Ways to Improve Social Security in Barbados – Thesis Part 4

As we continue the Thesis series, let’s talk about some ways I thought we could improve social security in Barbados. Do I still agree? Have I thought of new ways? Watch the video below to find out:

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2.3. Proposals for Improving Social Security in Barbados

This section presents various proposals for improving pension schemes both in the international and regional contexts. Holzmann (2000) discusses the World Bank’s perspective and involvement in pension reforms worldwide. The World Bank is generally concerned with (1) short- and long-term financial viability, (2) effects on economic growth, (3) adequacy and other distributive issues, and (4) political risk and sustainability. According to this work, there are three main options: strictly reforming the pay-as-you-go (PAYGO) system, transitioning to a fully funded system, or adopting a multi-pillar system combining the previous two options.

The first method involves reforming the parameters used in PAYGO-funded pension schemes, such as the minimum retirement age, accumulation factors, evaluation period, and indexing. An advantage of this option is that it is theoretically easier to implement than the other methods, but it is not attractive to politicians and governments as it is a lengthy process and can take years to see results. The second method proposed by Holzmann is transitioning to a fully funded system, thus eliminating many difficulties found under the PAYGO system, such as benefit distribution and contributions. Unfortunately, the funded method brings its own challenges, such as (a) paying benefits granted before the transition while needing to capture resources for future benefits, (b) regulating funded funds, and (c) market fluctuations that could jeopardize the fiscal sustainability of the pension system. The third method, a multi-pillar system, involves part of the system funded by the PAYGO scheme and the other part funded. This method has several advantages, including (a) delineating between poverty reduction and income replacement, (b) risk diversification as an elderly support provision, and (c) reducing fiscal transition responsibility while preserving economic gains.

According to Bongaarts (2004, pp. 13–19), there are several ways to reform pension systems, as ignoring evidence at this point can lead to a disaster in terms of debt accumulation. The author presents four groups of suggestions: combating population ageing, expanding the labour force, raising the minimum retirement age, and finally, reducing retirement benefits. In the Barbadian context, encouraging fertility is not a good choice. However, the immigration of young professionals would have the effect of rejuvenating the Barbadian population, thus lowering the median age and dependency ratio, as there is already a migration flow between Caribbean countries and the presence of foreigners (PIENKOS; ILO, 2000; THOMAS-HOPE; CARICOM SECRETARIAT, 2000; UNITED NATIONS SECRETARIAT, 2005) in Barbados, making it possible to open more job opportunities for non-Barbadians.

In terms of the labour force, many men and women are unemployed, thus reducing the ratio of retirees to workers. This option is directly linked to the previous one but must include people with low education levels to be efficient, as the previous option focused on professionals and qualified individuals. Another suggestion would be opening jobs for domestic and rural workers to maintain balance. However, as Barbados is one of the most densely populated countries, there would not be enough space or accommodation if immigration were liberalized, making this suggestion not advisable (N.I.S BARBADOS, 2000, p. 7).

Raising the minimum age is not viable at this stage of Barbadian reform, as there has been little time since the last increase and the first reform is not yet complete. It would be necessary to allow time to truly observe the effects of the reform implemented in the early 2000s. Finally, the last option proposed by Bongaarts refers to reducing retirement benefits. Before embarking on the NIS reform, the Barbadian government, along with NIS itself, methodically educated the Barbadian population about the reform and how it would impact benefit accumulation (HERBERT, 2003). The guide explaining the reform options clearly outlines the disadvantages and advantages of each, so citizens are aware of the decisions they will make and how they will impact their lives.

In the Caribbean, there is a deficit of research on pension schemes due to a lack of data. However, the articles found contradict international advice, as they are not ideal for the region. According to Williams and Osborne (INTER-AMERICAN DEVELOPMENT BANK; CARIBBEAN DEVELOPMENT BANK, 2005, cap. 3), the options are neither viable nor recommended for the Caribbean region. Instead, it would be wise to focus on the structure, financing, administration, and governance of existing public elderly support systems. Several Caribbean countries, including Barbados, are already suffering from financial deficits and must carefully address reforms, aligning them with good financial practices to cover past deficits and future regime costs (WILLIAMS, 2003; PETTINATO; DIAZ CADDOU, 2003). Barbados was hit by the effects of the 2008 recession and has not yet fully recovered, according to the International Monetary Fund’s most recent report on Barbados’s economy (INTERNATIONAL MONETARY FUND, 2016), “the global financial crisis destroyed growth while fiscal adjustment was delayed and insufficient, leading to persistent deficits and rising debt.”

Pettinato and Diaz Caddou (2003) proposed seven preliminary recommendations for Caribbean pension schemes:

1. Increase other sources of income, such as contribution rates, or reduce expenses by lowering benefit eligibility or benefit calculation formulas to achieve financial sustainability.
2. Reduce operational and administrative costs as almost one-fifth of contributions are allocated to these expenses.
3. Expand NIS coverage to include self-employed and informal workers.
4. Introduce legal infrastructure for the development of second and third pillars, such as deferred annuities and pension or retirement funds, to provide supplementary income for an increasing number of individuals.
5. Facilitate and simplify access to pension funds for less privileged individuals. Additionally, NIS personnel should receive training with greater supervision to prevent corruption.
6. Engage financial and social security professionals and stakeholders to gather knowledge, ideas, and concerns, and develop consensus on the direction of the reform.
7. Promote dialogue and negotiations with governments—according to the previous recommendations, the logistics of any reform should involve organizations and experts, both international and national or regional, to ensure the success and effectiveness of the implemented procedures.