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.
RECENT REFORMS II
Recent reforms in Barbados will result in the contribution rate rising from 15.25 percent of earnings currently to 18.25 percent by 2006. Thus it may be inferred that to Barbadians, this level of contributions for national short-term and employment injury benefits and pensions is acceptable.
About 3 percent is required for nonpension benefits and administrative costs, leaving 15 percent for old age benefits.
In Latin America defined contribution pension schemes tend to charge about 10 percent of wages.
Therefore, to illustrate the implications of each of the three alternatives described above, projections of the Bahamas National Insurance Scheme have been performed assuming that the maximum rate affordable for pensions only would be 15 percent under a partially prefunded scheme and 18 percent if the program remained pay-as-you-go.
The Seventh Actuarial Review of The Bahamas National Insurance Fund as of 31 December 2001 was recently released. Projections under the intermediate scenario suggest that the fund will encounter its first cash-flow deficit in 2019 and be depleted in 2029 if the current contribution rate and benefit provisions are not changed. The report also indicates that the level of the average premium required to cover benefits over the next 60 years is 15.5 percent, that the pay-as-you-go rate will increase from 9 percent in 2002 to almost 25 percent in 2061, and that the present value of the contribution shortfall is $3.4 billion—three times current reserves.
Table 12.3 illustrates some alternatives that would result in a sustainable pay-as-you-go system for the Bahamas. The alternatives reveal that achieving pay-as-you-go sustainability, along with a reserve cushion, is possible through parametric reforms. But the necessary changes will be significant and more than likely unpopular. While the specific alternatives outlined for the Bahamas might not exactly match those needed for other countries in the region, similar reforms will be required in countries where the maximum benefit percentage exceeds 50 percent and contribution rates for pensions are less than 8 percent of covered earnings. Alternatively, where system revenues exceed benefit payments and reserve ratios are positive, there would be time and financing to move to a fully funded defined contribution system if this were deemed economically and politically sensible.
Table 12.3. Illustrative Parametric Reforms Sufficient to Sustain a Pay-as-You-Go System for the Bahamas
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Maintain current contribution Raise contribution rate Trim benefits and raise
rate and benefit provisions; to 15 percent and reduce contribution rate to achieve
when reserves are exhausted, benefits to fit within that pay-as-you-go system with
cut benefits to sustain a pay-as-you-go budget long-term reserve ratio of
system twice annual expenditures
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In 2029 reduce pension payouts Raise contribution rate to 15 Raise contribution rate to 12
by 30 percent percent over seven years; percent, reduce accrual rates
Reduce accrual rates and and maximum benefit
maximum benefit percentage from 60 to 50
percentage from 60 to 50 percent, index pensions by
0.5 percent below inflation
Keep contribution rate under Higher reserves ratio: 15 Lower reserves ratio: 2 times
18 percent expenditures in 2061 expenditures in 2061
(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
P.O. Box 1125
St. John’s, Antigua
or email us at: HYPERLINK “mailto:christiann@socialsecurity.gov.ag“christiann@socialsecurity.gov.ag or HYPERLINK “mailto:socsec@socialsecurity.gov.ag”socsec@socialsecurity.gov.ag
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