Mon | Aug 21, 2017

Editorial | Make it a DC plan, Mr Shaw

Published:Friday | March 17, 2017 | 3:00 AM

He hasn't sent it the entire length of the field, but Audley Shaw is kicking Jamaica's slow-paced pension-reform project, or an important element thereof, some way down the pitch.

On Wednesday, he announced that the Government will have a phased implementation of the five per cent of salaries that public servants will have to contribute to their pensions.

While the finance minister hasn't yet set out his timetable for full enforcement and the ratios to be applied until the target is met, we understand the political impulses behind his actions. In recent weeks, public servants, teachers more vocally, have been complaining about the impact that this five per cent pension contribution will have on their take-home pay, after a multi-year freeze of basic salaries.

But perhaps the more acute issue is the J$17.5-billion tax package Mr Shaw imposed last week to help fund the Government's 2017-18 Budget. That will mean higher prices for fuel, electricity, and motor vehicle licences, which is likely to translate to higher costs for a range of other services. Although more than 80 per cent of the taxes will go towards covering the second tranche of a give-back on income tax to PAYE employees, the sense is that the public doesn't much like the measures, having been initially told that the generous hike in the income tax threshold wouldn't mean new, or higher, taxes.

On this matter, however, Mr Shaw should hang tough, giving public servants the unvarnished truth: that the current pension arrangements are unsustainable and that Jamaican governments have been kicking the can down the road for far too long. Moreover, he should use this opportunity to do something more: pull back from a defined benefit (DB) pension scheme, where employees are guaranteed a specific level of pensions, to a defined contribution (DC) arrangement in which pensions are determined by the performance of the fund.

For the fiscal year starting April, the administration projects a pension bill of J$34.3 billion, or a 130 per cent increase over eight years, making pensions among the Government's fastest-rising obligations. If nothing happens, the Government's implied pension debt, at around 36 per cent of GDP in 2010, will be hovering at around 50 per cent in 2030, maintaining an upward trajectory over the next decade onwards.

 

MOST SUSTAINABLE OPTION

 

Mr Shaw's new proposal, combined with the phased increase in the retirement age by five years, to 65, will slow down both the implied pension debt and pension expenditure. But most simulations indicate that the scheme that is most sustainable for the public finances, while providing confidence to pensioners, is a DC scheme into whose fund Government makes a matching contribution.

In reformulating the arrangement to a DC scheme, Mr Shaw must apply it not only to new public officers; rather, the Government should draw a red line under the existing DB arrangement when the law comes into force. Thereafter, all public servants, including employees in the system, should be made part of the new DC arrangement.

Mr Shaw should further tweak the bill to make explicit that the Government will match employee contributions to the proposed pension fund, rather than leaving the amount and manner of its payment to the determination of the minister, even if subject to a resolution by Parliament.