Understanding the New Social Insurance System Legal Change in Saudi Arabia

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Introduction

If your country’s leadership promised you improved health quality and an increased average life expectancy, but in return, you had to contribute partially (pay a premium or a share) for a few years, would you contribute? This is exactly what the Saudi Government is trying to do. They are asking you to keep your contribution with social insurance until reaching the age of 65, which is still 10 years away from the average life expectancy in KSA.

Why This Change?

The Kingdom of Saudi Arabia is committed to enhancing the well-being of its citizens. By extending the contribution period and increasing the retirement age, the government aims to ensure the financial stability of the social insurance system and provide better benefits in the future. This legal change is part of broader efforts to modernize the social insurance systems, streamline processes, improve transparency, and ensure that both employees and employers are well-protected under the law.

The Legal Change

The recent changes in the social insurance regulations in Saudi Arabia bring a significant shift in how different age groups approach their retirement. To better understand the impact, let’s imagine we have three contributors racing towards their retirement:

• 50-year-old man riding an airplane: He will reach his retirement age of 58 in 8 years, making him the fastest to achieve his pension.
• 40-year-old man riding a train: He will reach his retirement age of 61 in 21 years, representing a moderate pace to retirement.
• 28-year-old man riding a ship: He will reach his retirement age of 65 in 37 years, taking the longest time to reach his pension.

This illustration helps visualize the different paths and timelines based on the new regulations.

Now, let’s dive into the specifics of the new social insurance system and how it categorizes employees into three distinct groups:

1. Employees without Previous Social Insurance Coverage:
   • Applicable Employees: Those newly entering the labor market after the effective date July 3, 2024, with no prior social insurance contributions.
   • Retirement Age: Set at 65 years.
   • Contribution Rates: Incrementally increase by 0.5% annually on the GOSI base fund contribution starting from the second year until the fifth year, reaching a total increase of 2%.
2. Employees with Existing Contributions Before the Law Effective Date and below age of 50:
   • Retirement Age: Gradually increases from the current retirement age, based on the employee’s age at the time of the law’s implementation.
   • Contribution Continuity: These employees will continue their contributions under the existing system without changes to contribution rates.
3. Employees Above 50:
   • Retirement Age: Will remain under the old system rules, allowing them to retire without the adjustments affecting younger employees.
   • Contribution Continuity: These employees will continue their contributions under the existing system without changes to contribution rates.

This new categorization ensures a smooth transition for different age groups while aligning with the goal of enhanced social security and increased life expectancy.

The Impact on the System

The implementation of the new social insurance system requires adjustments in our payroll system to categorize employees correctly based on their contribution history and age. The key parameters needed for these adjustments include the “first contribution date” and the employee’s age.

The illustration below outlines the process of determining an employee’s group:

First Contribution Date:

By comparing the first contribution date with the law’s effective date, we can determine if the employee belongs to the first group (those without previous social insurance coverage) or the other two groups.

Group Determination:

If the employee belongs to the first group, we need to check if this is the 1st, 2nd, 3rd, 4th, or 5th year from the new system start date

For the second and third groups, we calculate the employee’s age to see if they are below or above 50. This helps decide if they belong to the second group (employees with existing contributions before the law effective date) or the third group (employees above 50 who will continue with the old system).

With this categorization, we can ensure that employees are placed in the correct group, and the appropriate contribution rates and retirement benefits are applied.

Proposed Solution

To effectively implement the new social insurance system, our proposed solution includes capturing new parameters that will help determine the correct group for each employee.

We invite you to join our upcoming webinar where we will discuss the proposed solutions in detail. This will be an excellent opportunity for you to engage with our team and provide your valuable feedback before the final solution is released. Stay tuned for the event agenda, date, and time, which will be shared soon on our user group “MENA Localization Group” so please join if you are not a member yet.

For more information, please refer to the published announcement in the RCM for this legal change New Social Insurance System.

Conclusion

The new social insurance system legal change is a significant step towards modernizing the workforce’s legal and compliance landscape in Saudi Arabia. By staying informed and actively participating in our discussions and webinars, you can ensure your business remains compliant and benefits from the best possible solutions.