The Pension System in Barbados – Thesis Part 1

I started writing my thesis in 2015 and defended it in late 2016. Here is a translation of my thesis which was originally written in Portuguese. The aim behind translating this is to then share my more recent findings almost 10 years later and discuss the current state of affairs of the Barbados National Insurance Scheme (NIS).

Extract

This paper examines the evolution of retirement in Barbados and its main program of supporting the elderly. The main objective is to demonstrate how demographical change in Barbados and the current structure of the public pension programs will be unsustainable moving forward and provide suggestions for improvement.

Keywords: public pension programs, population ageing, demographic change.

Introduction

Despite being a small developing country, Barbados takes pride in having one of the pioneering social security systems in the Caribbean (Inter-American Development Bank; Caribbean Development Bank, 2005), both in terms of its inauguration date and the range of benefits offered by the responsible agency. According to various indicators used by the World Bank and the United Nations (The World Bank; United Nations), Barbados ranks favourably among developing and developed countries, as shown in Table 1 below:

	Barbados	Brazil	Mexico
Human Development Index (HDI)	0.785	0.755	0.756
GDP per capita	17,200	15,100	18,900
Life expectancy at birth	75.6	74.5	76.8

The Human Development Index (HDI) is an index used to compare countries, aiming to measure the degree of economic development and the quality of life offered to the population. The HDI is computed from economic and social data, such as average years of schooling, life expectancy, and Gross Domestic Product (GDP) per capita. The purpose of this indicator is to emphasize that people and their capabilities should be the primary criteria for measuring a country’s development, not just economic growth by itself. In 2015, the HDI for Barbados was 0.785, ranking 57th out of 188 countries, thus placing it among the highly developed countries (United Nations, 2015).

The age structure of the Barbadian population, like that of other developing countries, has changed drastically in recent decades due to a higher proportion of elderly people while the birth rate remains low and continues to decline—thus reflecting a country that is advanced in demographic transition and a developed nation. These new trends have caused tension in Barbados’ social security system, more commonly known as the National Insurance Scheme or NIS.

First of all, it is necessary to clarify how social security can impact a society in terms of the age structure and vice versa. The basic concept of Social Security is that people contribute to the program while they are working in order to receive a monthly pension in old age. However, these programs also consider the principles of equity and adequacy, as there must be a balance between the two. Equity can be defined using this simple example: those who can contribute more during their working years should reap more benefits during retirement than those who contribute less. On the other hand, adequacy refers to the way benefits are calculated. Various social security systems, including the Barbadian model, do not consider the insured’s low-income years (Inter-American Development Bank; Caribbean Development Bank, 2005; N.I.S Barbados, 2016). According to Gruber and Wise (1998), the decline in labour market participation rates has been impacted by the incentive to leave the workforce given the benefits offered by Social Security. That is, an individual may choose whether it is worthwhile to remain in the labour market or retire based on the level of benefits they would receive, and in several countries, the option to retire from the labour market is more attractive than continuing to work, whether these benefits are monetary or not.

Given the disproportion between the elderly population and the young population (World Bank, 2016), Social Security is essential in combating poverty among the elderly, as many seniors, especially those without family, depend on these benefits as their only means of resources besides family support (Quashie, 2015; Rawlins, 1999). Regarding the participation rates of the elderly (65 years and older), they declined in the 1990s, but with the turn of the millennium, the rates showed an upward trend. According to LABORSTA-ILO (2011), Barbados had a male participation rate of 13.7 while the female rate was 6.9 in 2015, indicating that women still face difficulties in entering the labor market. Since the main focus is to support the elderly in their senior years, decisions made now about pensions will impact the income of future retirees. Due to the ageing population, the collection of resources to pay future benefits has been a challenge and continues to be a worrying factor in the future sustainability of pension systems, as the elderly population has grown rapidly while the young population continues to decrease. These trends cause the pension fund reserves to shrink, thus leading to pension reform, an opportunity to redefine the means of capturing resources and granting benefits (Gruber; Wise, 1998; Inter-American Development Bank; Caribbean Development Bank, 2005; N.I.S Barbados, 2000).

The agency responsible for social security in Barbados, named the Barbados National Insurance Scheme (NIS), began its operations in June 1967. Currently, the NIS covers all salaried and non-salaried workers and offers five (5) types of social security benefits with payments from three distinct funds. However, the fund of interest for this work is the National Insurance Fund (NIF), which grants short- or long-term benefits—pensions, disability benefits, and accident benefits (N.I.S Barbados, 2014). In the early 2000s, a pension reform was proposed to better support citizens in retirement. Within the Caribbean, and certainly in Barbados as well, a larger number of older people present challenges to families, communities, and governments for which many of the countries are not adequately prepared (Rawlins, 1999). There was a need to reform the pension system, driven by the ageing population, which can be measured by the proportion of people aged 65 or older in the total population. This increased from 6.8% in 1960 to 11.5% in 2000 and 13.8% in 2014 (World Bank, 2016), thus highlighting why reform was necessary at the time. As the main objective of social security systems is to protect the insured from significant income drops after retiring from the workforce (Bongaarts, 2004), under the pension system of that period, this would not be possible.

The reform implemented in the 2000s involved increasing the minimum retirement age, similar to the Progressive Rule 85/95 in Brazil. From January 1, 2006, the minimum age was changed to 65 years for both men and women, gradually increasing over the years to reach 67 years in 2018. Guerra and Queiroz (2016, p. 11) state that “[…] instead of the social security factor, opting for the Progressive Rule 85/95, provided that, by December 2016, the sum of 85 points, if female, and 95 points, if male, was obtained” and that from 2017, “[…] the sum of age and contribution time would have to be 86, if female, and 96, if male (MPS, 2015). MP 676/2015 limited this scaling until 2022, when the sum for women should be 90 points and for men, 100”. Returning to Barbados, we see that the reforms are similar in terms of scaling retirement criteria. However, in Barbados, the participant’s contribution time is not considered—only the insured’s age.

As a more advanced Caribbean country in demographic transition, Barbados has a fairly high life expectancy at birth. Recent data shows that a Barbadian woman is expected to live for 78 years while a man will live, on average, for 73 years (World Bank, 2016). Additionally, according to the UN Population Division, the median age of the population in 2015 was 38.5 years (United Nations, 2015). Regarding the NIS, in 2014, out of 110,939 active insured persons, 97% were under 64 years of age. Of this percentage, 26.9% were in the 40 to 49 age group. In terms of the dependency ratio, Barbados has a total dependency ratio of 50.4% compared to 52.5% for the Caribbean. Regarding the elderly dependency ratio, Barbados presents a ratio of 21.3%. Additionally, the country has a support ratio of 4.7%, which is below the average for the region. According to these values, it is perceived that half of the population is in non-active ages, meaning they are out of the labor market, and almost half of the total dependency ratio is related to the elderly who will need to be supported by active workers, thus creating a greater burden on the social security system.

The purpose of this work is to analyze the financial situation of the NIS during the reform through the study of the dependency ratio between beneficiaries and contributors, especially those receiving retirement benefits, and the Fund’s reserve. After a pension reform, it is expected to capture more resources for both current and future beneficiaries. Generally, a dependency ratio measures the proportion of dependent people to the number of working people (United Nations; DATASUS), but in this case, the dependents would be classified as those receiving retirement benefits while the contributors represent the people contributing to the pension fund. As the survival of a social security system depends heavily on the dependency ratio, the management of the fund’s reserve, and other factors involving public policy-making, the main contribution of this work, given the concern with the social security system especially during a reform period, is to show how the NIS, the insured, and the Barbadian Government could behave in the future and propose possible improvements to the system.

This work presents, firstly, an overview of the current Social Security system in Barbados as well as its performance according to the latest Actuarial Report published by the responsible agency. Next, the Literature Review discusses all the factors that influence the success or failure of a social security system with a great focus on the Caribbean region, specifically Barbados. The Methodology presents the data and methods used in the project’s development, while the Results section shows the results of the analysis and proposes suggestions to ensure the future success of the Barbadian system. Finally, the Conclusion discusses the work as a whole and how the results found in this work could be used to improve this social security system as well as recommendations for the future.

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