Pension Reform

Pension Reform

The Social Security System in Mozambique

Economies the world over recognize the importance social security systems. Social security systems are a fundamental part of the private sector - and ensuring systems work responsibly and effectively is critical for a vibrant economy.

Social Security systems contribute to economic growth by encouraging investment, promoting productivity (better health for workers), and sustaining economic activities and wage security. Social protection for the poorest and the most vulnerable people can also facilitate the implementation of structural reforms aimed at economic growth and development. Furthermore, it has a key function in promoting equity and reducing inequality (and thus on the reduction of poverty).

In Mozambique, the USAID Trade and Investment Project examined various problems that the pension system in Mozambique is experiencing and provide recommendations to assist in improving the program. Ultimately, these recommendations will help to make the pension program more effective in providing retirement income security and in limiting the effects of poverty among pensioners and their families.

This study focuses on the old-age, invalidity and survivors (OAIS) pension program of the social security system. The social security system also includes cash sickness and maternity, hospitalization, cash death grants and funeral allowances for burial expenses. The social security system is administered by the National Social Security Institute (INSS). A separate pension insurance scheme exists for civil servants and is administered by the Ministry of Finance. Together these social insurance programs play a vital role in providing social protection and income security to workers and their families.

The current structure of the OAIS program was established in 1989 after the passage of the Social Protection Law (Law No. 5/89). The program now has been operating for 20 years and needs adjustment as it matures. Ongoing adjustment of pension programs is necessary in most countries and in particular with Pay-As-You-Go (PAYG) financing and defined benefit systems. Amendments to the law were made in 2007 (Law No. 4/2007) extending coverage to the informal sector and changing the formula for calculating the length of service used to determine pension benefit eligibility and amount. These changes eventually will help the financing of the program, but will take time for full effect.

During the team’s discussions with stakeholders, some raised the fear that the pension program may not be sustainable over the next several years. In demographic terms, the country is not aging rapidly with an aged dependency ratio of .054. However, the pension program is growing rapidly and will need changes over the coming years as explained in Chapter 3. This rapid program growth is not the result of population aging, but rather imbalances in financing and benefit growth.

The OAIS program provides very generous replacement rates to retiring workers, but some stakeholders question whether the level of replacement rates is affordable or sustainable in the system. Raising contribution rates may temporarily solve a financing problem, but would increase labor costs for businesses and could lead to dislocations in labor markets. This could also harm a struggling economy trying to be competitive in global markets.

A broader question that is touched on in this study, but should be further examined by Government policymakers and program stakeholders, is whether this system is serving the social protection needs of the population in general. Program coverage is very small compared to the number of economically active. In 2008, 234,311 workers contributed to the system out of 730,934 registered in the system out of an estimated total of 9.7 million economically active. Registered workers are 7.5 percent of the economically active work force and contributing workers are just 2.4 percent of the economically active—less than one-third of registered workers. Only 26,437 retirees received pension benefits. The 2007 law extends coverage to all sectors of the economically active population, but in reality the international experience with mandating coverage is that it has very little effect unless structural problems in the program are identified and corrected and confidence is built up over time.

This study examines issues that arose in our discussions with stakeholders and makes recommendations on how the program can develop and become sustainable. These recommendations fall into two categories: 1) short-term reform that will help build confidence in the system and increase sustainability through administrative cost effectiveness and modernization, good governance, and improved transparency and, 2) medium-term reform that will help with financial stability and help meet retirement income and poverty alleviation objectives in the years ahead.

Download the Draft Report on the Social Security System in Mozambique

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