The following article is a chapter in the text: Workable Pension Systems; Reforms in the Caribbean. It appears here with permission; the authors are Olivia S Mitchell and Derek M Osborne.
This is the continuation of last week’s article.
Based on the best information, given current contribution rates and pension provisions as well as projected demographic changes, all the English-speaking Caribbean schemes reviewed here are likely to be unsustainable over the long term.
While most countries in the region have relatively young populations, substantial declines in fertility over the past two decades— to near or below replacement rates — and improvements in life expectancy will produce dependency ratios like those in industrial countries over the next 50 years. Recent actuarial projections suggest that cash-flow deficits could begin within 20 years, and programme funds could be exhausted in 25 – 35 years if reforms are not made.
The projected timing of these events and the growth pattern of expenditures depend on factors related to the schemes themselves — years of existence, contribution rates, current funding levels, eligibility for and benefit levels of pensions, investment returns, and administrative costs. While future economic growth and migration will have a major impact on the long-term viability of these schemes, depletion of reserves is expected due to contribution rates being below the average long-term cost of benefit promises, along with an expected drop in the number of contributions per pensioner.
For most schemes in the English-speaking Caribbean, contribution rates were initially established under the scaled premium method of financing for an initial period of equilibrium. Thus the framers anticipated that contributed rates would have to be raised in the future. Most of the region’s schemes have not reached the point where expenditures exceed contributions, so no tax increases have been needed thus far. Among countries that have had to use portions of their investments to cover expenditures, only Guyana has made a small rate adjustment, while Barbados has adjusted contribution rates five times, as well as changed the benefit formula to help cover growing expenditures.
If governments in the English-speaking Caribbean want to maintain the defined benefit structure and bring long-term sustainability to pension programmes, further reforms are needed to increase system revenues, reduce expenditures, or both. Such changes could include: cutting promised benefits; eeducing administrative costs; increasing investment returns; and raising contributions.
The first three changes require reviewing current systems, eventually leading to refined programmes that offer reasonable, equitable, and affordable benefits, are operated efficiently, and maximise investment returns. Increasing contributions could then be seen as a final step toward strengthening programmes for future generations. One nonfinancial reform that is also required is removing most political intervention, so that schemes keep up with the changing socio-economic conditions.
Specifically, governments currently decide on the timing and magnitude of increases in earnings ceilings and pension payments. When such changes are made — or avoided — the decisions are often politically motivated. Moreover, there is often not a sound basis for whatever adjustments are made. For pensions especially, underfinanced benefit increases tend to occur with depressing regularity during election campaigns. If the rules governing such adjustments were guided by regulations, social security scheme coverage and benefits would more likely be affordable.
(To be cont’d)
If there is a particular aspect of Social Security that you would like discussed be it from a local, regional or international perspective, please contact the Social Security office at:
Know Your Social Security
The Antigua & Barbuda Social Security Board
PO Box 1125
St. John’s, Antigua
or email us at: christiann@socialsecurity.gov.ag or socsec@socialsecurity.gov.ag
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