National Insurance Scheme Pensions Data – Thesis Part 5
3. Methodology
3.1. Data
The data used in this study includes information on contributors and beneficiaries, insurable earnings, and average benefits provided by the NIS Barbados. Additionally, population data and participation rates were obtained from the United Nations. The objective is to observe trends in these variables over the analysis period of approximately 50 years (2000 to 2050). Due to technical difficulties, data from the inception of the fund in 1967 was not available; therefore, real data was used for the period from 2000 to 2014.
Firstly, an overview of the NIS from 2000 to 2014 shows an approximate 79.3% increase in contribution income. On the other hand, expenses showed an expected trend, with a significant increase in contributory pensions and a decrease in non-contributory pensions, 226.3% and -72.5% respectively.
Regarding the profile of beneficiaries, in 2004, 30,682 benefits were granted, of which 17,616 were contributory old-age pensions and 10,526 were non-contributory. In the same year, 4,770 people aged 65 to 69 received a contributory pension, with 50.1% of them being men and 49.9% being women. For the age groups 60 to 64 and 70 to 74, the gender distribution remained consistent—with 48.5% men in the 60 to 64 age group and 47.9% women in the 70 to 74 age group. Analyzing non-contributory pensions, a different trend is observed, with the majority of benefits granted to women, which was an expected trend considering women’s historical participation in the labour force. Ten years later, in 2014, the number of beneficiaries increased to 34,956, indicating the first sign that the reform was inefficient in retaining workers in the labour force to reserve more resources for future beneficiaries and/or retirees. Of these 34,956 retirement benefits, 28,199 were contributory and 6,757 were non-contributory. The number of non-contributory pensions decreased significantly, while the number of contributory pensions saw a substantial increase. However, this result was expected, as the reform results would not be immediately noticeable. It is hoped that the measures currently being taken will have positive long-term effects.
In 2005, the NIS had a total of 117,964 active insured individuals, the majority being women under sixty (60) years of age. When analyzing the average insurable earnings, it is observed that women earn less than men across all age groups—the average insurable earnings in 2005 were BBD$ 2,192.94 for men and BBD$ 1,930.00 for women. On average, male contributors have contributed longer to the pension system, with 13.5 years compared to women, who have contributed an average of 12.7 years. More recent data from 2014 shows a decline in the number of active insured individuals to 110,931 from 117,964 in 2005. However, the average insurable earnings for both sexes increased, but men continued to earn more than women (BBD$ 2,692.64 compared to BBD$ 2,486.45). The data also shows an ageing insured population, with the average years of contribution being 18.0 years and 17.6 years for men and women respectively.
According to data provided by the actuary responsible for the 14th Annual Report, the average weekly insurable earnings increased by 44.2% between 2000 and 2011, despite the number of active insured individuals increasing by only 3.2%, while the number of retirees jumped by 6.9% during the same period. Additionally, data on the average weekly retirement benefit shows a gradual increase every year, except in 2005. From 2000 to 2011, the average weekly retirement benefit increased from BBD$ 130 to BBD$ 270, an increase of 96%. During the same period, the number of retirees per contributor remained relatively constant, fluctuating between 3.6 and 3.3.
3.2. Methods
In the literature, there are several measures to assess social security costs. The ones used in this work, proposed by Bongaarts (2004), will be presented below. These measures will be important to analyze whether the Barbadian social security system is sustainable in the long term. The author divides these measures into two categories: old-age dependency and retirement and benefit expenditures.
Reference Scenario
Before that, it is necessary to define the reference scenario. For this method to work well, Bongaarts provided a reference scenario where he details the main characteristics of each measure mentioned above. Specifically, it is recommended to use the medium variant of the United Nations population projections. These projections are based on a series of assumptions about future levels of fertility, mortality, and migration. For the other measures, the database used was provided by NIS Barbados.
Measures
The first set includes four ratios or measures all related to old-age dependency:
- Dependency Ratio
- Retirement Ratio
- Employment Ratio
- Retiree-to-Worker Ratio (PWR)
The second set refers to retirement and benefit expenditures:
- Retirement Expenditure Ratio (PER)
- Benefit Ratio (BR)
Traditionally, the dependency ratio refers to the number of dependents, whether young or old, relative to the working-age population, i.e., between 15 to 64 years old. In this work, the dependency ratio considered is the old-age dependency ratio. This measure can be understood as follows: a ratio close to 1 or 100% indicates that the working-age population and the economy as a whole will face a challenge in supporting the aging population. Additionally, it is a measure that indicates the possible effects of changes in the age pyramid on socioeconomic trends. Although it is a widely used measure, there are some limitations to the dependency ratio (United Nations). Firstly, it is an estimate of the ratio of net consumers to net producers, as it suggests that children under 15 and adults over 65 do not work and are thus economically dependent. It is known that this is not the reality in many countries, as not everyone between 15 and 64 is economically active, and not everyone retires from the workforce upon reaching 65 years of age.
Bongaarts (2004) and Queiroz (2011) argued that this measure is not efficient in measuring the burden of social security. Queiroz (2011) states that “[…] people retire before the age of 65” and “the number of individuals contributing to social security is less than the labor force in many countries”. Population data and dependency ratio data were obtained from the United Nations (UN), specifically the medium variant estimates and projections. When annual data was not available, linear projections were used to convert quinquennial data into annual data.
Alternative Measures
Due to the limitations of the dependency ratio, Bongaarts proposed other more effective measures for assessing social security expenditures. The first of these is the Retirement Ratio (PR). This measures the proportion of retirees and people eligible for retirement relative to the elderly population (65 years or older). Since some people retire before reaching retirement age, the PR can be greater than 1. The second measure is the Employment Ratio (ER), which indicates the number of employed people contributing to Social Security relative to the economically active population (15 to 64 years). The fourth and last measure of the first category mentioned earlier is the Retiree-to-Worker Ratio (PWR). The PWR is an enhanced measure of the number of retirees to workers and is calculated based on the three other ratios previously mentioned.
Expenditure Measures
As for the second set of measures, the PER measures social security expenditures and is calculated as the total annual expenditure divided by the total insurable earnings of workers. Finally, the Benefit Ratio (BR) can be understood as the relationship between the retirement benefit and the salary earned during working years. What stands out in Table 3 is the strong relationship between the measures mentioned above. Bongaarts concludes that “countries with high Benefit Ratios (BR) tend to have high numbers of retirees per worker,” meaning the PWR will be similarly high.
- Old-Age Dependency Ratio (ODR): Population over 65+ divided by population under 65 but older than 15 ie. persons of legal working age
- Pensioner Ratio (PR): Population aged 65+ and any person below 65 who is retired and above the minimum age of eligibility divided by total population
- Employment Ratio (ER): Number of employed persons divided by the population of 15 to 64 years
- Benefit Ratio (BR): The average pension (per retiree) divided by the average insurable earnings (per worker).
- Pensioner/Worder Ratio: ODR x (PR/ER)
- Pension Expenditure Ratio (PER): Measures the level of expenditure in relation to social security (public pensions). It is calculated as the total annual expenditure on social security divided by the total annual earnings of workers before taxes.