The Pension System in Barbados – Thesis Part 2
Welcome back to my graduate thesis review!
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2. LITERATURE REVIEW
This section aims to demonstrate the link between population ageing and the sustainability of a pension system. It will also present the pension regime in Barbados, known as the National Insurance Scheme (NIS). The main objective is to report on the performance of one of its funds, the National Insurance Fund (NIF), which is undergoing a period of reform. Worldwide, population ageing has caused significant political debate as it is the main cause of future instability in social security systems. Various pension systems, especially those of the pay-as-you-go defined benefit type (PAYG-DB), have become the focus of legislators, economists, and the general public due to incurred deficits or actuarial imbalance (Working Paper of the International Monetary Fund; Sadka; Tanzi, 1998).
The term “population ageing” has been widely discussed in recent years and is indeed a worrying phenomenon. The rapid ageing of the population and its increased longevity have placed significant pressure on the future sustainability of the pension system. Additionally, there is a trend towards early retirement, where people retire before the suggested minimum age, thereby reducing the size of the labor force. According to Gruber and Wise (1998, p. 161), the decline in labour force participation could be explained by the following: “The provisions of social security provide a huge incentive to leave the workforce early, thus exacerbating the financial problems of the elderly by their very structure.” In other words, when many people start to enjoy benefits early, this negatively impacts the fund’s reserve, as the labour capacity, or in other words, the contributors decreases to the extent that the old-age dependency ratio increases.
The introduction of social security allowed the elderly to leave the workforce in old age, usually from the age of 65, providing these people with an income at this stage of their lives. Due to this, the participation of the elderly in the workforce has dropped significantly over the past decades, particularly among men. Additionally, the authors mention two characteristics that encourage exiting the workforce. The first characteristic is the earliest age at which benefits can be granted, i.e., the minimum retirement age—in Barbados, the minimum age is 60 for both men and women, while the normal retirement age is currently 66½ years. The second characteristic that can affect the decision to remain in the workforce is the way benefits are accumulated. That is, are there incentives for the person to work longer? In this study, it is seen that the Barbadian system rewards those workers who remain in the workforce after the normal retirement age.
The Caribbean Regional Charter on Aging and Health was adopted by the Caribbean Community (CARICOM) in 1999. The aim of this charter was for Caribbean governments to recognize that population ageing was a priority in the areas of health and social planning. The Caribbean is one of the most aged regions and is following global population ageing trends, notable trends include (1) the irreversibility of ageing, as there will be no other “baby boom,” (2) the elderly population will continue to grow, (3) the elderly population itself is ageing—the population of elderly people aged 80 or over continues to increase, (4) developing countries are ageing faster than developed countries, (5) the elderly population continues to grow faster than the population as a whole, (6) the majority of the elderly population are women, (7) increased life expectancy at birth implies that people will live longer, but more years of life cause greater demand for long-term health care, and (8) due to the success of social security in developed countries, the majority of the elderly leave the workforce, however, in developing countries, many elderly people are still engaged in paid work.
Even following general trends, it is necessary to highlight some points about the Caribbean region. A projection made by the same authors estimated that the elderly population of the Caribbean would increase to 18% in 2050 compared to 4.5% in 1950. Barbados is considered more advanced in the demographic transition with one of the most aged populations in the region. In 1975, people aged 65 or older represented 10% of the total population; now in 2016, this proportion has increased to 15% (World Bank, 2016).
2.1. The Pension System in Barbados
As mentioned earlier, the National Insurance Scheme of Barbados, more commonly known as NIS, opened its doors to the public in June 1967 and has since offered Barbadians and foreign workers on the island a range of social security benefits. The NIS currently offers five (5) types of benefits that are paid from three distinct funds. The first fund, the National Insurance Fund (NIF), covers short-term benefits, long-term benefits or pensions, and employment injury benefits, while the other funds are the Unemployment Fund, which covers unemployment benefits, and the Severance Fund, which pays severance compensation.
In addition to annual reports, every three years, the NIS Barbados publishes an actuarial report. This section discusses the experience of the NIS as reported in the 14th Actuarial Report published in 2013. Although the report was published in 2013, the data contained in it refer to the system’s experience between 2009 and 2011, with an emphasis on the experience of the National Insurance Fund, as this fund underwent significant reform in the mid-2000s. To fully understand the behavior of the funds during this period, it is necessary to look at the national, regional, and even international economies during the same period. According to the executive summary of the actuarial report:
“During the 3-year review period, the Barbadian economy contracted, unemployment increased, the number of NIS contributors and contribution income declined while payouts for most benefits increased. Contributing to the decline in contributions was increasing non-compliance among employers and self-employed persons,” (NIS Barbados, 2014, p. iv)
During this period, the three Funds had different experiences:
- National Insurance Fund (NIF): The differential between contributions and expenses decreased while income and expenses were in line with projections from the 13th Actuarial Report. Additionally, in December 2011, the fund’s total reserve closed at BB$ 3.8 billion, which was 7.8 times greater than the year’s expenses.
- Unemployment Fund: Made more payments than combined contributions and investment income, resulting in a reserve decrease.
- Severance Fund: The reserve grew significantly during this period as benefit payments remained low.
As previously stated, the focus of this study is to examine the relationship between the dependency ratio and reserve accumulation. To do this, the study will focus solely on the National Insurance Fund and primarily on contributory and non-contributory old-age pensions, as the reform was intended to specifically improve these benefits.
Summarizing the experience of this fund, based on the 14th Annual Report, by the end of 2011, contribution and benefit provisions were sufficient to provide a good level of benefit adequacy and income protection for most workers and retirees, as annual adjustments to the wage and pension limits have been effective in combating the effects of inflation. Additionally, NIS Barbados used projections to examine the fund’s future sustainability. Note that the projections were based on the assumption that no changes would be made to the current (2011) contribution rates and benefit rules as established in the legislation. The following are the results obtained from these projections:
- Total expenses will exceed contribution income each year;
- Total expenses will exceed total income first between 2028 and 2035 in Pessimistic and Best Estimate scenarios;
- The Fund will be depleted between 2045 and 2056 in the Pessimistic and Best Estimate scenarios, but in the Optimistic scenario, the Fund will only be exhausted in the next 60 years;
- The pay-as-you-go (PAYGO) rate in 2071 will be between 23.5% and 34.7%;
- The average general premium will be between 20.9% and 26.0% over the next 60 years.
Summarizing the projections, NIS Barbados recognized that the Fund, referring to the National Insurance Fund, will not necessarily be financially sustainable in the long term in two of the three scenarios, but it will be well-funded if there is continued economic growth (NIS Barbados, 2014, pp. v). As the 14th Actuarial Report was published in December 2013, the following recommendations were made based on the fund’s experience between 2012 and 2013:
- Improve Coverage: Implement means by which the self-employed can contribute and benefit from the NIF.
- Improve Benefit Adequacy: For Old-Age Pensions, consider removing the requirement that the benefit will not be granted early if the calculated amount is less than the minimum pension; Consider granting old-age pensions and a reduced death pension to widows who meet the eligibility requirements for both benefits.
- Improve Sustainability: Increase investment diversification with the goal of reducing the proportion of the Fund held by the Government of Barbados to 50% over five years and increasing the proportion held in foreign investments; Take measures to improve contribution compliance.
- Improve Administrative Efficiency: Upgrade information technology systems and ensure that all key positions within the NIS are filled.
