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Final Thoughts on my 2016 Thesis – Thesis Part 7

5. Conclusion

In Barbados, since the implementation of the pension reform in 2006, the number of contributors has increased due to changes in eligibility terms for benefits, such as the minimum retirement age. However, this work highlights that the latest reform will not solve the fiscal problems of the NIS, but rather delay them, as the results indicate the need for additional reforms. Few articles found on pension schemes in the Caribbean outline the steps to be taken due to lack of research and data availability, thus hindering the understanding of these systems, their financial deficits, and the performance of their funds as a whole.

The significant decline in fertility rates has caused countries to age faster than expected, resulting in a larger elderly population than the young population, as seen in Table 7. This trend threatens the sustainability of pension schemes, especially those whose schemes are financed by simple reparation or PAYGO, as the aim of this financial scheme is for workers’ contributions to be equivalent or higher than retirees’ benefits. The pension reform in Barbados involved the phased increase of the minimum retirement age, thus creating flexible ages at which a person can claim retirement. The changes made to the eligibility criteria have increased the number of contributors and the NIF fund reserve, although the growth rate of the reserve has been declining from 2008 to 2014, fund growth was observed. This decline was possibly the result of the 2008 economic crisis, as people chose not to contribute to the fund or made smaller contributions.

Indicators19672014
Total fertility rate (births per woman)3.6371.794
Crude birth rate (per 1000 people)24.23312.088
Crude death rate (per 1000 people)10.83010.576
Life expectancy at birth (e0)64.09975.496
Population aged 0 to 14 years (% total)*38.55219.366
Population aged 65 years and over (% total)*7.57614.164
Table 7 – Summary of Demographic Indicators for Barbados. Source: The World Bank; (*) Data for the year 2015 and not 2014.

The results of this work show that the latest reform was just the beginning of additional reforms to the NIF, as the steps taken under this reform would not be sufficient to solve the fund’s fiscal problems. In addition to the results presented in this work, there are three important findings about the Barbadian system that are related:

  • To the increased minimum retirement age and resource capture;
  • To accumulation factors;
  • To the evolution of pension expenses.

First finding

The first finding refers to the phased increase in the minimum retirement age and its effectiveness in capturing more resources than before, as the elderly population is growing at a faster rate than the young population, it would be essential to reformulate the way benefits are accumulated and contributions are made. This review should consider the formula used to calculate retirement benefits, such as the percentages applied to earnings and contributions, and the minimum number of contributions required to be eligible for benefits. It may also review PAYGO rates and contribution rates used in benefit accumulation. The actuarial report published by NIS itself predicted that total expenses would exceed contributions each year. By performing a linear projection of total expenses and contribution revenues, consistent results were found, however, applying the Bongaarts methodology yielded contradictory results, as the pension expense ratio or PER peaked in 2012 at 0.9896 or 9.90% and then declined to 0.05914 or 5.91% in 2050. As the number of elderly people is expected to increase over time, it is expected that the number of retirees will also increase. Therefore, it is concluded that the decline in PER is attributed to the inadequacy of the retirement benefit caused by the decrease in the benefit ratio.

Second finding

The second finding concerns the accumulation factors of benefits and the calculation used to determine the value of the benefit granted to the retired participant. As mentioned above, the results demonstrate a disparity between the participant’s earnings or remuneration and the value of the benefit received as retirement income. The benefit ratio or replacement rate measures the proportion of the participant’s last salary that the retiree expects to receive in retirement. From the analysis conducted in this work, it is noted that the average insurable income increases while the value of the pension decreases, this trend leads to the conclusion that accumulation factors and/or benefit calculation need to be reviewed. From Table 4, a comparison of indicators in several countries in 2000, it is seen that the BR for Barbados was consistent with other countries, particularly North American countries.

Third Finding

The third and final major finding relates to the evolution of social security expenses. Normally, an increase in the elderly population implies higher expenses related to this population group, however, the results obtained show an opposite scenario – pension expenses tend to decrease. In this work, the pension expense ratio (PER) was used to measure public spending related to social security, in a simplified way this indicator divides the total value of pensions by total wages. So, the decrease in PER implies a decrease in the number of retirees or in the average retirement benefit. As the number of elderly and retirees is expected to increase steadily, the problem lies in the values of the pension and the replacement rate.

The need for research, reform, and some proposals

We highlight the need for more research on the Caribbean and the various pension schemes in the region. In the Barbadian context, the country is very interesting for several reasons, for example, although it is considered a developing country, it is quite advanced in demographic transition and has a high human development index, even higher than that of Brazil. In terms of the pension system, the NIS covers various branches such as retirement, unemployment insurance, and benefits for dismissal and was a pioneering system in the Caribbean. The way is ending soon and up to this moment the last actuarial report of the NIS was in 2011 so there is a great incentive to follow the process and evolution of the reform to better serve the needs of its participant mass and disseminate the findings to the public in order to produce more research and work on the Barbadian regime. Proposing the replication of the methodology used in this work to other Caribbean countries in order to compare them and study better how to combat the fiscal problems present in each scheme.

This work concludes with some improvement proposals based on the main findings. Firstly, there is a need to evaluate the administration of the NIS as well as the good management practices of the National Insurance Fund (NIF) in order to better manage the reserve and investments of the NIF. Secondly, due to the recent reform that has not yet concluded its course, it would not be wise to increase the minimum retirement age at this time, but the review of contribution rates and PAYGO rates needs to be carried out as soon as possible. If the rate review proves insufficient in combating fiscal difficulties, it would be necessary to analyze whether the simple reparation regime (PAYGO) is really efficient and the best financing method for the NIF. The elaboration of a study comparing the scenarios of an NIF under simple reparation, fully financed,

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