20
30
40
60
50
70
Source: Authors calculations using individual records
Figure 12: Age distribution of the population of retirees
0.05 0.045
0.04
LI 0.035
5 0.03
0.025
'CD 0.02
55
t
60
65
70
75
80
85
b~~~~~~~Ae
usingindividualrecords
Source:
Authorscalculations
Wage andpension distributions. In the case of contributors we merged the individual records to a
database containing the index wage by category, class and grade. Since the nominal wage is
proportional to the index, we simply looked at the distribution of the latter. The adjusted
distribution is summarized in Figure 13. Given that the Government is in the midst of a fiscal
stabilization program, we have assumed that nominal wages will not be adjusted within the next 5
years. Afterwards, wages are assumed to growth in real terms with labor productivity (see
Section Al). In the case of retirees, in the absence of information about age, we used the same
distribution of pensions by age than for OPS. The important element is to consider that the
average pension is lower among older retirees, given that their wage at retirement is lower. Using
a uniform distribution would have been another alternative, but since the mortality rates of old
pensioners are higber, this assumption would have biased down-wards total expenditures.
46
Figure 13: Adjusted wage distribution by age for the population of contributors
200%
_
180%
¢
.
100%
I
-
-
:
_
160%
ZD140%-_
120%
__
*___,_
80%
_
___j
'~60%
_
40%_
_-
20%
20
30
40
50
60
70
80
_
90
Age
Source: CNR individual records
Total pensions and total contributions. Data on total contributions and total pensions paid come
from CNR's income statement. The average wage of the functionaries was computed by dividing
the average contribution per worker by the contribution rate (18%). The average pension for old
age pensioners was computed by dividingtotal pensions by the total number of retirees.
Flows of contributors and beneficiaries and vesting periods. We use the same model as in the
case of OPS. The implementationin the case of CNR, however, is simpler. First, we assume that
no new hiring will take place until 2006. From 2006 onward, the stock of functionaries remains
constant. Second, we assume that new functionaries enter CNR at age 27. Finally, we assume
that all functionaries retire at age 55 and that on average have contributed to the system 25 years.
In the case of the current contributors older than 55 years, we assume that the probability of
retirement is 30% (this probability was calibrate to preserve the trend in terms of new retirements,
close to 80 per year). These simplifying assumptions are required given the quality of the data.
Nonetheless, since in the case of CNR the parametric reform concentrates on changes to the basic
and marginal replacement rates, these assumptions are appropriate to make a first evaluation of
their impact.
A3. Deriving equilibrium contribution rates and replacement rates in funded and unfunded
systems
Funded system
This section proves the following proposition. There is a well defined linear relationship
between equilibrium contribution and replacement rates which depends exclusively on labor
productivity growth (g), the contribution period (T), the retirement period (L), and the interest
rate (r). A higher contribution period, a lower retirement period and a higher interest rate will
always reduce the contribution rate necessary to match a given replacement rate. The effect of
laborproductivity growth, however, is ambiguous.
47
Derivation
The total contribution accumulated by a given worker during a period of T years is given by:
T
(8)
C = fawoet(rr)+r,
,=o
where a is the contribution rate, g is productivity growth, r is the interest rate applied to the
contributions and w0 is the worker's wage when he/she starts to make contributions. On the other
hand, the present value of the total pension received by the worker when he/she retires is given
by:
L
P=
fpoe-r
(9)
,=o
where p0 is the pension that the worker receives and L is the number of years that the worker
receives a pension.
Let's assume that the pension is computed on the basis of a replacement rate, R, which applies to
the salary in year z<T, so that
(10)
Po = tR.wOe,
By integrating (1) and (2) and rearranging we derive the following relationship:
a = O(g,r,T,L)R.eg,
where 0(g,r,T,L)=
(
g-r)e(rL
reT(g-r)+rT -
(11)
1i)
rT
A higher interest rate, a higher contribution period and a lower retirement period will always
reduce the contribution rate necessary to match a given replacement rate. The effect of economic
growth,
-=
ag
however,
Ra () e
is
+ e 'z
ambiguous.
Indeed,
we
notice
that
while
()
ag
< 0,
can be positive depending on the value of z. Basically, if the
Og)
replacement rate applies to a wage which is close to the workers final wage (i.e., z is close to T),
then labor productivity growth increases the expected pension and therefore the contribution rate.
Unfunded system
In the case of a non-funded system, the equilibrium contribution rate depends on the dependency
ratio (number of retirees per contributors) and the average replacement rate (the ration between
the average pension and the average wage). We have:
48
c =Bp = d.R,
W.W
(12)
where c* is the equilibrium contribution rate, B is the total number of beneficiaries, p is their
average pension, W is the total number of workers, w is their average wage, d is the dependency
ratio and R the replacement rate.
As a non-funded system matures, d increases and financial sustainability requires either a higher
contribution (c*) or a lower replacement rate (R).
A4. Changes in the accrual rate, minimum pensions, and incentives to retire
One of the measures that would accompany the parametric reform is the introduction of a
minimum pension. An issue to consider in this context is whether this minimum pension
generates incentives for early retirement that may have negative impacts over the financial
situation of the fund. In this section, in order to derive some basic insights, we formalize and
solve the problem of deciding the optimal year of retirement within a defined benefit system
(after the vesting period has been completed) and analyze how changes to the system parameters,
including the introductionof a minimum pension, affect the decision.
For simplicity, we postulate that at the end of the vesting period individuals choose the retirement
year in order to maximize the present value of revenues during their remaining lifetime. The
present value of this stream of revenues is given by:
PV(R)=
[wo(1+g)(1-c)p
]+
E[(W 0 (1+g)
(b+aT)+rw 0 (1+g)')p'],(I3)
where T is the number of years the individual will continue to work after the vesting period has
elapsed, w0 is the wage at time 0, g is the expected average growth rate of the wage, c is the
contribution rate to the pension fun, b is the basic replacement rate (the replacement rate at the
end of the vesting period), a is the accrual rate, r is the share of the original wage that could be
received in the form of a non-taxable income flow after retirement (for example by working in the
informal sector), L is life expectancy, and p the discount factor. The first summation gives the
present value of the revenue the individual receives while working (between time I and time T),
and the second summation gives the present value of the income that the worker receives after
retirement. This formulation assumes no ceiling in the replacement rate.
Depending on the value of g, c, a, b, and r, the function linking PV(R) to T can take four basic
shapes (see Figure 14). Shape 1: The function increases constantly so that the worker has never
the incentive to retire (he/she would retire only if there is a physical impediment to continue work
or a mandatory retirement age). Shape 2: the function decreases constantly so that the work
would have the incentive to retire as soon as the vesting period has been completed. Shape 3 (U
shaped): the function first increases, then decreases, so that there is an optimal retirement year.
Shape 4 (inverted U shape): the function first decreases then increases so that the individual is
better off by not retiring (as in shape I).
49
Figure 14: Total revenue and year of retirement
,19
e' 17
_-
!15
13
g
___-
11
_
Shape1 (b=0.3,a=O.a2,c=O.20,r=O)
9g
a
_
_
-a-+ Shape2 (b=0.6,a=0.02,c=0.20,r=0.5)
Shape
3 (b=0.3,a=0.02,c=0.20,r=0.5)
7
5
___________________________
0
5
_
10
,
15
-Shape 4 (b=0.6,a=-0.02,c=0.20,r=0.5
20
25
30
Number
of yearsaftervestingperod
Wage at the end of vesting period (w) is set equal to 1. Growth rate of wages (g) is 2% per year.
Source: Authors' calculations
In the case of Djibouti, where b=0.30, a=0.02, c=0.20, and r is expected to be low, the curve will
most likely adopt shape 1 (which implies that workers will have an incentive to delay retirement
as much as possible), or shape 3 (where workers retire a few years after completing the vesting
period).
The impact of a minimum pension on the retirement date. Consider the case of an individual
who, after the vesting period has elapsed, would receive a pension below a certain minimum P*.
This implies that b*wo<P*. Moreover, assume for illustrationpurposes that P*/ wo =0.60 so that
in order to receive the minimum pension this individual would need a replacement rate of 60%.
Now consider the introduction of this minimum pension. The curve facing this individual will
most likely adopt shape 1. However, if the expected growth in wages is low and the replacement
rate to attain the minimum pension and/or the ratio between non-pension related income after
retirement and income prior to retirement (r) is high, the curve will adopt shape 2. In this case,
the minimum pension provides an incentive for early retirement (see Table 3). If individuals,
however, expect higher wages, then the income curve will become S-shaped (see Figure 15) and
again workers will have an incentive to wait.
In the case of Djibouti (OPS), current retirement patterns and low wages in the infortnal sector
suggest that the average r is low. If structural reforms stimulate growth, and thus expected
wages, it is unlikely that the minimum pension would create incentives to retire as soon as the
vesting period is over. However, in order to avoid the risk of an outbreak of low-income early
retirees, the minimum pension could be linked to a higher vesting period.
Table 3: Minimum pension, reservation income, and early retirement
Reservation wage
Replacement rate to attain a minimum pensior 0.2
0.4
0.5
0.4
Shapel hape.
Ihope
0.5
Shape Sha el ha e
0.6
Shape IShape Shape2
0.7
Shope , hapeShape
50
Figure 15: Present value of income with a minimum pension and fast growth
!
$20000
$10.052°
$14000
$&000
$SO1.OOO
$2000O
0
5
10
15
20
25
30
Tnme
aftr vedngperiod
51

Republic of Djibouti Pension System Reform

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