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Saudi Arabia: Pension black hole hits early retirement plans

Portraits of Saudi King Salman (R) and his son Crown Prince Mohammed bin Salman (MBS) in Riyadh one day before the Future Investment Initiative FII conference that will take place in Riyadh from 23-25 October, on 22 October 2018 [FAYEZ NURELDINE/AFP via Getty Images]
Portraits of Saudi King Salman (R) and his son Crown Prince Mohammed bin Salman (MBS) in Riyadh one day before the Future Investment Initiative FII conference that will take place in Riyadh from 23-25 October, on 22 October 2018 [FAYEZ NURELDINE/AFP via Getty Images]

Saudi Arabia is staring at a gaping black hole in state-controlled pension funds so large that the Kingdom is having to take drastic counter-measures, including the raising of the retirement age, a move that could create problems for Crown Prince Mohammed Bin Salman. Despite his pariah status on the world stage, the de facto ruler of the Kingdom enjoys strong backing amongst the country's youth, largely due to his pledge to provide more jobs and improve living standards.

In a country where the retirement age is one of the lowest in the world and the population expects to retire early, such a move could make a dent in that support. However the 35 year old, who became the youngest crown prince in the Kingdom's history after deposing his cousin Muhammed Bin Nayef, may have no other choice.

According to three people familiar with the matter who spoke to Bloomberg, there is a $213 billion gap in the pension funds. The Saudi officials warned that the current system is unsustainable; as a result, Riyadh is contemplating a number of measures, of which raising the retirement age is one. Another is to make workers contribute more of their salaries to the General Organisation for Social Insurance (GOSI) which manages both public and private sector pensions within Saudi Arabia.

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Although Saudi life expectancy is on the rise — it stands at 75 currently — and poses a pension headache in the Kingdom and elsewhere, its crisis is unique. The official retirement age is 60 for both men and women, but about a third of employees are said to take early retirement after working just 20 or 25 years.

The scale of the problem was highlighted by Nader Al-Wahibi, the assistant governor at GOSI. He argued on state television recently that early retirement and longer life spans are endangering the pension fund's future. The option to take retirement after 20 years of service was temporarily frozen last month.

"The people who are retiring early now are going to drain all of the money in the fund," explained Al-Wahibi. "They're living longer, and the money isn't enough, even if we achieved astronomical investment returns." Workers currently pay 9 per cent of their salaries into the pension fund.

His claims have angered some Saudis. "Even if we agreed that this is the truth, it shouldn't be said in this dry, tough language," said novelist Mohammed Al-Rotayyan on Twitter. "People aren't numbers in a rigid accounting process."

Al-Rotayyan's comment highlights the deeper problem with Bin Salman's grand plan to modernise Saudi Arabia and reduce its dependency on oil through his Vision 2030 project. Like the other oil-rich Gulf States, the Kingdom rests on a very delicate social contract. A combination of perks and a bloated welfare system is used to ensure political quietism and public acquiescence.

The crown prince has already started to tinker with this delicate balance by cutting subsidies, introducing taxes and criticising a top-heavy public sector. He has also upended decades of expectation that the state would use its oil wealth to provide citizens with benefits like cheap petrol and power, plentiful government jobs and university scholarships.

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