Saudi Arabia has made a breakthrough in pension reform with the recent announcement of comprehensive changes, aimed at enhancing income protection during old-age and promoting gender equality, according to a blog posted on the website of the World Bank.
The reforms, designed with support from the World Bank, set a new benchmark for the MENA region, addressing critical issues such as retirement age and social insurance coverage.
Increasing and Equalising Retirement Age
One of the cornerstone changes in Saudi Arabia’s new pension reform is the gradual increase in the statutory retirement age from 58 to 65 years. This adjustment aims to ensure the sustainability of the pension system and reflect the longer life expectancy in the country, which increased from 52 years old in 1969 (when the Social Insurance Law was issued under a Royal Decree) to 78 in 2022.
In and of itself, this increase in life expectancy is an achievement and an example of the success of human development policies. The reform also equalizes the retirement age between men and women, promoting gender equality in the labour market and enhancing the adequacy of pensions for women retirees. This parity is essential in creating a fair and inclusive system where both sexes can equally contribute to and benefit from social security.
The reform also raises the required contribution period for early retirement from 25 to 30 years. This change aims to encourage longer workforce participation, thereby reducing the financial strain on the pension system while still providing an option for early retirement under more sustainable conditions.
A Role Model for Pension Reform
Pension reforms are among the most difficult reforms due to their wide impact and political economy challenges. Saudi Arabia took various measures in the rollout of the reform.
First, most reform measures only apply to newly employed people in the public and private sectors who have not made prior contributions to the social insurance systems. Current participants stay under the existing rules. The only exception is that for those with less than 20 years of contribution and under 50 hijri (lunar) years old, some changes in retirement age and vesting period will apply.
Second, contribution rates increase only gradually over five years, from 9% to 11%. This phased approach allows both employees and employers to adjust gradually to the new rates, ensuring a smooth transition.
Finally, the reforms are being accompanied by a targeted communication campaign, with a dedicated platform and an option for workers to input their national ID to receive personalised details on how they are affected by the reform, including their new early retirement eligibility date and their regular retirement date.
More reforms needed
While Saudi Arabia’s pension reform is a groundbreaking development for the MENA region, more reforms are needed. Achieving a truly robust pension system requires further reforms in the entire region beyond parametric reforms such as retirement age and contribution periods.
To ensure sustainability and adequacy, it is essential to diversify pension funds, design adjustment mechanisms, and enhance private savings options. These measures can offer greater flexibility and security, addressing the diverse needs of the population. By adopting a holistic approach that balances fiscal sustainability with social equity, countries can better protect against economic, demographic, and political risks.