Options for pension reform in Tunisia

Tunisia's pension system provides old age, survivorship, and disability benefits to retired and disabled workers and their dependents. It is a partially funded system based on solidarity between generations. It is designed to provide insurance against loss of income in old age, especially for people who live longer than average, and to redistribute income more favorably toward low-income retired workers. Only to a limited extent does it achieve a third objective: compulsory long-term saving. The author analyzes the structure of Tunisia's pension system, assesses its financial condition, and sets out options for pension reform. He finds that the current system: a) is fragmented, comprising several schemes with different rules and conditions; b) promises generous benefits, with high targeted replacement rates that may be unsustainable; c) despite high benefits, operates with low contribution rates, because both the system and the labor force are young; d) only weakly links contributions and benefits - it suffers from evasion of contributions and inflated benefit claims and redistribution (from capricious favoring of workers with low incomes and short credited service); and e) faces increasing financial pressures because it is maturing and expanding benefits, but its reserves show poor investment performance and it has failed to adjust contribution rates. The author proposes the following main reforms: a) in the short run, reallocating social security contributions from family allowances to pensions and improving the financialperformance of reserves; b) in the medium term, rationalizing benefit formulas through gradual use of lifetime actualized earnings, indexing pensions, gradually increasing the normal retirement age, and exanding the use of proportional pensions for workers with short careers; and c) in the longer term, a more radical program to create a fully capitalized pillar that complements a redistributive pillar paying basic benefits. This would generate long-term savings, stimulate the development of capital markets, and facilitate the privatization program. A third pillar, voluntary savings encouraged by tax savings, would cover self-employed people not covered by occupational schemes.