A clear victory by the incumbent government in the October elections reflects public confidence in the Kurdistan Regional Government’s (KRG) vision for a better future. In its previous tenure, the government initiated several economic reforms aimed at revitalizing and diversifying the economy, reducing dependence on oil, and establishing a digital one-stop solution to attract both domestic and foreign investment. This article, however, explores one economic reform that is featured less often in public discourse: pension reforms.
To create a robust labor market – and make private sector jobs attractive – the government initiated consultations to adopt legislation that would be modeled after the Iraqi federal government’s Social Security and Pension Law (No. 18 of 2023), which mandates compulsory retirement benefits for private sector employees. While pension benefits are not a new phenomenon in the Kurdistan Region, private and foreign companies are only requested to provide them on a voluntary basis. Nevertheless, there has been a significant surge in private sector participation in recent years. According to the latest available information in the public domain provided by the KRG Ministry of Labor and Social Affairs, the number of local and foreign employees enrolled in social security and pension plans doubled from 84,466 in 2018 to 165,627 by 2023.
A large, young population
Financial security in old age is essential to ensuring that retirees can have similar living standards as they did during their active working lives. There are multiple economic models for financing old age living expenditures. Ideally they fall into three categories: partially or fully employee-sponsored, government-sponsored social security, and self-financed.
The Kurdistan Region has a predominantly young population. While recent statistics from the 2024 Iraqi census are still being counted, data from 2009 indicate a median age of approximately 20.65 years. At the same time, the region has experienced an average birth rate of 2.5 children per woman – a level of 2.1 is needed for an existing population to be replaced – which will ensure that a large, young population will be available to join the labor force in the coming years.
Pension reforms and the provision of compulsory retirement benefits can serve as a strong incentive for the younger population to join the private sector, which typically favors public sector jobs due to their job security and additional benefits, particularly pensions. However, the experience of countries in Africa, Latin America, and parts of Asia highlights that a significant challenge in expecting the private sector to offer pension benefits to employees is the issue of underreporting. Furthermore, without appropriate incentives for the private sector, there is little justification for disclosing accurate information.
To address this, we need a multi-pronged strategy. To begin with, first and foremost we need an awareness campaign to explain the importance of retirement planning. Introducing retirement planning concepts at universities can effectively prepare the future workforce to understand its importance and ask for such benefits in their employers. Awareness is responsible for creating demand, with initiatives in countries such as Australia, Malaysia, and Tanzania serving as key case studies.
Second, private sector employees typically have higher mobility than public sector employees. Facilitating the seamless transfer of retirement accounts between employers is essential to enhancing their attractiveness. Simply put, people are rarely keen to manage multiple retirement accounts.
Another important issue is the option for emergency withdrawals from retirement accounts, which is normally only possible at a given age, usually around 60. Countries like India have addressed this issue by introducing a two-tier system, allowing flexibility through Tier 2 accounts for emergency withdrawals while maintaining long-term savings in Tier 1. This option provides a notional cushion during an emergency.
The supply challenge
The features discussed above are essential for addressing demand. However, to make the model workable, it is equally important to address supply-related issues.
On the supply side, mandating private organizations to offer retirement benefits without appropriate incentives may deter compliance and discourage job creation. In fact, stringent measures may lead organizations to avoid creating jobs or to create exploitative jobs.
Considering the economic structure of the region, motivating the private sector to extend retirement benefits to employees will not be straightforward. Drawing lessons from other countries, the Kurdistan Region will need to undergo significant economic reforms. One possible incentive could be providing tax credits for contributions to employees’ retirement accounts. However, to offer such incentives, the tax system needs to be reformed, with clear tax brackets introduced. Additionally, the tax system must be transparent and digitized.
Making retirement benefits obligatory is a win-win economic model for all stakeholders. It will create a robust labor market, generate more quality jobs, and motivate the young population to join the private sector. Additionally, it will improve job security, which is expected to increase employee productivity. On the other hand, the accumulation of savings will provide the government with resources to fund large-scale infrastructure projects.
Cevendra Kumar is an Indian associate professor and the head of the research center at British International University, Erbil.
