Editorial | Gov’t must seek best pension deal
Although pension reform, for which legislation is already before Parliament, is now a fiscal matter of some urgency, as well as a critical plank in the Government's proposed restructuring of the public sector, the specifics of what is on offer are getting surprisingly little attention from independent analysts. Our fear, if this posture is maintained, is that the country may not get the best deal possible.
Of course, the overhaul of a pension scheme is never easy business, especially if it means asking employees to extend their working lives and to contribute more to their retirement plans. So, we understand why restructuring the one for Jamaican government workers, though a requirement under its agreement with the International Monetary Fund (IMF), was consistently delayed by the previous People's National Party (PNP) administration.
The Andrew Holness administration, however, seems to have little option but to get on with it. For under the new Government's US$1.7-billion standby arrangement (SBA), the new public-sector pension law should be in place by next April, for implementation by June 2017.
There is good reason why pension reform is on the agenda. The Government's annual pension bill is heading in the realm of J$20 billion, towards which employees contribute very little. The Government's implicit pension debt, that is payments due to current and future pensioners, is more than 36 per cent of GDP. If nothing changes, it will to rise to more than 57 per cent by 2075. The pension debt, on its current trajectory, is unsustainable.
If taxpayers make good on their promise
Under the proposed law, public-sector workers will be required to contribute five per cent of their salaries towards their pensions and their age for retirement will, over a five-year period, move from 60 to 65. Further, while their pension accrual, determined by their salaries over the last five years of employment, will decline slightly, they will continue to be part of a direct benefit scheme. In other words, they will be entitled to a specific amount of pension, assured that taxpayers are on standby to make good on the promise.
Nonetheless, with the restructured scheme, the Government expects to save around half a per cent of GDP annually on its pension bill, against its current expenditure of around 1.4 per cent of GDP. The Government can do better.
The issue here is the Government's decision to maintain a direct benefit scheme, rather than, as is increasingly common in the private sector, a direct contribution one, in which there is no guarantee of the level of retirement income former workers receive. That is tied to the performance of their pension fund and the amount they contributed to the scheme over time.
While there will be an investible pension fund into which government workers pay their five per cent contribution, taxpayers will be obligated to make up the difference between its returns and the sum that is required to meet the pension obligations to which the Government has committed itself.
Even with the culling of some public-sector jobs, and the shift in the accrual rates, that, as private sector firms know well, can be a moving target that drains the firm of cash needed to fund the business.
Political considerations, including pressure from trade unions, have perhaps influenced the Government into thinking that it can't break their ways, but changed circumstances sometimes insist on new paradigms.