New study suggests raising retirement age
A new study by staff of the International Monetary Fund (IMF) has suggested that regional states, including Jamaica, should raise the retirement age, freeze old-age pension benefits and increase the contribution rate to put the schemes on a stronger financial footing.
While the appropriate combination of reforms necessary to eliminate the actuarial deficits varies depending on each country's circumstances, most countries need to undertake reforms now or risk even higher taxes, lower growth and unsustainable debt dynamics, the staff said.
In the last memorandum of economic and financial policies submitted to the IMF under the extended fund facility, the Jamaican Government said reforms to improve the sustainability and coverage of the National Insurance Scheme are ongoing.
In a discussion paper prepared in October, the IMF staff pointed out that, weighed down by population ageing, slow economic growth and high unemployment, National Insurance Schemes in the Caribbean are projected to run substantial deficits and deplete their assets in the next decades, raising the prospects of govern-ment intervention.
With the region highly indebted, the paper quantifies the impact of three parametric reforms - freezing pension benefits for two years, raising the retirement age and increasing the contribution rate by one percentage point - that, if implemented, would put the pension schemes on a stronger financial footing.
Noting that pension schemes have become unsustainable, the staff said that in addition, there is a concern that investment of pension funds may lead to high exposures to government securities.
"These developments, together with anaemic economic growth, rising unemployment, and limited room for macroeconomic policy intervention, suggests that pension reforms are unavoidable," they argue.
They suggest that a range of reform measures, with varying socio-economic impact, could be implemented to contain the projected increase in pension spending.
In addition to containing demographic pressures, raising the retirement age would not only be intergenerationally fair, but could also have a positive effect on economic growth in the long run by increasing participation in the labour force, said the discussion paper prepared by Koffie Nassar, Joel Okwuokei, Mike Li, Timothy Robinson and Saji Thomas of the Western Hemisphere Department.
At the same time, they said, it will reduce the welfare of older workers and the unemployment of the young. An across-the-board freeze in old-age benefits for two years is shown to improve the financial position of the pension systems but it could somewhat dampen economic growth and, at the margin, could increase old-age poverty.
Finally, a one percentage point increase in the pension contribution rate would bring the contribution rate closer to global averages and improve the sustainability of the pension systems, but it could also discourage labour market participation and aggravate intergenerational imbalances, said the staff.
According to the IMF staff, for most countries, implementing these three reform measures concurrently would suffice to put the pension scheme on a sustainable path. For other countries, such as Antigua and Barbuda, Belize, Jamaica, and St Vincent and the Grenadines, these measures would need to be complemented by improvement in the coverage of the pension schemes.
"It is imperative that the authorities begin to build national awareness of the fiscal risk associated with the pension schemes and the need for reforms," said the paper.
At a minimum, the actuarial deficits should be systematically monitored and reported to the public with more frequency and a degree of detail to allow proper evaluation of the fiscal risk.
"The schemes appear relatively sound until about 2017. Thereafter, they are projected to incur substantial deficits and eventually run down their assets, raising the prospects that the government would have to bear a share of the promised pension benefits," it added.
These developments will take place as the authorities aim to scale up infrastructure spending, while at the same time pursuing debt sustainability.
"To avoid crowding out other priority expenditures, the authorities could, in the short term, implement parametric reforms that would help offset the impact of demographic pressures. Phasing in these reforms now will prevent a significant buildup of pressures and avoid the need for drastic measures in the future," said the IMF staff.