By Asya El-Meehy, Lund University
*This memo is part of POMEPS Studies 31, Social Policy in the Middle East and North Africa. Download the full PDF here.
Despite massive mobilization around social justice during the January 25th uprising, Egypt’s current social policies show strong patterns of continuity and few changes from the Mubarak era. In fact, successive reforms reduced food subsidy benefits and cut leakage to unintended groups without significantly undermining universal access to the system, a hallmark of the country’s welfare regime. Despite the launching of two new, targeted cash transfer schemes, Takaful and Karama, social assistance, on a non-contributory basis, has continued to represent a marginal component of the state’s overall social expenditure and its safety net’s coverage. Contribution-based social insurance schemes, nonetheless, have recently witnessed significant developments. Aside from the issuing of health insurance reforms addressed elsewhere in this collection, ambitious semi-privatization of old age pension schemes was reversed following the ouster of Mubarak’s regime. In fact, the short-lived 2010 pension reforms – which sought to structurally transition Egypt’s old age pensions from a defined benefits system, financed on a “pay-as-you-go” basis, to a defined contributions notional accounts funded system – were nullified by transitional authorities post-uprising. Instead, under Sisi, reform initiatives have focused on more limited parametric reforms. Cumulatively, welfare policy changes in recent years have fallen short of restructuring social policy-frameworks, or explicitly overhauling the structural foundations of Egypt’s welfare regime, which I label insurance-based egalitarian regime (see El Meehy 2010).
This memo focuses on one specific dimension of welfare reforms, namely contribution-based old age pensions. I seek to explore the underlying dynamics that have shaped the pension reform process in Egypt pre and post uprising. The welfare state literature often stresses path dependency and longevity of pensions policies in developed countries due to the influence of well-organized interest groups and beneficiaries’ associations that resist changes to the prevailing policies and entitlements. In contrast, I argue that, in Egypt’s context, pressures from civil society and pensioners’ associations played a limited role in shaping pension reform outcomes. Rather, the regime’s own power maintenance logic and cultural norms of citizenship shaped the acceptable contours for policy reforms, which were instigated by concerns over financial sustainability of pension funds. The memo draws on in-depth interviews with current and former officials in charge of the social insurance and pension fund, senior decision-makers at the Ministry of Finance, and specialized technocrats, who were involved in drafting reform bills.
Context: Egypt’s insurance-based egalitarian welfare regime
The beginnings of Egypt’s contemporary welfare regime dates back to the period between 1936 and 1951, which witnessed the enactment of the country’s first social security legislations and the expansion of the state’s direct involvement in the social arena. Influenced by the ILO, income security was promoted through “forms of risk-pooling and/or saving that are dependent on employment,” as opposed to citizenship-based social assistance. The pursuit of an etatist development model, based on import substitution-based industrialization, nationalization, and public employment policies, facilitated the rapid expansion of employment-based benefits. Since the adoption of Arab socialism tied the state’s legitimacy to the enactment of “social rights,” ideological dynamics created a momentum to extend coverage to new groups and eventually expand egalitarian universal benefits such as subsidies on food (see contribution on social insurance expansion).
Over time, the country developed a well-established social insurance system that gradually expanded beyond the urban working class to achieve one of the highest labor market coverage rates in the Middle East and North Africa. Indeed, coverage is estimated to range from 39 percent (Sieverding 2016) to 60 percent (interview with Mohamed Maait) and even as high as 65 percent (World Bank figures from Robanilo 2005, p54). With growing informalization of labor market, however, there are signs of declining trends in effective coverage, particularly among youths.
In order to promote equitable outcomes, Egypt’s insurance-based system traditionally incorporated a modest upper ceiling on pensionable salaries. Although social insurance schemes are co-financed by the employer, the beneficiary, and the public treasury, which contributes 1 percent of the annual pensionable salary regardless of earnings levels, a modest upper ceiling on monthly earnings for contribution and benefit purposes is set at LE 3852. Given that salary levels typically exceed the maximum monthly salary this feature of the social security system serves to moderate inequality.
As far as benefits are concerned, the system has been characterized as “one of the most comprehensive in Africa and the Arab World,” encompassing old age, disability, maternity, health, and unemployment benefits. However, the system is stratified with five occupationally based social insurance schemes, extending varied legal benefits and differential coverage of risks. The largest of which is pension scheme established by law 79/1975, which unified coverage for all government, public, and private sector employees who are subject to the labor law provisions. Beneficiaries of this scheme represented more than half of all pensioners and the bulk of contributors.
Finally, Egypt’s welfare regime traditionally incorporated marginal social assistance schemes that, unlike pensions, extended means-tested support to the poor on a non-contributory basis. However, the country’s insurance-based system was supplemented by a universally accessible food subsidy system that, I argue, constituted a significant egalitarian component of Egypt’s welfare programs. Indeed, until the onset of retrenchment in the 1990s, public expenditure on the subsidy system and the welfare regime as a whole surpassed indirect taxes that predominantly affect the poor (for discussion see El Meehy 2010).
Pension reforms under Mubarak
Mubarak’s regime maintained Egypt’s pension policy framework with mild waves of reforms in the 1980s and 1990s aimed at adjusting benefits to improve coverage and to keep up with inflation levels. In the early 2000s, however, neoliberal-minded reformers within the ruling National Democratic Party led by Boutrous Boutrous Ghali spearheaded a pensions restructuring campaign focused on old age benefits. The existing system was criticized as both financially unsustainable and regressively biased against lower income groups who pay higher contribution rates from their wages. The former criticism relates to the poor management of pension funds, which fell under National Investment Bank before their official transfer to the public treasury in 2006. Indeed, old pensions, according to one of the architects of the reforms, did not accrue interest, instead they were often used to cross-subsidize pensions for military personnel and social assistance schemes, or finance infrastructure development yielding little profit (interview August 1, 2011). This eventually led to a shortage of funds and growing public debt by successive governments to the pensions funds.
The World Bank advocated overhauling the long prevailing pay-as -you-go system that provides defined benefits to retirees to establish a Notional (non-financial) Defined Contribution System (NDC), along the lines of the Chilean model. Neoliberal reformers in Egypt, however, were skeptical about introducing a NDC system that had been implemented in very few countries and was perceived as politically unviable. Alternatively, they developed a hybrid multi-pillar model combining NDC with a financial defined contribution schemes. Starting 2013, new labor market entrants would designate between 65 and 80 percent of their pension contribution to the NDC scheme, which guaranteed annual interest return equivalent to the interest rate on government bonds and Treasury bills. The remaining 20 to 35 percent would be designated to the Financial Defined Contribution (FDC) scheme, whose balance would be invested in a diversified portfolio and assigned average rate of returns on total invested FDCs. Investments for the new pensions were envisioned to absorb demographic and financial changes. Further, the switch to individual accounts was seen as creating incentives for people to save as well as encouraging stock markets activity. Also, the system was envisaged to include a social pension for all persons aged 65 or over, regardless of whether they had participated in the pension scheme. The minimum pension was set at 15 percent of the national average wage.
In addition to these changes, reform steps included a number of parametric changes. Employees’ contribution rate would be cut from 14 to 11 percent, while employers’ contributions would be reduced from 26 to 19 percent. The law eliminated the cap on pensionable salary, while also stipulating that pensions calculations were to be based on gross, rather than basic, salary levels. The law also provided for the regular adjustment of pensions for inflation, as long as the inflation rate is above 8 percent. And, controversially, the reform gradually increased the retirement age from 60 to 65 years by the year 2027.
Although the Mubarak regime created spaces for dialogue over pension reforms, mobilization and legal action by civil society actors opposed to the new system heightened the stakes in a highly polarized debate. According to the architect of the reforms, the government agreed to make a few amendments related to work injury compensation rates and the end of service indemnity during discussions in the Shura council in order to appease fears among the citizenry. In his words: “We made some amendments because how you package reforms is important,” (Interview with Maait August 11, 2011). These amendments, however, seemed to some extent reflect cultural values on social rights but did not necessarily reflect activists’ demands. For instance, they did not include key demands by pensioners’ associations such as maintaining retirement age at 60 or a provision for early retirement after 20 years of service. My interviews with pensioners’ associations and civil society activists indicate that, despite their mobilization in opposition to the legislation, they perceived their influence on the final bill as limited.
Pension reforms post-January 25th uprising
In the wake of January 25th uprising, a series of workers’ strikes and the establishment of Egypt’s first independent labor union brought labor rights to the forefront of social policy debates. The ability of unions and pensioners’ associations to advocate for policy change was curtailed both by the establishment of a neo-authoritarian populist regime, as well as the emergence of splits within the ranks of both groups. Indeed, the two biggest independent unions – the Egyptian Federation of Independent Trade Unions (EFITU), which was established on January 30, 2011, and the Egyptian Democratic Labor Confederation (EDLC), established on April 24, 2013 – have still not succeeded in uniting their ranks. Despite efforts to amend the Trade Union Law and officially legalize the right to freely establish trade unions upon notification to the Ministry of Manpower since 2011, the bill has yet to be ratified, putting the unions in a legally precarious situation. As far as pensioners’ associations are concerned, serious splits in leadership have emerged over tactics and strategies to lobby the state for greater rights.
Despite the weakness of these groups, successive transitional authorities and the Sisi regime repeatedly raised pension levels. As a result, spending on pensions as a ratio to total social expenditure in the budget steadily rose from 2.4 percent in 2011 to 2012, to 5 percent in 2012 to 2013, to 8.8 percent in 2014 to 2015, and 12.4 percent in 2016 to 2017. Rising pensions spending arguably reflected the ruling regime’s efforts to consolidate support among pension beneficiaries, the vast majority of whom belong to the so called limited income groups, or state-linked lower middle classes.
The uprising also created a window for major policy reversals on earlier pension reforms. Following the June 30th mobilization and Mohamed Morsi’s ouster, Egypt’s interim president Adly Mansour officially rescinded law 135/2010, citing the lack of social consensus around the new system, even among employers, and the state’s commitment to social justice. The decision was again driven by attempts to win popular support and consolidate the regime’s hold on power.
In fact, changes to the pensions policy framework reforms have yet to materialize, although Egypt’s 2014 Constitution included an explicit clause on guaranteeing minimum pensions level. In fact, since Sisi’s accession to power, several draft bills to reform the pensions system were proposed for discussion in Parliament. In 2017, a drafting committee was formed that included a few representatives from pensioners’ associations along with concerned ministries, the army, and actuarial experts. Following six months of debate, however, the space for social dialogue about the direction of pension reforms was narrowed with subsequent discussions in Parliament and redrafting stages not involving civil society actors, including labor unions or pensioners’ associations.
Findings from my research indicate that the latest bill is expected to merge Egypt’s pension schemes into a single unified defined benefits system based on inter-generational solidarity principle. While official retirement age at sixty will be maintained, a series of parametric reforms will be introduced. For instance, in a bid to improve coverage and sustainability, pension benefits will be calculated based on average salaries in the last five years of contributions as opposed to the highest paying last two years as in the current system. Other changes include doubling the upper ceiling on insurable salaries as well as calculating benefits based on gross, rather than basic, salaries. With the increase in the salaries’ upper ceiling, the reforms will likely improve its coverage among higher earning employees, but it is likely to also result in greater differentiation along class lines. As minimum contributions for private sector workers would more than double from 162 LE to 400 LE, there may be less incentive for informal sector workers to opt into the system without specific measures designed to incorporate them.
In order to improve the scheme’s poverty alleviation effects, the reforms will legally stipulate annual raises in benefits corresponding with official inflation rates. Further, it is expected that a minimum monthly pension will be set at LE 750. Finally, the law envisions creating a new entity to autonomously manage pension schemes. It is not clear, however, if the envisioned reforms will indeed effectively limit cross subsidization of the military pension schemes, or succeed in expanding coverage to a larger segment of the labor force.
Towards an explanation
The power maintenance logic of successive regimes has, to a large extent, shaped pension reforms in Egypt prior to and after the uprising. To varying degrees, cultural norms of social citizenship seem to have as well informed both rounds of pensions reforms. As for the unions and pensioners’ associations, my analysis shows that they were neither fully included in either of the reform processes nor will they capable of exercising enough leverage over the direction of reforms.
 Under defined benefits-PAYG schemes, the contributions of current active members are used to pay the pensions of those who are currently retired, and the benefits are determined as a defined percentage of the average monthly wage earned in the last few years before retirement. Under defined contributions notional accounts funded system, the insured pays a defined contribution of monthly wages, which upon retirement finances a pension benefit partially calculated on the basis of accumulated savings, life expectancy, and market interest rates.
 Welfare schemes were successively adopted in 1936, 1942, and 1950. In later years, there were various attempts to consolidate social insurance schemes and introduce coverage for: the self-employed (1976); casual workers (1980); and workers employed abroad (1973)
 Ibid. 13.
 The employer contributes 15 percent of the covered monthly payroll plus 2 percent of base monthly payroll for lump sum benefits, while the beneficiary contributes 10 percent and 3 percent respectively. The maximum monthly salary for pensions purposes includes both base and variable earnings. US Social Security Administration Office of Policy, “Social Security Programs Throughout the Worlds: Africa, 2007” <http://www.ssa.gov/policy/docs/progdesc/ssptw/2006-2007/africa/egypt.html>
 Blandine Destremau, “Overview of Social Protection in Southern and Eastern Mediterranean Countries,” (paper presented at the Social security: a factor of Social Cohesion Euro-Mediterranean conference, Limassol, 27 and 28 May 2004), 30, A.S.M.Kashef, “Egypt,” in Social Welfare in the Middle East, ed. John E. Dixon (London ; Wolfeboro, N.H.: Croom Helm, 1987).
 On the food subsidy system, see Karima Korayem, “Food Subsidy and Social Assistance Programmes in Egypt; Assessment and Policy Options,” CROP Poverty Brief March 2011.
 I use the term as defined by Paul Pierson in his influential study Dismantling the Welfare State? to refer to “policy changes that either cut social expenditure, restructure welfare state programs to conform more closely to the residual welfare state model, or alter the political environment in ways that enhance the probability of such outcomes in the future.” p41
 The old system was envisioned to continue covering existing subscribers for another 75 years, but members were to be given the choice to transition to the new system.
 Article 27 states: “The economic system is socially committed to ensuring equal opportunities and a fair distribution of development returns, to reducing the gaps between incomes by setting a minimum wage and pension to ensure a decent life, and setting a maximum wage in state agencies for whoever works for a wage as per the law.”