Revamping Iraq’s Pension System for Equity, Sustainability, and Expanded Coverage

Iraq urgently needs comprehensive pension reform to address its fragmented and unsustainable system, with recommendations from the IMF, ILO, and World Bank focusing on equity, financial sustainability, and expanded coverage. The proposed changes aim to provide adequate protection for all Iraqis, support economic diversification, and maintain fiscal stability.

A comprehensive reform of Iraq's pension system is critically needed to address its fragmentation, inequity, and inefficiency. A recent collaboration between the International Monetary Fund (IMF), the International Labour Organization (ILO), and the World Bank has resulted in a detailed assessment and a proposal for a set of reforms aimed at making the system more sustainable and equitable. Iraq’s current pension system includes contributory schemes for public and private sector employees, as well as several budget-financed programs. The pension coverage gap, particularly for women and informally employed workers, is projected to widen rapidly. Fiscal costs of the current system are expected to remain close to 4 percent of GDP annually for the next eight decades, disproportionately benefiting formal workers in both sectors.

Fragmented Pension System Reflects Political History

Iraq’s pension system is a mosaic of fragmented schemes, reflecting the country’s tumultuous political history. The contributory scheme for public sector employees, governed by the Unified Pension Law, offers high coverage and generous benefits. However, recent amendments have expanded eligibility and increased pension benefits without adjusting contribution rates, exacerbating financial sustainability issues. The private sector scheme was reformed in 2023, expanding legal coverage to all workers on a voluntary basis and introducing new benefits like maternity and unemployment insurance. Despite these changes, effective coverage remains low due to regulatory hurdles and weak uptake, with only about 500,000 workers currently registered. Additionally, three budget-financed schemes created in 2009 provide various forms of compensation to victims of war, terrorist acts, and political persecution, further complicating the system.

Challenges to Effective Coverage and Financial Sustainability

Challenges to Iraq’s pension system include low effective coverage in the private sector, driven by low mandatory legal coverage and weak uptake. The public and private contributory pensions combined are estimated to cover 70 percent of men and 45 percent of women above 65 years of age in 2023, with low rates of female labor force participation and high informality among working women being major factors of gender exclusion. The financial sustainability of the current system is at risk due to a structural imbalance between sources of financing and benefit entitlements. The public sector pension scheme’s financial sustainability has been eroded by recent amendments that expanded eligibility, lowered the retirement age, and increased benefits, resulting in expenditures now exceeding revenues and rapidly depleting reserves. The private sector scheme, although less generous, also faces financial sustainability challenges, with the new law expected to delay reserve depletion but ultimately requiring significant government subsidies.

Balancing Equity, Adequacy, and Efficiency

The reform proposals aim to balance equity, adequacy, labor market efficiency, and financial sustainability. Key objectives include reducing overall fiscal costs and reallocating public funds to extend pension protection to vulnerable populations. This includes aligning replacement ratios between the public and private sectors, expanding coverage for private sector workers, and ensuring that incentives for contribution throughout working life are in place. Additionally, the proposed reforms ensure regular pension indexation to maintain benefit adequacy over time. The proposed reforms include parametric changes such as adjusting retirement ages, contribution rates, and benefit formulas, as well as institutional realignments to improve administrative efficiency and portability of pension benefits. Expanding coverage through a government-financed scheme for those without income in old age is also suggested.

A Path Toward Comprehensive Pension Reform

Implementing these reforms will require a gradual, multistage process, involving broad consultations with key stakeholders to build consensus and address political economy constraints. Effective communication with the public will be crucial to ensure understanding and support for the chosen reforms. The ultimate goal is to achieve a more inclusive, equitable, and sustainable pension system that provides adequate protection for all Iraqis, supports economic diversification, and maintains fiscal stability.

Expanding Coverage and Ensuring Sustainability

The proposed reforms include expanding coverage through a government-financed scheme for those without income in old age, ensuring that the most vulnerable segments of the population receive adequate protection. This involves a detailed reassessment of current benefit formulas and retirement ages, with the aim of creating a more balanced and sustainable system. By introducing these changes, the pension system can better address the needs of Iraq’s diverse workforce and ensure long-term financial viability.

A comprehensive pension reform in Iraq is essential to create a system that is inclusive, equitable, and sustainable. The collaboration between the IMF, ILO, and World Bank has provided a clear roadmap for achieving these goals. With careful implementation and broad stakeholder engagement, Iraq can build a pension system that not only meets the needs of its current population but is also prepared for future demographic and economic challenges.