SOCIAL PROTECTION & JOBS DISCUSSION PAPER No. 2206 | APRIL 2022 Voluntary Savings Schemes to Protect Informal Workers in Jordan Friederike Rother, Carole Chartouni, Javier Sanchez-Reaza, Ernesto Brodersohn, Montserrat Pallares-Miralles © 2022 International Bank for Reconstruction and Development/The World Bank. 1818 H Street NW, Washington, DC 20433, USA. Telephone: 202–473–1000; Internet: www.worldbank.org. Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and con- clusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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The risk of claims resulting from such infringe- ment rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202–522–2625; e-mail: pubrights@ worldbank.org. Abstract This paper proposes a framework of voluntary savings schemes (VSS) in Jordan that can complement the current formal sector arrangements to better protect informal workers against economic shocks, unemployment, old age, or disability. As benefits of traditional mandatory pension systems worldwide have been cut substantially since the 1990s, voluntary defined contribution schemes are increasingly trying to fill the gap. In many countries, including in low-income countries, special voluntary savings schemes have been introduced to protect informal workers. Blending the knowledge from best practices internationally with the cluster methodology developed specifically for Jordan, the paper provides an overview of the current system of social security in Jordan and presents policy options to lower informality, extend social protection coverage, and provide more adequate protection to workers. JEL Codes: E26, H55, J26, J28, J21, J46 Keywords: Informal Sector, Informal Labor Market, Social Security and Public Pension, Pension Reform, Pension Benefits Contents Acknowledgements................................................................................................................................................v Acronyms....................................................................................................................................................................vi Executive Summary.............................................................................................................................................. vii 1 Introduction ................................................................................................................ 1 2 Jordan’s Social Security System ............................................................................. 5 3 Best Practices in Voluntary Savings Schemes..................................................... 9 Country examples of voluntary savings schemes ......................................................................... 9 Lessons drawn from international experience................................................................................ 13 4 A Voluntary Savings Scheme for Jordan..............................................................16 General considerations in structuring a VSS in Jordan ............................................................... 16 A VSS based on clusters of workers ................................................................................................... 17 Extending VSS to early retirees............................................................................................................. 25 5 The Way Forward..................................................................................................... 27 References......................................................................................................................... 29 Photo Credits..................................................................................................................... 31 iii iv VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN Boxes 1.. Jordan’s Social Security System..............................................................................................................................................6 2.. New policies to expand social security coverage in Jordan.....................................................................................7 Figures 1.. The “missing middle” of the income distribution excluded from social protection coverage................3 B2.1.  Tranches of contributions and lower benefits compared to full pension.....................................................7 2.. Mexico’s voluntary contribution system...........................................................................................................................11 3.. Hypothetical approach to identifying profiles where informal workers have similar wages to formal sector colleagues......................................................................................................................................................... 18 4.. Comparison in wage distributions between formal and informal female Jordanian employees......... 20 5.. Comparison in wage distributions between formal and informal male Jordanian employees............. 20 6.. Comparison in wage distributions between formal and informal male non-Jordanian employees.....21 7.. Conceptual incentive design for different tranches for the informal sector............................................... 22 8.. Comparison of four pilot packages to add to full current retirement pensions (in JD)........................... 25 9.. Proposal to provide incentives to postpone early retirement............................................................................. 25 Tables 1.. Voluntary contributions growth in Mexico compared to mandatory contribution growth...................12 2.. India’s APY contribution and guaranteed benefit....................................................................................................... 14 3.. Clusters of informal workers................................................................................................................................................. 19 4.. Summary of pilot packages....................................................................................................................................................23 5.. Cluster analysis mapping ....................................................................................................................................................... 24 Acknowledgements v Acknowledgements This report was prepared by the World Bank In the process of drafting the core ideas, main Group’s (WBG) Middle East and North Africa messages, and policy options presented in the (MENA) Regional Social Protection Unit (HMNSP). report, the authors benefited from the interac- The report was drafted by Friederike Rother, Car- tion with Jordan’s Social Security Corporation ole Chartouni, Javier Sanchez-Reaza, Ernesto (SSC). The authors would like to thank in par- Brodersohn, and Montserrat Pallares-Miralles. The ticular Hazim Rahaleh, the Director General of report was prepared under the general direction the SSC in Jordan. Similarly, the authors wish to and ongoing support of Anush Bezhanyan (Prac- express their gratitude to the ILO team for ex- tice Manager, HMNSP), and under the overall guid- change and coordination including Luca Palle- ance of Cristobal Ridao-Cano (Lead Economist). rano, Susan Razzaz, Meredith Byrne, Rana Al-An- sari, Sandra Alves Lopes Silva, and Jullnar Kurdi. The authors are particularly grateful to Khalid Ahmed Ali Moheyddeen (Senior Social Protec- This report is part of the Pensions, SSN, Labor tion Specialist, HMNSP) for the exchange of ideas and HCP in MASHREQ (P171595) ASA. The au- and facilitating the engagement with the Gov- thors would like to thank the donors, the Dutch ernment of Jordan and other partner institutions, government’s PROSPECT partnership initiative, as well as Saroj Kumar Jha (Mashreq Regional Di- for their generous contribution to the overall rector, World Bank Group) and Holly Welborn work program on informality in Jordan, including Benner (Resident Representative Jordan) for their this study. guidance and continuous support for the dia- logue with the Jordanian government and key The authors would like to thank Maroun Bedran stakeholders in Jordan. The authors are also and Michael Alwan for all their efforts in editing thankful for discussions and key contributions this study. from Rada Nawwaf Nafe Naji (Social Protection Specialist, HMSP). The authors would like to Finally, the authors would like to thank Michael thank Gustavo Paez Salamanca for his contribu- Weber (Senior Economist at the World Bank’s tions on the cluster analysis methodology, over- Jobs Group & Global Lead for Labor and Skills) all feedback, and discussions, as well as to Belal and Gustavo Demarco (Lead Economist & Global Fallah for his analytical contributions, feedback, Lead for Pensions and Social Insurance at the World and discussions. Bank) for their review, comments, and guidance. vi VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN Acronyms APY Atal Pension Yojana CBJ Central Bank of Jordan CONSAR National Commission of Savings Systems for Retirement (Comisión Nacional del Sistema de Ahorro para el Retiro) DB Defined Benefit DC Defined Contribution DS Department of Statistics—Government of Jordan GoJ Government of Jordan ILO International Labour Organization IT Information Technology JD Jordanian Dinar JLMPS Jordan Labor Market Panel Survey KYC Know Your Customer LFS Labor Force Survey MOPIC Ministry of Planning and International Cooperation MXP Mexican Peso NSSF National Social Security Fund NTHC National Trust Holding Company OECD Organisation for Economic Co-operation and Development PAYG Pay As You Go SSC Social Security Corporation SSL Social Security Law SME Small and Medium-Sized Enterprises SSNIT Social Security and National Insurance Trust SSIF Social Security Investment Fund USD United States Dollar VSS Voluntary Savings Scheme Executive Summary The recent COVID-19 pandemic has exposed informal workers’ vulnerabilities. As described in the companion paper to this study,“Enhancing Workers’ Protection in Jordan” (hereafter “Profiling paper”), high levels of job informality weigh heavily on Jordan’s social and economic development (Rother et al. 2022). Almost half of the total workforce, and 90 percent of non-Jordanian workers, are not covered by social security programs, thus leaving these segments of the labor market without access to pensions and unemployment insurance. The COVID-19 pandemic has added fuel to the fire: its impact has hit informal workers harder. Without adequate and timely social protection, job losses and reduced livelihoods as a consequence of the crisis have pushed many informal workers into poverty. The Government of Jordan (GoJ) has recently achieved some progress with im‑ proving social security but long-term challenges remain significant. To mitigate the impact of the pandemic on firms and better protect workers, the Social Secu- rity Corporation (SSC) established new programs and policies. These recent initia- tives have been highly successful in reaching workers and in expanding participa- tion in social security schemes by providing an incentive to formalize. It has been estimated that SSC support reached more than 900,000 workers and more than 35,000 businesses—some of which registered for the first time in 2020. New regis- trations included over 170,000 workers. The net gain in terms of social protection coverage in Jordan, however, might have been smaller, since more than 180,000 workers became inactive. And while the new programs and policies led to impor- tant short-term improvements, more effective schemes are still needed to im- prove social protection in a longer-term view. The key is to build on short-run gains with formalization to achieve higher levels of formal contributions and protection for the longer term. vii viii VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN The pandemic underscores the need not only incentivizing self-employed workers to register in for timely policy interventions, but also for the mandatory SSC programs. These measures sustainable protection mechanisms that rec‑ are useful but cannot capture the complexity of ognize the heterogeneous nature of informality. the problem or the heterogeneity of the workers The short-run policies to mitigate the loss of pur- involved, as outlined in great detail in the com- chasing power and buffer the shock to vulnera- panion “Profiling paper” to this study. ble workers as well as their families and commu- nities have proven to be effective in providing Expanding protection to informal workers re‑ support to Jordan’s social fabric. However, in the quires targeted policies. The clusters identified medium to long run, more adequate and sustain- in the companion “Profiling paper” are especially able social protection is needed. Specifically, the helpful in designing tailored policy responses for COVID-19 pandemic has highlighted the need for the biggest segments of the population of infor- solutions to extend social protection to informal mal workers in Jordan and their respective needs. workers in a way that recognizes the informal The World Bank’s cluster approach of identifying sector’s heterogeneity. At the same time, formal informal workers by specific characteristics workers can supplement inadequate retirement builds on this insight and complements findings earnings through alternative savings schemes. from recent reports (Razzaz, Pellerano, and Byrne What is required are policy interventions tailored 2020; Winkler and Gonzales 2019; Palacios and to different needs. This has become an urgent Robalino 2020) showing that this methodology is policy priority to reduce the impact of informal- now seen to provide a strong basis for devising ity, while the longer-term priority remains the successful policy responses to the complex chal- creation of more productive jobs that allow the lenge of informality. The proposed voluntary workforce to gradually move into formality. schemes complement the SSC’s current manda- tory scheme by providing different levels of con- Addressing informality requires going beyond tributions paired with benefits specifically de- formalization. While the GoJ has taken some signed for the target population groups based on steps in the right direction to address informality, the cluster analysis. Four different packages were it has faced profound challenges in reaching out designed based on wage levels and other differ- to the large segment of the workforce that works ences between formal and informal sector col- informally. Efforts by the government have leagues as a proxy to measure vulnerability. Three tended to focus on formalization: they included of these packages are part of the proposal for a measures to formalize businesses, getting formal pilot program for Jordan. businesses to register workers in the SSC, or 1 Introduction Many workers in Jordan are informal and vulnerable to economic shocks and poor health, lacking any protection during old age or unemployment. Almost half of the workforce remains in informality, not contributing to social security programs such as pensions and unemployment insurance. Formal employment is the long-term vehicle to provide workers with better opportunities to earn income and the ability to contribute to social protection schemes. While efforts to formalize workers will continue to be important, it will take decades if not generations to fully integrate Jordan’s large population of infor‑ mal workers. Attempts are underway to expand coverage to informal workers through new bylaws and regulations. A companion paper to this study, “Enhancing Workers’ Protection in Jordan” (Rother et al. 2022), proposes further policies to in- crease formalizing of workers. In the meantime, there is an urgent need offer better social protection to informal workers who remain vulnerable to shocks. In terms of instrument choice for better protecting informal workers, a Volun‑ tary Savings Scheme (VSS) can play an important role. A voluntary scheme al- ready exists today, but is modest in scope, and it is designed as DB (defined bene- fit), not DC (defined contribution). The aim of the VSS is to expand coverage of social security into the informal sector under fiscally constraint conditions. It is meant to be a complementary pillar to the existing schemes at SSC.1 This is because 1. In 2020, participants in the current voluntary DB pensions program represented less than 10 percent of total insured persons in SSC. As such, the voluntary DB program does not provide adequate pensions and also increases the financial sustainability challenge. 1 2 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN one pillar cannot bear all the weight of delivering VSSs will likely become even more relevant as adequate income with broad coverage in a sus- employment practices change. While VSSs play tainable, efficient and secure way. Globally, there an important role in improving benefit adequacy is no example of a country that achieves high lev- in a financially sustainable way, they are also fun- els in each of these outcomes with a single pillar; damental in adapting social protection policies instead, countries rely also on additional pillars, to the changing nature of jobs. Increasingly, non- such as voluntary savings schemes. Some standard forms of employment are emerging schemes in the MENA region are only starting to that are not covered by the traditional social in- consider some additional pillars (Price, et al, 2017). surance schemes, especially with the expansion of the gig economy (see Packard et al. 2019; Best international practices show that VSS are World Bank 2019). increasingly part of the solution to balance ex‑ tended coverage with financial sustainability. Finally, voluntary savings schemes can be used As benefits of traditional mandatory pension sys- to incentivize workers to contribute for longer tems have been cut substantially since the 1990s, periods of time and reduce early withdrawals. voluntary DC schemes are increasingly filling the Jordan shows significant challenges in maintain- gap. In many countries, the primary objective of ing contributions from formal sector employees these schemes has been to maintain or increase over time. Administrative data from SSC over a the level of pension adequacy. Voluntary pension 20-year period shows a contribution density of savings already provide about 20 percent of re- about 34 percent, significantly lower than other tirement income on average in OECD countries countries such as Chile and Uruguay. (OECD 2019a), and other countries across the world are following the same path. In some The focus of the paper emerging market countries, 14 percent of the la- bor force are already making voluntary contribu- This study proposes a framework of a VSS that tions to established pension systems (Jackson can complement the current formal sector ar‑ 2017). While the figure may pale in comparison to rangements and can cater to a vast and heter‑ the 54 percent in the United States of America, it ogenous group of informal workers. A compan- is still significant and continues to grow (Jackson ion paper (Rother et al. 2022) comprehensively 2017). In middle-income countries, VSSs are particu- profiles informal workers in Jordan, and shows larly relevant, given the fact that a high percentage clear differences in workers’ demographic and of their population is in the informal sector. socioeconomic characteristics and levels of vul- nerability. A significant segment of informal sec- Even in low-income countries in Africa, special tor workers perhaps cannot afford to contribute VSSs have been introduced to protect informal toward a pension. However, other workers can workers. Taking advantage of technology, coun- contribute, and their income and level of vulner- tries like Ghana, Kenya, and Rwanda have estab- ability may not differ much from their formal lished contribution channels through mobile sector colleagues. These less poor households money network operators, which already have are not eligible for social protection coverage, allowed over 800,000 individuals to participate. cash transfer programs, or formal sector arrange- For example, in Ghana, about 4 percent of the ments and are often described as the “missing labor force contributes to a VSS (Guven 2019; middle” of households when discussing informal- NPRA—Pension’s Regulator in Ghana, 2020). ity. The missing middle is the intended target Introduction 3 group for VSSs, as illustrated in Figure 1. The con- unable to afford social contributions to become ceptual illustration is useful since using data from protected by the Jordanian system, and can Jordan’s Department of Statistics (2018 and 2016) roughly be found in the first 2–3 deciles of the will typically underrepresent the income of infor- income distribution. These workers typically mal and self-employed workers.2 work in informality and contribute with their ba- sic skills to low-productivity micro and small Jordan’s household income distribution shows firms. For them, social assistance programs aiming three groups of people with very different out‑ at curbing vulnerability and alleviating poverty looks for social protection. For a first group of are probably the most suitable and realistic op- people with low household incomes, voluntary tion. A second group includes wage earners savings contributions are unaffordable (Figure 1). above the 3rd decile and below the 9th decile of This group of poor and vulnerable individuals is the income distribution. This group is able to make social contributions and can be enrolled in 2. According to OECD (2019b), the self-employed lacks an em- the mandatory Jordanian social protection sys- ployer, which complicates pensions design. Among the com- tem. For this group of people that work either plications is the lack of income validation by an employer, formally or informally, a new VSS can be estab- which makes it hard to prevent income underreporting (that is, at least partial informality) and low contributions. In Spain, lished to complement the mandatory system. income underreporting is widespread among the self‑em- This means more resilience to economic shocks ployed (Martinez-Lopez 2012). In other countries Hurst, Li, and Pugsley (2010) and Bucci (2019) also find similar underre- and higher pensions at old age. Workers and fam- porting. In the United States, one-third of the self-employed ilies in this group would benefit from a range of admittedly underreport their income for tax purposes (Bruck- contribution options that responds and is ner and Hungerford 2019). FIGURE 1.  The “missing middle” of the income distribution excluded from social protection coverage Population Wage Vulnerable Informal Non-Vulnerable Formal Sources: Authors’ illustration. 4 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN targeted to their individual ability to save and protection to workers.3 Section 4 presents a their needs. A final group represents household framework for a VSS that is based on the statisti- incomes in the top 2 deciles of the income distri- cal techniques (cluster analysis) employed in the bution. These workers can afford to contribute companion paper (Rother et al. 2022). The clus- to a VSS at the level of their choice. tering of workers by similar characteristics (in- cluding education, gender, wealth, and form of The framework for this study was developed employment) informs development of the most using best practices from international experi‑ attractive policy tools within the VSS for each ence and blends this knowledge with the clus‑ targeted population group.4 The paper con- ter methodology developed specifically for cludes with a suggestion for three pilots to test Jordan. Following this introduction, the study the approach. proceeds as follows: Section 2 describes the cur- rent system of social security in Jordan, including 3. A profiling of the self-employed and employers is currently recent attempts to improve coverage by expand- under implementation and will be conducted as a follow-on analysis and report under this task. The labor demand survey ing access. Section 3 presents best practices of specifically targets informal businesses, including the self- voluntary savings schemes (VSS) and their inno- employed. 4. Both inferential and multivariate clustering are used, em- vative possibilities for extending social protec- ploying data from two surveys: the 2010–16 panel data in the tion to informal workers. Cross-country evidence Jordan Labor Market Panel Survey 2016 (JLMPS 2016) and the shows that these programs could lower informal- Labor Force Survey 2018 (LFS 2018). While most of the profil- ing will be done using the LFS 2018, intertemporal and dy- ity, extend coverage, and provide more adequate namic analysis has been carried out using the JLMPS 2016. 2 Jordan’s Social Security System Jordan’s legal framework provides for social security coverage of regular em‑ ployees and the self-employed. By law, the social security system covers a wide range of workers (see Box 1), including: (i) all workers (not younger than 16 years of age) who are Jordanian, as well as non-Jordanian private sector employees, working either more than 16 days a month or getting paid on a monthly basis;5 (ii) public sector employees; (iii) self-employed persons; and (iv) citizens of Jordan working at diplomatic missions or for international organizations in Jordan. However, many workers who meet the requirements are in fact not covered by the system (Rother et al. 2022). Recent policy efforts to strengthen social security coverage in Jordan include the following: • In 2019, certain bylaws and amendments to current regulations were intro‑ duced for start-ups in the IT and agriculture sectors. Eligible firms, defined as employing fewer than 25 workers under age 28, are allowed a grace period of non-contribution6 to the pensions program during the first five years of existence of the firm. The new regulations will also allow for partial coverage for long-term benefits (retirement), depending on reduced rates of contribu- tions chosen by individual workers (see Box 2 for more details). 5. This is the definition of regular employment. For the first month of work, the principle of 16 days or more per month applies, not whether payment is intended to be on a monthly basis. 6. The non-contribution period also represents a non “pension credited” period. Those affected young employees might decide to contribute voluntarily. 5 6 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN Box 1.  Jordan’s Social Security System Jordan’s first social security law from 1978 (Law No. 30) provided work injury, old-age, survivors, and disability benefits, and was administered by the Social Security Corporation (SSC). Until 1995, the SSC covered only private sector workers; civil servants and the military had their independent schemes, which were closed to new entrants under the 1995 and 2003 reform laws, respectively. New recruits in the govern- ment and army are now covered by the SSC. It is estimated that by the 2060s, Jordan will have a fully unified social security system where both public and private sector workers will be covered solely by the SSC. Today, the Jordanian social security system provides benefits for old-age, disability, survivors, maternity, work injury, and unemployment insurance.a The law was redesigned in 2010 and approved by Parliament in 2014.b Maternity leave, unemployment, and health insurance for pensioners were initiated during these reform years. The pension program of SSC is designed as a contributory, earnings-related, pay-as-you-go (PAYG), defined-benefit (DB) plan.c Social security contributions (payroll taxes) are currently 21.75 percent overall, but 17.5 percent of that goes to pensions. Employers and workers contribute 14.25 and 7.5 percent of wages, respectively. Benefits include maternity and sickness allowances for all members. Private-sector employees and Jordanians with SSC membership also receive unemployment benefits. However, public sector employees, self-employed workers, and casual laborers are excluded from such benefits. Work injury benefits are provided to private sector employees and apprentices, the self-employed, and Jordan citizens at diplomatic missions or in international organizations. As a result of COVID-19, various “defence orders” and protective measures affecting the current SSC regulations were implemented. Between March and May 2020, private sector firms (except for banking and electricity) were allowed to suspend payments to the retirement program, while continuing to make contributions for all other insurance schemes. The total social security contribution for that period was reduced to 5.25 percent (of which workers’ contribution was 1 percent), although voluntary contributions were allowed (up to 17.5 percent). Since July 2020, firms have been allowed to halve their contributions to the old age pension program. Notes: a. A means-tested benefit is paid to certain elderly persons, persons with disabilities, and survivors under an SSC program on family allowances. b. Jordan has undergone a profound social security reform since 2010, primarily aiming to ensure the financial sustainability of the system over time. The reform measures mainly included increasing the age of early retirement and the minimum contributions required to claim it, increasing employee and employer monthly contributions, and covering even micro firms (with at least one employee). c. Contributory means that participating employees in the pension scheme are required to support the scheme with contributions (often through payroll taxes). Earnings-related means that pensions are based on the beneficiary’s earnings. Pay-as-you-go (PAYG), in its strictest sense, is a method of financing whereby current pensions are paid out of current revenues from contributions. When revenues are higher than expenditures some reserves can be accu- mulated, hence PAYG can be partially funded, like in the case of Jordan. Defined benefit (DB) means the pensions are calculated based on a prescribed formula that usually considers several factors—mostly length of employment and salary history. Jordan’s Social Security System 7 Box 2.  New policies to expand social security coverage in Jordan New bylaws have recently been considered to address the situation of Jordan’s self-employed, IT, and agriculture workers. Beginning in 2021, a new bylaw is in the process of being implemented whereby mandatory insurance will be extended to self-employed Jordanians (and non-Jordanians with flexible work permits) in the following sectors: (i) agriculture, (ii) construction, (iii) transport, (iv) tourism, (v) general ser- vices and maintenance, (vi) art and media production, and (vii) other occupations or trades as decided by the Board based on recommendation of the General Manager. The new regulations will allow for full coverage in the case of short-term benefits and partial coverage for long-term benefits (retirement), depending on reduced rates of contributions chosen by individual work- ers. Unlike waged workers, the individuals who will enroll under this new bylaw will be given the option of paying their full old age pension payment or part of it. The contribution tranches allowed are 75, 50, 25, or 10 percent of full payment, with the benefit calculated the same way (pro rata) as for waged workers, but proportional to the contribution made. With these levels of partial payment, new contributors may end up receiving lower pensions than their formal colleagues (see Figure B2.1). The new bylaw allows the applicant to define the wage level, subject to upper and lower limits (the minimum is equivalent to the minimum wage, and the maximum is a specific multiplier of the average wage per age group). Implementation is planned in stages. The new amendment states that instruction will be issued defining conditions for enrollment for the workers in the occupations mentioned above. The first group of workers to be targeted by the SSC will be the taxi drivers; the SSC has begun coordinating with the transportation authority in order to identify these workers. Implementation started in the first semester of 2021. The new bylaw, as well as further amendments to current social security regulations that SSC is consider- ing (to encourage early retirees to return to the labor market), would need to be carefully assessed and analyzed. Both the share of workers that will actually decide to contribute to their pension accounts and the adequacy of the pensions are unknown. For instance, it is realistically assumed (based on international experiences) that workers might end up contributing the minimum rate (10 percent) on the minimum wage. If so, the pro rata benefit based on this contribution level would be insignificant for the individual. In short, the tranched approach is a good way to establish a first stepping stone toward formality, but could also establish wrong expectations for individuals enrolling in terms of how adequate these pensions will be. FIGURE B2.1. Tranches of contributions and lower benefits compared to full pension Adequate Mandatory Mandatory Mandatory Mandatory Mandatory ”Full” Formal with Informal Informal Informal Informal Pension early Tranche 1 Tranche 2 Tranche 3 Tranche 4 retirement Adequate Full Pension Mandatory Mandatory Informal Complementary Note: This figure is an illustration by the author aimed at showing the impact on the benefits of the different tranches of contributions in relation to the “full” formal sector benefit individuals would receive. 8 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN • Other recent amendments to SSC regula‑ ticle 4 of the 2014 Law, those who are ex- tions discourage early retirement. Recog- cluded from mandatory coverage (and vol- nizing the challenge of early retirement in untary coverage if they are non-Jordanians) Jordan, a recent amendment to 2014 Law include: (i) individuals covered by the old specified that all contributors who started civil and military pension schemes; (ii) non- contributing on October 1, 2019 will be sub- Jordanians living in Jordan but employed by ject to new rules: men will be required to regional and international missions; and (iii) contribute at least for 252 months before irregular workers (who neither work 16 days retiring at age 55, and women will be re- a month nor get paid on a monthly basis). quired to contribute at least 228 months Participation in the current voluntary pen- before retiring at age of 52. Nobody will be sion program of SSC remains low at less than allowed to retire before the ages of 55/52 10 percent of the total number covered by for men/women respectively. As only new the SSC. The voluntary program does not entrants are affected, no impact of these provide adequate pensions and also in- changes is expected for at least the next 20 creases the financial sustainability challenge years. The new amendment also specifies a since it is a defined benefit. higher reduction factor for early retirement pensions, even if they will not yet be actu- • While the recent efforts to expand social arially fair. With the new rule of early retire- security coverage are welcome, comple‑ ment, people will no longer be able to retire mentary efforts are needed.8 The next sec- at 45 with 25 years of service. However, tion depicts some of the global experience there could still be many people retiring at on how countries with a high share of vul- as young as age 55/52, while life expectan- nerable informal workers have attempted to cies keep increasing. increase protection through a voluntary sav- ings scheme. • In addition, Jordan operations a voluntary pension scheme. The country provides a voluntary pension scheme for self-em- ployed Jordanians (who could not contrib- ute to the regular scheme), casual workers, and inactive housewives.7 According to Ar- 8. ILO (2021) suggests a need for a combination of policy ap- 7. They contribute 17.5 percent of monthly earnings, where proaches, such as combining actions to fill regulatory gaps the minimum earnings are based on the national monthly and clarify ambiguities with those aimed at addressing inad- minimum wage. equate compliance and enforcement. 3 Best Practices in Voluntary Savings Schemes A number of countries have taken on the challenge of assisting informal sector workers to save for retirement in different ways. The structure of existing sys- tems provides some insight as to how they are able to cope with the demands of a pension system focused on the self-employed and informal sectors. A variety of alternatives exist, which range from leveraging existing structures to creating brand new entities to run the new pension schemes. A few country examples are pre- sented below, followed by lessons drawn from international experience. Country examples of voluntary savings schemes A number of countries have made a voluntary savings program available to workers. International experience may provide insights on how a complementary pension system may be designed to complement the SSC’s supply of pension prod- ucts. For example, in addition to the mandatory enrolment to the Old Age Security and the Canada Pension plans, Canadians have the option of also enrolling in an employer-sponsored voluntary program (the Occupational Pension plan). In Mex- ico, private funds (Afores) manage pensions and operate in a market-driven scheme, but they also allow voluntary contributions. Kenya relies on their mobile money infrastructure to facilitate contributions to a defined contribution pension scheme targeted at the informal sector. And in Ghana, employers and employees’ shared contributions to the pension system use electronic/mobile platforms to manage and make contributions; at the same time, the system offers workers the possibility of accessing their long-term savings in case of a shock. Here, we examine the VSS experiences in Mexico, Kenya, Ghana, and India in terms of three main elements: the administration they have used and leveraged to support these informal sector- focused pension systems, the product configuration, and the outreach efforts to gain members. 9 Best Practices in Voluntary Savings Schemes 11 Mexico (equivalent to about US$2.50 at the time of this report), with all fees absorbed by the pension To reach the informal sector, the Mexican pen‑ fund administrator receiving the funds, thus elim- sion system authority has expanded the man‑ inating the transaction costs for individuals (Table datory pension based on a privately adminis‑ 1). The other characteristic of these voluntary tered defined contribution scheme. The contributions is that they can be withdrawn by informal sector comprises between 50 and 60 members within a six-month period after making percent of the working age population. The pen- their first voluntary contribution. sion system has significantly increased the chan- nels by which individuals can make voluntary The Mexican VSS has grown fast, but it still contributions, by introducing the use of conve- represents a minority. Despite this rapid growth nience stores. Since 2014, this, along with a mo- for a voluntary contribution scheme with few bile technology app to enable standing orders, benefits for the informal sector, voluntary sav- has been the cornerstone of the regulator’s sup- ings represent only about 7 percent of total con- ply side policy to increase voluntary savings (Fig- tributions (Table 1). The regulator continues to ure 2). improve the appeal of voluntary savings by link- ing in ancillary benefits while utilizing specific While this initiative did not specifically target marketing campaigns to publicize the new mech- the informal sector, the number of voluntary anisms for making contributions. The regulator savings contribution collection points grew to has also required all pension fund administrators just over 17,000 in just five years, which yearly to incorporate publicity in quarterly generated receive over 5 million voluntary savings contri‑ balance statements sent to about 50 million indi- butions. Through 2019, voluntary contributions viduals, with different behavioral economics- continued to grow year over year at a faster pace based messages embedded. This may have con- than mandatory savings. The minimum contribu- tributed to the rapid growth in voluntary tion in the Mexican case was set at Mex$50 contributions shown in Table 1. FIGURE 2.  Mexico’s voluntary contribution system Savers Channels Central Switch Fund Managers Fee Mobile APPs Fee 1. AUTHENTICATES SAVER AND ACCOUNT Regulator’s website 1. DISPLAYS 2. EXCHANGES TRANSACTION TRANSACTION INFO INFORMATION 2. TRANSFER 3. RECONCILES AMOUNTS AMOUNTS Convenience stores 4. RECEIVES TOTAL AMOUNT CONTRIBUTED FROM Fee CONTRIBUTION CHANNELS Source: Brodersohn 2018. 12 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN TABLE 1.  Voluntary contributions growth in Mexico compared to mandatory contribution growth Voluntary savings Voluntary savings YoY voluntary Mandatory savings as a of mandatory YoY mandatory Year (Mex$ million) savings growth (%) (Mex$ million) savings (%) savings growth (%) 2009 482.15 104,341.86 0.47 2010 1,555.66 216.09 119,139.39 1.31 14.18 2011 2,937.14 88.80 125,494.87 2.34 5.33 2012 4,917.21 67.41 130,190.66 3.78 3.74 2013 6,187.47 25.83 137,334.06 4.51 5.49 2014 7,172.35 15.92 155,519.58 4.61 13.24 2015 9,657.25 34.65 166,022.99 5.82 6.75 2016 11,332.85 17.35 182,047.52 6.23 9.65 2017 12,030.44 6.16 195,293.21 6.16 7.28 2018 14,000.60 16.38 215,034.84 6.51 10.11 2019 16,180.48 15.57 237,851.18 6.80 10.61 Source: Mexico, National Commission of Savings Systems for Retirement (CONSAR), voluntary savings statistics. Note: Figures in millions of pesos (about Mex$20/US$1). Kenya after just three years (although the process to do so is complex). Among the main challenges for Kenya introduced a new defined contribution the sustainable growth of the new pension pension scheme in 2009 to target the large in‑ scheme have been the need for continued out- formal sector. Kenya’s informal sector amounts reach and the ability of the administrative plat- to 85 percent of the working population. Indi- form to provide online access to members’ up- viduals are allowed to make contributions as to-date balances. Both policy makers and small as US$0.20 to an individual account, lever- regulators continue to work to improve adminis- aging the well-known Kenyan mobile money in- trative capacity and to undertake research on the frastructure M-Pesa. The pension scheme was demand side geared toward providing an appeal- initially championed and heavily promoted by ing product and expanding the number of mem- the regulator, and took off to a great start to bers enrolled in the scheme. reach over 78,000 contributing members by 2017. The key enabler in Kenya has been to leverage Ghana informal sector associations as outreach chan- nels, using field agents who are trusted within the Ghana’s Social Security and National Insurance community where the National Social Security Trust (SSNIT) introduced a voluntary defined Fund (NSSF) (Kenya’s formal sector mandatory se- contribution scheme in 2005. The program curity fund) is not as well known. Kenya also uses based enrollment and contribution collection on mobile money as the main means to make con- its field offices, which collect mandatory contri- tributions to the scheme, free of fees to the butions from formal businesses. The program members making contributions, and allowing was later segregated from the SSNIT organization members to withdraw the full voluntary savings to constitute a new organization dedicated to Best Practices in Voluntary Savings Schemes 13 run the program, the National Trust Holding their contributions, and this outcome depends Company (NTHC), which has gained about on the age of entry and contribution rate (Table 2). 150,000 members. The pension system provides Thus, individuals have some certainty on benefits, for a “tier 3” voluntary defined contribution sys- with a specific monthly pension for different levels tem. This is run by private pension administrators, of contribution. The benefit is not pegged to infla- who have leveraged the third tier to increase the tion, which makes it easier for the scheme to man- defined contribution product to over 500,000 age the commitment of the pension liabilities. members. Accounts may split contributions, so that a percentage of the funds contributed can be made available in the short term (5 years), with Lessons drawn from a 50/50 split for short- and long-term disburse- international experience ment being the most common practice. Enroll- ment and contribution processes have been A VSS requires administrative capacity to col‑ adapted to be more in tune with the channels lect contributions, maintain an accurate re‑ and mechanisms that informal sector workers cordkeeping system, and simplify enrollment use. These efforts have included leveraging a net- processes. In most cases, workers in retirement work of mobile money operators, or in some schemes, both self-employed and formal work- cases local agents, who have been trained to pro- ers, have three contacts with pension administra- vide information and enroll individuals, as well as tive systems in their lifetime: (1) when they enroll, introducing fee-free contribution channels (2) when they access and update their informa- through mobile money and standing orders on tion, and (3) when they apply for their pension. mobile wallets. Outreach from NTHC continues The experience individuals have in these three to rely on SSNIT’s branches, while private provid- key moments is crucial to building trust in the ers engage with different alliances, including mo- pension system. Administrators should aim to be bile network operators, by training them specifi- agile and have adequate and easy processes in cally for that purpose. different “touch points.” Because the collection of contributions from in‑ India formal sector members can be challenging, ad‑ India’s Atal Pension Yojana (APY) pension ministrators and social security institutes must scheme was established in 2015. It is structured have as many collection points as possible to as a national pension scheme, and its administra- ensure greater coverage and to facilitate con‑ tion is based on the public sector pension tributions. This usually has a direct relationship scheme’s central recordkeeping agency used to with access to banking or banking services in dif- manage a defined contribution scheme. Eligibility ferent jurisdictions, as pension system administra- to enroll ranges from ages 18 to 40. The govern- tors generally do not have enough branches to cover ment offered a 50 percent match of the contri- an entire country or region. Institutions focusing on butions for initial enrollees, but that was discon- extending coverage should make alliances with other tinued after the first year. Enrollment is done financial-inclusion-focused parties to provide sim- online, leveraging a network of private banks ple and accessible channels for contributing to who receive compensation based on the number the pension scheme. If these new contribution of members enrolled and the persistence of their channels are subcontracted, the fee structure contributions. The APY product offers individu- should ensure very low-cost contribution collec- als who enroll a guarantee of the outcome of tions, if not free, for the administrating entity. 14 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN TABLE 2.  India’s APY contribution and guaranteed benefit Monthly Monthly Monthly Monthly Monthly Years of pension of rs. pension of rs. pension of rs. pension of rs. pension of rs. Age of entry contribution 1,000 2,000 3,000 4,000 5,000 18 42 42 84 126 168 210 19 41 46 92 138 183 228 20 40 50 100 150 198 248 21 39 54 108 162 215 269 22 38 59 117 177 234 292 23 37 64 127 192 254 318 24 36 70 139 208 277 346 25 35 76 151 226 301 376 26 34 82 164 246 327 409 27 33 90 178 268 356 446 28 32 97 194 292 388 485 29 31 106 212 318 423 529 30 30 116 231 347 462 577 31 29 126 252 379 504 630 32 28 138 276 453 551 689 33 27 151 302 414 602 752 34 26 165 330 453 659 824 35 25 181 362 495 722 902 36 24 198 396 543 792 990 37 23 218 436 594 870 1,087 38 22 240 480 654 957 1,196 39 21 264 528 792 1,054 1,318 40 20 291 582 873 1,164 1,454 Source: NSDL—Central Recordkeeping Agency for National Pension System, India. Additionally, workers should ideally not be integrated with accurate reconciliation systems charged at the contribution collection point for and an accurate identification validation mecha- making contributions, thus eliminating as many nism at the point of contact. Because the contri- barriers as possible for contributions. From ob- butions will be received at different times for served experience, the higher the volume of different individuals, the administrator should contributions, the greater the chance of estab- focus on daily reconciliation to accurately reflect lishing a low-cost solution for contribution col- transactions on individual benefit statements or lection. These new mechanisms should be accounts, in the case of defined contribution Best Practices in Voluntary Savings Schemes 15 plans. This daily reconciliation is essential for de- jurisdiction. In many countries, administrators fined contribution systems, as the administration carry out the KYC process manually, following should be focused on investing the contributions the same guidelines and processes for enroll- as soon as possible, ideally the next day, and reflect- ment and identification of informal workers that ing the new balance on the individual accounts. they use for formal sector workers. Because many of these pension schemes are voluntary, a An efficient contribution collection system re‑ complex process may discourage individuals quires an accurate recordkeeping system. Ad- from enrolling. ministrators should be able to provide up-to- date information to their members, where they Finally, services need to be tailored for the can see reflected the transactions they have workers being targeted, and behavioral tools made within a very short period of time after the can be used to nudge individuals toward en‑ contribution is made, along with up-to-date ben- rollment. A readily available benefit statement, efits information. This is crucial in building confi- along with reminders and (potentially) nudges for dence with members, thus providing a high level workers to comply or make voluntary contribu- of transparency for those who have a harder tions, is key. However, significantly improved in- time postponing short-term needs for long-term frastructure and recordkeeping capacity is re- savings. International experience shows there are quired, along with more focused demand side both centralized and decentralized types of research to provide greater insight on what type recordkeeping. of balance statements and services would sup- port compliance. Effective outreach and com- A simplified enrollment process would signifi‑ munication of the value of pensions or long-term cantly improve the likelihood of increasing en‑ savings within a trusted institution that runs the rollment. A simplified process typically relies on pension scheme will be needed to induce work- a simplified Know Your Customer (KYC) require- ers to participate in the retirement plan. ment, along with identity solutions in each 4 A Voluntary Savings Scheme for Jordan VSS can be a useful tool to extend coverage and improve income retirement adequacy for very heterogeneous workers and needs. The protection needs of Jordan’s workers can be as heterogeneous as the profile of workers (see the hetero- geneity discussion in Rother et al. 2022). In order to meet that need, effective VSSs are able to strike a balance between short-run needs and long-run objectives. In- ternational experience also signals that enrollment simplicity, collection points, and administrative infrastructure are all critical issues in a well-functioning VSS. In addi- tion, the most effective VSSs are attractive, flexible, and transparent. These attri- butes can make a VSS attractive for informal workers, who do not have access to social protection, as well as to formal workers that do have access to social protec- tion but want to increase the adequacy of their retirement incomes. This section presents options to pilot a VSS in Jordan taking into account work‑ ers’ heterogeneity and cluster-based structure of contributions and benefits. Following workers’ clusters identified by Rother et al. (2022), this section employs those clusters as the basis to tailor pilots to implement a VSS approach. The struc- ture of benefits in such pilots is based on custom-tailored contribution levels that allow the system to be flexible and attractive for workers. Finally, the suggested pilots for Jordan could address both white- and blue-collar workers as a first stage to test their effectiveness. General considerations in structuring a VSS in Jordan International experience highlights attributes of voluntary savings schemes that are critical for success. A VSS can be most effective when both short- and 16 A Voluntary Savings Scheme for Jordan 17 long-run savings objectives are included. Because systems. VSS administration, including frag- the collection of contributions from informal mented contribution periods and potentially dif- sector members can be challenging, administra- ferent benefits for different cohorts, could put a tors and social security institutes must have as significant burden on the already loaded manda- many collection points as possible to ensure tory contribution or occupational pension sys- greater coverage and to facilitate contributions. tems. The informal pension system is also more An efficient contribution collection system re- sensitive to administration costs, particularly quires an accurate recordkeeping system, so that transactional costs from collecting and managing administrators can provide up-to-date informa- micro-level contributions. Thus, running a mixed tion to their members. A simplified enrollment formal/informal administration system is a stra- process significantly improves the chances for tegic choice affecting the long-term sustainabil- increasing enrollment. Finally, services need to be ity of the informal sector pension system. tailored for the workers being targeted, and be- havioral tools can be used to nudge individuals A Jordanian VSS would require flexibility, at‑ toward enrollment. tractiveness, and transparency to work. The VSS for informal and self-employed workers in Jordan’s VSS would be most effective if the sys‑ Jordan could be managed by a public authority, tem strikes a balance between short-run needs such as the Ministry of Planning and International and long-run objectives. The VSS could have a Cooperation (MOPIC), or by private funds. Some combined short- and long-term savings compo- other characteristics of the system should in- nent; this vehicle could leverage the existing in- clude: (i) voluntary contributions; (ii) possibility vestment fund structures of Jordan’s Social Secu- for matched employer contributions; (iii) possi- rity Investment Fund (SSIF), and could provide bility to bundle products and services focused on some characteristics that individuals may need as attracting different clusters of individuals; (iv) ac- part of the product design. The savings rate in cess to savings in the short term in the form of Jordan grew from 3.8 percent in 2014 to 9.3 per- loans (should the employer experience a shock); cent in 2017 (although only 28 percent of adults (v) access to other insurance such as health, em- use formal bank accounts to save), which hints at ployment, and disability insurance; (vi) mobile ap- the capacity to save for many Jordanians. Ac- plication option to offer transparency; and cording to a Central Bank of Jordan (CBJ) study (vii) portability, so that the worker can move in from 2017, old age represents the second most and out of informal employment and keep their important reason for individuals to save (CBJ benefits. Jordan’s national or foundational ID ef- 2018). Between 2014 and 2017, more people saved forts could be leveraged by the SSC to provide a informally, growing to 13.1 percent; thus, the VSS simple yet reliable enrollment process. could be appealing for those individuals who do not currently have a formal savings vehicle of any kind, and especially for those who “are often dis- A VSS based on clusters of couraged by the product conditions” (CBJ 2018). workers The choice of the administrative machinery for The proposed VSS would cater to the hetero‑ the VSS is critical. Leveraging the SSC’s infra- geneity of informal workers and their different structure would imply potentially strengthening needs. This heterogeneity in Jordan is analyzed in the administration platform to a level that is typi- detail in Rother et al. (2022), where an innovative cally not required by traditional mandatory clustering methodology was developed to pro- file informal workers. As a result, six clusters were 18 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN FIGURE 3.  Hypothetical approach to identifying profiles where informal workers have similar wages to formal sector colleagues Wage Formal Informal Vulnerable Non Vulnerable Source: Authors. identified for each of the following subgroups of sector is non-vulnerable when comparing to informal workers: (i) Jordanian male employees, their formal sector colleagues. (ii) Jordanian female employees, (iii) self-em- ployed men,9 and (iv) non-Jordanian male em- The analysis underscores the need for an ployees (Table 3). Each cluster depicts similar char- approach that differentiates between at least acteristics in terms of who the informal workers four segments of the target population. The are, where they work, and what they earn. comparison shows that the agricultural workers across all subgroups, service and sales Jordanian Cluster analysis reveals major differences in in‑ male workers, Jordanian male workers in less formal workers’ capacity to save and contrib‑ populated governorates, and Syrians involved in ute to a VSS. Comparison between informal and crafts trade are among the most vulnerable. formal wages was used as a proxy for a cluster’s There is virtually no overlap in wages between capacity to save. It helped identify how vulnera- formal and informal, making it hard to induce ble the informal workers are in each cluster. If the workers in these four segments to save wage is not significantly different between for- (Figures 4–6). Wage distributions that show some mal and informal workers, then an informal overlap but still indicate a significantly lower worker should not face a “savings capacity” chal- median informal wage (and very little overlap lenge and therefore should be able to contribute with the 25th percentile for formal sector at the comparable wage level. Figure 3 presents a workers) would also have a lower capacity to hypothetical illustration of how vulnerable work- save. This is also the case for the clusters of ers can be identified. Where there is wage over- “service and sales” Jordanian female employees lap in the comparison between formal and infor- (cluster 3A in Table 3), “craft and related trade” mal sectors, it can be assumed that the informal Jordanian male employees (cluster 3B in Table 3), and  semi-skilled non-Jordanian workers in 9. Details on the self-employed are not shown in this study as this population group lacks data on income. medium and large firms” (cluster 5C in Table 3). A Voluntary Savings Scheme for Jordan 19 TABLE 3.  Clusters of informal workers Category Cluster Cluster name Short description 1A Agricultural workers Workers of low education who are in the agriculture sector, employed in SMEs. They are the lowest earners among that population group with average monthly wage of JD 76. 2A Crafts and related trade Workers of medium education who are in the manufacturing sector, employed Female Jordanian employees workers in micro firms. Their average monthly wage is JD 178. 3A Service and sales workers Workers of high education in the trade sector, employed in micro to medium firms. Average monthly wage is JD 224. 4A Elementary occupations Workers of medium education who are employed in all sectors across all firm sizes, including large firms. Their average monthly wage is JD 202. 5A High skilled workers Workers of high education who are employed in the education and human health sectors across all firm sizes, including large firms. Their average monthly wage is 246 JD. 6A High-skilled workers in less Workers of high education who are employed in all sectors including populated governorates administration and professional activities across all firm sizes, including large firms, and across all governorates, including less populated ones. Their average monthly wage is JD 219. 1B Agricultural workers Workers of low education who are in the agriculture sector, employed in SMEs. They are the lowest earners among that population group with average monthly wage of JD 201. 2B Service and sales workers Workers of low education who are in the trade sector, employed in micro and Male Jordanian employees medium firms. Their average monthly wage is JD 249. 3B Crafts and related trade Workers of low education who are in the construction and manufacturing workers sectors, employed in micro firms. Their average monthly wage is JD 214. 4B Plant and machine operators Workers of low education who are in the transportation sector, employed in micro firms. Their average monthly wage is JD 238. 5B Semi-skilled workers in less Workers of low education who are in various low-productivity sectors, populated governorates employed in SMEs across all governorates, including less populated ones. Their average monthly wage is JD 233. 6B High-skilled workers Workers of high education who are employed in all sectors including administration and professional activities across all firm sizes including large firms. They are the highest earners among that population group with average monthly wage of JD 321. 1C Service and sales Egyptian Highly educated Egyptian workers in the administration sector, employed workers in micro firms, half of whom are not registered. They are the highest earners among that population group with average monthly wage of JD 263. Male non-Jordanian employees 2C Agricultural Egyptian Workers of medium education who are in the agriculture sector, employed in workers micro firms, half of whom are not registered. Their average monthly wage is JD 240. 3C Craft and related trade Many Syrian workers of low education in the construction sector, employed in Syrian workers micro firms that are mostly registered. Their average monthly wage JD 152. 4C Semi-skilled workers in Workers of medium education who are in various low-productivity sectors, registered businesses employed in micro firms that are mostly registered. Their average monthly wage is JD 213. 5C Semi-skilled workers in Workers of medium education who are in various low-productivity sectors, medium and large firms employed in medium and large firms. Their average monthly wage is JD 224. 6C High-skilled white-collar Workers of high education in various sectors including professional activities, workers employed mostly in micro firms. Their average monthly wage is JD 232. Source: Companion paper (Rother et al. 2022). 20 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN FIGURE 4.  Comparison in wage distributions between formal and informal female Jordanian employees 450 400 350 300 Wage distribution (%) 250 200 150 100 50 0 Cluster 1A: Agricultural Crafts and Service and Elementary High-skilled High-skilled Agricultural workers related trade sales workers occupations workers workers in workers workers less populated Clusters governorates Source: Authors’ calculations based on cluster analysis in Rother et al. (2022). FIGURE 5.  Comparison in wage distributions between formal and informal male Jordanian employees 600 500 Wage distribution (%) 400 300 200 100 0 Agricultural Crafts and Service and Elementary High-skilled High-skilled workers related trade sales workers occupations workers workers in workers less populated Clusters governorates Source: Authors’ calculations based on cluster analysis in Rother et al. (2022). A Voluntary Savings Scheme for Jordan 21 FIGURE 6.  Comparison in wage distributions between formal and informal male non-Jordanian employees 450 400 350 300 Wage distribution (%) 250 200 150 100 50 0 Service and sales Agricultural Craft and Semi-skilled Semi-skilled High-skilled Egyptian workers Egyptian workers related trade workers in registered workers in medium white-collar Syrian workers businesses and large firms workers Clusters Source: Authors’ calculations based on cluster analysis in Rother et al. (2022). Less vulnerable clusters show wage overlap be- 7). The different benefits (represented as differ- tween formal and informal workers, but informal ent colors in the figure) can be specifically tar- wages are still lower compared to the 75th per- geted to the needs of the different clusters. Ben- centile. On the other hand, for individuals where efits could range from specific insurance or credit formal and informal wages at the 75th percentile are bundled with the complementary contribution similar, capacity to save and ability to contribute is to a flexible scheme where individuals could the highest. This is the case for clusters with high- withdraw the complementary contribution skilled workers (clusters 6A, 6B, and 1C in Table 3). based on specific conditions. These bundled products could include: Against this backdrop, a VSS can be structured to provide different levels of benefits, based • Short- and medium-term savings; on custom-tailored contribution levels, for dif‑ • Vehicle insurance; ferent clusters. With the new bylaws (see Sec- • Additional unemployment support where a tion 2), the SSC is allowing individuals to choose portion of the voluntary contribution would the tranche at which they will contribute (contri- be used; bution tranches allowed are: 75, 50, 25, or 10 per- • Children’s educational insurance, leveraging a cent of the normal contribution). The proposed portion of the voluntary contribution; VSS also introduces a component that would • Access to housing/vehicle subsidized credit, encourage tranche selection based on cluster using the defined contribution component characteristics. The voluntary complementary as collateral; and DC component would bundle different benefits • Access to low-interest micro-credit, using the depending on the level of contributions (Figure defined contribution component as collateral. 22 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN FIGURE 7.  Conceptual incentive design for different tranches for the informal sector Defined ContribuƟon condiƟoned “addiƟonal” Bundled benefit Complementary IncenƟves conƟngent Defined upon making ContribuƟon Complementary Defined ContribuƟon Complementary Defined ContribuƟon SSC Defined SSC Benefit Tranche ContribuƟon Defined Tranche 1 Tranche 2 Tranche 3 Tranche 4 Benefit IncenƟve to “increase” Source: Authors. On balance, four packages are proposed to Package 2: Individuals would make contributions complement the existing mandatory scheme. linked to different government licenses or au- The packages respond to two criteria: (i) they thorization processes. The complementary con- need to be self-sustainable in the long term, and tributions would be part of the product offering. (ii) they need to improve the adequacy of pen- Part of the contribution would be channeled to sions (see Table 4). an insurance product related to the license or au- thorization provided through an opt-out process Package 1: This most basic tranche level of con- based on the product. A portion would be di- tribution could introduce a voluntary comple- rected to the SSC as part of their DC compo- mentary DC component with a simple short- nent, complementing the pension. A small por- term withdrawal. This would allow individuals to tion would be treated as short-term accessible contribute additional funds for retirement in a funds that, if unused, would be rolled over to the typical DC scheme. This component may be heav- pension. Finally, another portion would be used ily subsidized through a government program and/ to gain access to a feature that would be appeal- or serve as “one-stop-shop” access to other tar- ing to the different pilot clusters (Table 4). geted government programs (Table 4). A Voluntary Savings Scheme for Jordan 23 TABLE 4.  Summary of pilot packages Pilot packages Complementary contribution purpose 1 2 3 4 Defined contribution component for pension X X X X Links to licenses, permits, and other government authorizations   X   Defined contribution accessible in the short term with pension rollover X X X X Self-selection bundled product X X X X Subsidized component/one-stop shop X       Source: Authors. Package 3: A small portion of the complemen- Ultimately, individuals would “self-select” the tary contributions would be channeled to the package they contribute to; however, the map‑ SSC as part of a short-term accessible compo- ping of clusters to the four packages helps in nent that, if unused, would be rolled over to the designing the incentives that would encourage pension. Another portion (larger than the one for the most adequate contribution levels. For ex- package 2) would be used to gain access to a fea- ample, for clusters of individuals who are not able ture that would be appealing to the different to save and are the most vulnerable (clusters 1a-c clusters (Table 4). in Table 3), the “mandatory” contribution may have to be supported by significant subsidized Package 4: An additional complementary DC short-term benefits. This subsidized benefit tar- component would provide access to a product gets those in the lower wage groups but should be that would target higher-wage groups, as well as deemed irrelevant for higher wage groups, so as provide access to a medium- or long-term sav- to establish a “self-selection” process. That is, ings vehicle that many individuals otherwise those with higher wages would not be inclined to would not have access to. A portion of these comply “only” at the minimum level to gain ac- funds could be withdrawn according to simple cess to the short-term subsidized benefit. rules, and if unused, would be rolled over to the pension scheme (Table 4). Introducing the voluntary complementary DC component to the scheme may help improve Clusters are mapped to each of the packages adequacy for those who comply with the man‑ depending on expected levels of contributions datory contributions and introduce incentives and capacity to save. Package 1 is targeted to the for the informal sector to enroll and contrib‑ most vulnerable clusters as it is heavily subsi- ute. It would incentivize individuals contributing dized. They are clusters whose informal wages at to the different tranches to potentially have a pen- the 75th percentile are much lower than the mean sion a little closer to the “normal” mandatory pen- or median wages of similar formal workers. On sion scheme benefits (Figure 8). The figure com- the other extreme, package 4 is targeted to infor- pares SSC pension adequacy levels between (i) full mal workers who can save, and where their wages formal sector retirement and (ii) packages of contri- are relatively comparable to formal workers with bution tranches “topped up” with DC components. similar characteristics (Table 5). Finally, the voluntary complementary DC com- ponent would increase exposure to DC schemes, paving the way for more structural changes to the base of the SSC system in the future. 24 TABLE 5.  Cluster analysis mapping 75 Percentile Mean Pilot Mean Wage P 25 Median Wage Wage (P75) Informal/ P75 P75 Package Mean Informal/ Informal/ Classifi­ Category Cluster Short Description Formal Informal Formal Informal Formal Informal Formal Informal Formal Mean F Median F cation 1 Agricultural workers 200.00 73.10 200 24 200 28 200 150 0.37 0.75 0.75 1 2 Crafts and related trade 330.03 218.84 240 150 300 200 400 300 0.66 0.91 1.00 3 workers 3 Service and sales workers 298.53 200.10 220 150 280 200 350 250 0.67 0.84 0.89 2 4 Elementary occupations 292.03 223.63 200 200 265 200 350 275 0.77 0.94 1.04 3 5 High skilled collared 337.87 246.39 250 150 300 250 400 300 0.73 0.89 1.00 3 Female Jordan Employed 6 High skilled in less 221.17 177.84 190 120 200 200 250 250 0.80 1.13 1.25 4 populated governorates 1 Agricultural workers 336.05 200.25 300 95 330 200 350 300 0.60 0.89 0.91 1 2 Service and sales workers 341.67 232.41 250 150 300 250 400 300 0.68 0.88 1.00 1 3 Crafts and related trade 435.97 321.39 300 230 400 300 500 350 0.74 0.80 0.88 2 workers 4 Plant and machine 320.94 237.53 260 100 300 250 360 300 0.74 0.93 1.00 3 operators 5 Semi-Skilled in less 339.37 213.38 300 80 350 250 350 300 0.63 0.88 0.86 1 Male Jordan Employed populated governorates 6 High skilled collared 323.85 248.83 250 200 300 250 350 300 0.77 0.93 1.00 4 1 High Ed Egyptians 282.14 239.06 225 200 250 250 350 300 0.85 1.06 1.20 4 2 Agricultural Egyptians 327.44 151.23 250 40 300 140 350 250 0.46 0.76 0.83 1 3 Craft and related trade 327.98 211.58 280 100 320 240 350 300 0.65 0.91 0.94 1 Syrian 4 Semi-skilled in Reg Biz 309.24 224.35 250 160 300 250 350 300 0.73 0.97 1.00 3 5 Semi-skilled workers in med 332.31 232.30 250 180 320 250 400 300 0.70 0.90 0.94 2 and large firms Male Non Jordanian Employed 6 High skilled white collared 350.00 262.63 300 230 350 250 400 300 0.75 0.86 0.86 2 Source: Authors’ calculations based on cluster analysis in Rother et al. (2022). VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN A Voluntary Savings Scheme for Jordan 25 FIGURE 8.  Comparison of four pilot packages to add to full current retirement pensions (in JD) "Full" Formal Sector Package 4 - Tranche 4 + Package 3 - Tranche 3 + Package 2 - Tranche 2 + Package 1 - Tranche 1 + Retirement Pension Complementary Complementary Complementary Complementary Mandatory Complementary Adequate Full Pension Subsidized Source: Authors. Extending VSS to early the financial viability of the incentive. The volun- tary scheme can thus help workers achieve full retirees retirement benefits and provide incentives for The VSS can also target early retirees to en‑ postponing early retirement (Figure 9). courage extended coverage. Short-term incen- tives would be integrated into the VSS, helping Short-term incentives would be awarded only individuals reach the formal sector “full” retire- to those who continue to contribute. While ment age. The overall desired effect is to improve these benefits could be offered to everyone, the the adequacy of all pensions while supporting intervention may be specifically designed so that FIGURE 9.  Proposal to provide incentives to postpone early retirement Postponing retirement through a defined contribution bundled with short-term incentive “Full” Retirement Early Retirement Postponed Early Retirement Age Pension Pension Formal Pension Formal Mandatory Complementary Complementary Source: Authors. 26 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN it would benefit those in the age groups who are • Additional unemployment support where a more inclined to take early retirement. These portion of the voluntary contribution would short-term incentives would require further de- be used; mand side research, but may include a combina- • Children’s educational insurance, leveraging a tion of different alternatives, similar to those portion of the voluntary contribution; provided to informal workers and described in • Access to housing subsidized credit, using section 4: the defined contribution component as col- lateral; and • Access to low-interest micro-credit using the DC component as collateral. 5 The Way Forward This study proposes a framework for developing a voluntary savings scheme complementary to the mandatory one that exists in Jordan. The aim of the VSS is to improve workers’ protection, especially for those who remain vulnerable to income shocks and have limited ability to contribute to existing social insurance schemes. The framework proposes four different packages of the voluntary com- ponent targeted to different clusters of informal workers, responding to their re- spective capacity to save. As a next step, the framework developed in this study would need to be tested. To this aim, we suggest three pilots focusing on two distinct target populations with differing needs: • Another pilot (package 1) would focus on high-skilled blue-collar construc‑ tion workers. This test would focus on low education/low skills construction workers and would be offered to workers irrespective of nationality (including refugees). This target population, which represents the lowest wages and low- est work hours in the economy, is mainly organized in unregistered micro firms. Participation in the SSC scheme would not depend on a work permit. • One pilot (package 2) for low-skilled white-collar workers would be tested in Amman, Irbid, and Zarqa. This cluster comprises about 18 percent of Jorda- nian men working in the informal sector. The pilot would target sales and ser- vice workers with low education and who work in micro firms, which are mostly registered. This would mostly cover the wholesale and retail trade sec- tor. The individuals would make contributions linked to different government licenses or authorization processes: specifically, individuals would be required 27 28 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN to make the SSC’s contribution before re- and offer them products to encourage their ceiving the license10 and would have to opt participation. A portion of the account out of the proposed combined product if would be accessible in the short term, and they didn’t want to participate. The opt-out the remaining amount would be savings. mechanism would be important to intro- duce a behavioral bias in favor of participa- The pilots would need to be carefully designed, tion in the scheme. implemented, and evaluated. A comprehensive demand side diagnostics would support the de- • A third pilot (package 4) would focus on sign of the pilots and provide more information high-skilled workers who are mostly pro‑ on the kinds of incentives that would attract in- fessionals. It would capture individuals who formal workers to the two proposed packages. are “on the fence” of contributing to SSC, Specialized market studies, surveys, and field fo- cus groups could be established to collect data 10. The requirement for the contribution would be evaluated on the specific needs of the targeted groups. A based on political economy factors by the SSC. The license thorough evaluation would be undertaken be- renewal process would also need to include the same pro- cess, not just new license applicants. fore any scale up. References 29 References Akbas, M., D. Ariely, D. Robalino, and M. Weber. Department of Statistics (DS). 2016. “Jordan Labor 2016. “How to Help the Poor to Save a Bit: Market Panel Survey 2016.” Government of Evidence from a Field Experiment in Kenya.” Jordan. IZA Discussion Paper No. 10024. Institute of ———. 2018. “Labor Force Survey 2018.” Govern- Labor Economics (IZA), Bonn. ment of Jordan Brodersohn, E. 2018. “Representation of the Mex- Forteza, A., and I. Mussio. 2013. “Contribution ican voluntary contribution system as off Densities and Transitions in Social Security, 2018.” Unpublished presentation. World Bank, the Case of Jordan.” Journal of International Washington DC. https://thedocs.worldbank. 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Photo Credits 31 Photo Credits All photos are shared by the creators under the following Creative Commons license: Attribution-NonCommercial-NoDerivs 2.0 https://creativecommons.org/licenses/by-nc-nd/2.0/ Page iii (from top): 1. Abdel Hameed Al Nasier/ILO (Jordan, 2018/09). https://www.flickr.com/photos/ilopictures/51001055949/in/ album-72157714132237746/ 2. Abdel Hameed Al Nasier/ILO (Jordan, 2020/02). https://www.flickr.com/photos/ilopictures/51016793185/in/ album-72157714132237746/ 3. Abdel Hameed Al Nasier/ILO (Jordan, 2018/10). https://www.flickr.com/photos/ilopictures/51001054914/in/ album-72157714132237746/ 4. Abdel Hameed Al Nasier/ILO (Jordan, 2019/03). https://www.flickr.com/photos/ilopictures/51001052884/in/ album-72157714132237746/ 5. Jared J. Kohlerl/ILO (Jordan, 2012/12). https://www.flickr.com/photos/ilopictures/51087616646/in/album-72157714132237746/ Page vii (from top): 1. Abdel Hameed Al Nasier​ /ILO (Jordan, 2019/06). https://www.flickr.com/photos/ilopictures/51086069032/in/ album-72157714132237746/ 2. Nisreen Bathish/ILO (Jordan, 2015/11). https://www.flickr.com/photos/ilopictures/51062668796/in/ album-72157714132237746/ 3. Abdel Hameed Al Nasier/ILO (Jordan, 2020/08). https://www.flickr.com/photos/ilopictures/50993775721/in/ album-72157714132237746/ 4. ILO/Apex Image (Jordan, 2001/04). https://www.flickr.com/photos/ilopictures/51087531847/in/album-72157714132237746/ /ILO (Jordan, 2016/11). https://www.flickr.com/photos/ilopictures/51085995737/in/album-72157714132237746/ 5. Ala’a al Sukhn​ Page 1 (from top): 1. Abdel Hameed Al Nasier​ /ILO (Jordan, 2018/11). https://www.flickr.com/photos/ilopictures/51082525793/in/ album-72157714132237746/ 2. Ala’a al Sukhn/ILO (Jordan, 2016/11). https://www.flickr.com/photos/ilopictures/51082448628/in/album-72157714132237746/ 3. Abdel Hameed Al Nasier/ILO (Jordan, 2020/02). https://www.flickr.com/photos/ilopictures/51085977456/in/ album-72157714132237746/ 4. Abdel Hameed Al Nasier​ /ILO (Jordan, 2019/06). https://www.flickr.com/photos/ilopictures/51001052314/in/ album-72157714132237746/ 5. Nadia Bseiso/ILO (Jordan, 2014/12). https://www.flickr.com/photos/ilopictures/51089002210/in/album-72157714132237746/ Page 4: Abdel Hameed Al Nasier/ILO (Jordan, 2018/09). https://www.flickr.com/photos/ilopictures/51001055929/in/ album-72157714132237746/ Page 5 (from top): 1. Nisreen Bathish/ILO (Jordan, 2016/02). https://www.flickr.com/photos/ilopictures/51062756902/in/ album-72157714132237746/ 2. Abdel Hameed Al Nasier/ILO (Jordan, 2020/02). https://www.flickr.com/photos/ilopictures/51086070502/in/ album-72157714132237746/ 3. Guillaume Megevandl/ILO (Jordan, 2021/03). https://www.flickr.com/photos/ilopictures/51084126363/in/ album-72157714132237746/ 4. Abdel Hameed Al Nasier/ILO (Jordan, 2018/10). https://www.flickr.com/photos/ilopictures/51001054914/in/ album-72157714132237746/ 5. Jared J. Kohler/ILO (Jordan, 2012/12). https://www.flickr.com/photos/ilopictures/51063855267/in/album-72157714132237746/ 32 VOLUNTARY SAVINGS SCHEMES TO PROTECT INFORMAL WORKERS IN JORDAN Page 9 (from top): 1. Abdel Hameed Al Nasier/ILO (Jordan, 2019/06). https://www.flickr.com/photos/ilopictures/51085977171/in/ album-72157714132237746/ 2. Nadia Bseiso/ILO (Jordan, 2014/12). https://www.flickr.com/photos/ilopictures/51088735808/in/album-72157714132237746/ 3. Guillaume Megevandl/ILO (Jordan, 2021/03). https://www.flickr.com/photos/ilopictures/51002654614/in/ album-72157714132237746/ 4. Abdel Hameed Al Nasier/ILO (Jordan, 2018/11). https://www.flickr.com/photos/ilopictures/51001053574/in/ album-72157714132237746/ 5. ILO/Apex Image (Jordan, 2000/10). https://www.flickr.com/photos/ilopictures/51018257440/in/album-72157714132237746/ Page 10: Nisreen Bathish/ILO (Jordan, 2015/11). https://www.flickr.com/photos/ilopictures/51062752622/in/album-72157714132237746/ Page 15: Abdel Hameed Al Nasier/ILO (Jordan, 2019/05). https://www.flickr.com/photos/ilopictures/51085983036/in/ album-72157714132237746/ Page 16 (from top): 1. Abdel Hameed Al Nasier/ILO (Jordan, 2018/10). https://www.flickr.com/photos/ilopictures/51085980976/in/ album-72157714132237746/ 2. Guillaume Megevand/ILO (Jordan, 2021/03). https://www.flickr.com/photos/ilopictures/51062458288/in/ album-72157714132237746/ 3. Abdel Hameed Al Nasier​ /ILO (Jordan, 2018/11). https://www.flickr.com/photos/ilopictures/51016799890/in/ album-72157714132237746/ 4. Abdel Hameed Al Nasier​ /ILO (Jordan, 2018/10). https://www.flickr.com/photos/ilopictures/51085980696/in/ album-72157714132237746/ 5. Jared J. Kohler/ILO (Jordan, 2012/12). https://www.flickr.com/photos/ilopictures/51068775291/in/album-72157714132237746/ Page 26: Abdel Hameed Al Nasier​/ILO (Jordan, 2020/02). https://www.flickr.com/photos/ilopictures/51086070607/in/ album-72157714132237746/ Page 27 (from top): 1. Jared J. Kohlerl/ILO (Jordan, 2012/12). https://www.flickr.com/photos/ilopictures/51087616606/in/album-72157714132237746/ 2. Jared J. Kohler/ILO (Jordan, 2012/12). https://www.flickr.com/photos/ilopictures/51068774941/in/album-72157714132237746/ 3. Jared J. Kohler/ILO (Jordan, 2012/12). https://www.flickr.com/photos/ilopictures/51063855677/in/album-72157714132237746/ 4. Ala’a al Sukhn​ /ILO (Jordan, 2016/11). https://www.flickr.com/photos/ilopictures/51016719060/in/album-72157714132237746/ 5. Abdel Hameed Al Nasier​ /ILO (Jordan, 2019/06). https://www.flickr.com/photos/ilopictures/51085978696/in/ album-72157714132237746/ Page 28: Marcel Crozet/ILO (Jordan, 2016/04). https://www.flickr.com/photos/ilopictures/49934178951/in/album-72157714132237746/ Page 33: Jared J. 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C. Thomas, Victoria C. P. Knowland, Cathy Rogers January 2020 To view Social Protection & Jobs Discussion Papers published prior to 2020, please visit www.worldbank.org/sp. ABSTRACT This paper proposes a framework of voluntary savings schemes (VSS) in Jordan that can complement the current formal sector arrangements to better protect informal workers against economic shocks, unemployment, old age, or disability. As benefits of traditional mandatory pension systems worldwide have been cut substantially since the 1990s, voluntary defined contribution schemes are increasingly trying to fill the gap. In many countries, including in low-income countries, special voluntary savings schemes have been introduced to protect informal workers. Blending the knowledge from best practices internationally with the cluster methodology developed specifically for Jordan, the paper provides an overview of the current system of social security in Jordan and presents policy options to lower informality, extend social protection coverage, and provide more adequate protection to workers. ABOUT THIS SERIES Social Protection & Jobs Discussion Papers are published to communicate the results of The World Bank’s work to the development community with the least possible delay. This paper therefore has not been prepared in accordance with the procedures appropriate for formally edited texts. For more information, please contact the Social Protection Advisory Service via e-mail: socialprotection@ worldbank.org or visit us on-line at www.worldbank.org/sp