Thu | Jan 18, 2018

Martin Henry | Pension reform, pension crisis

Published:Sunday | April 16, 2017 | 12:00 AM

By bipartisan consensus, the 52 members of parliament who were present in the House of Representatives on April 5, voted two pension-reform bills. At the heart of the matter was the extension of the general age of retirement from the public service from 60 to 65, getting public servants to contribute to their own pension plan, and removing pension payments from the Consolidated Fund into a separate pension fund to which public employees and Government, as employer, will jointly contribute.

But true to form, the start of employee contributions was postponed from April 1 to June 1 and the five per cent of salary payment staggered over three years, starting with 2.5 per cent this June.

Government, opposed by the public-sector unions to the very last, has been dodging pension reform for years. With World Bank support, a Green Paper (for public discussion and feedback) was released in September 2011, six years ago, Options for Reform of the Public Sector Pension System'- A joint select committee of Parliament followed and reported in October 2012. A White Paper (for parliamentary debate) was tabled in 2013. Then the bills followed. They were tabled by Dr Peter Phillips as finance minister in the last Government, now leader of the Opposition.




We've been at pension reform, in this cycle, for seven years.

Over the period, the Government's annual pension bill paid from the Consolidated Fund has risen by 130 per cent to stand this year at $34.3 billion. In 2010, the pension debt on paper, that is the estimate of how much would have to be paid out to current pensioners over their projected remaining life, stood at 36% of GDP. That is projected to rise on the current trajectory to 50 per cent of GDP by 2023!

Pension payments from the Consolidated Fund just means that taxpayers have to foot a progressively growing bill. Which, ultimately, has to mean growing taxation. Or money has to be borrowed to pay. Which, ultimately, means growing debt.

The whole world is facing a global pensions crisis.

Shifting to a contributory scheme with its own trust fund has its own problems. Public employees, already trapped in a cycle of wage freezes for years, will be 5% poorer now because of the pension contributions. They will want a 5% wage increase, which, if Government acquiesces, will simply return expenditure on employee compensation back to the old levels. Nothing saved.

Government as the employer will have to make a matching contribution to the Pension Fund. Preferably the same 5%. Which means a payment out of the Consolidated Fund, anyway. But the bills passed recently only vaguely commit the Government to begin making contributions "from a date as the minister shall determine" without committing when or how much. The prime minister himself has conceded that there is really no assurance to public-sector employees that they will not be "at the mercy of a capricious Government".

The current wage bill being around $185 billion this year, Government would need to put up $9.25 billion for a 5% match. The way for Government to contribute to the pension fund fairly and reliably with no deferment possibility is to remove the contribution from any lump sum arrangement, disaggregate the amount, and tie it to each worker's salary as part of their remuneration, which must be paid when due like any other part.

The prime minister, in his contribution to the debate on the Pensions (Public Service) Act 2016, announced a programme of voluntary early retirement, which is really not new in Government but merely re-emphasised. The initiative, he said, was not merely a requirement of the IMF, but "we are doing this to secure Jamaica".

The problem with early retirement is that the retired employees will still have to be paid a salary "replacement" amount for a longer period while no further work is obtained from them to compensate for those costs. How this will pan out as savings is quite unclear. Meanwhile, the Government is also riding in the opposite direction to extend the retirement age from 60 to 65!

People are living too long. Too few people are being born. And investment funds are not doing as well as was optimistically projected for them. The net result of the collision of these three forces is that there are more pension obligations than the resources to meet them - and no quick or easy fix in sight.

A 2016 think tank report out of the Organisation for Economic Cooperation and Development (OECD), for example, is predicting that people retiring today on direct contribution pension schemes like what this newspaper has proposed in its editorial of April 3 can expect only half the income of those who became pensioners at the start of the millennium.

Direct benefit (DB) schemes, such as the Government of Jamaica has operated, guarantees retirees a specific level of pension based on their salary when they were on the job and their years of employment with "indexation provisions that should shield the workers from the effects of price, wage and interest rate adjustments", as the White Paper states.

Direct Contribution (DC) pension schemes do not guarantee a specific level of pension but pays as the pension fund performs.




Forgetting the rest of the world for a moment, in the particular context of the well-known Jamaican "macro-economic environment", one does not have to be particularly bright to see that DB, with rising obligations over time, is going to be unaffordable; and that DC is going to push retirees towards old-age poverty as payments to a rising population of retirees are matched to poor investment performance.

Going back abroad and pulling down some crisis data from around the Internet: In 2008, before the global financial meltdown which further flattened interest rates, the estimates for the underfunding of state pension programmes in the United States ranged up to US$3.23 trillion. Unfunded obligations under Social Security in 2010 were in the region of US$5.4 trillion.

The ratio of workers to pensioners, known as the support ratio, is falling in most of the developed world, and here, too. This is driven by increased life expectancy linked to a fixed retirement age and to a decrease in the fertility rate. Increased life expectancy (with fixed retirement age) increases the number of retirees since individuals are retired for a longer portion of their lives. Decreases in the fertility rate reduce the number of workers coming into the job market. It is these workers' pension fund payments that really pay retirees' pensions in what should be a nice, steady, unending stream. There is more than a hint of a pyramid scheme here!

In 1950, there were 7.2 people between 20-64 for every person 65 and over in the OECD countries. In 2010, it was down to 4.1 and it is projected to reach just 2.1 by 2050. The average ratio for the European Union was 3.5 in 2010 and it is projected to reach 1.8 by 2050.

In 1950, in the world's rich economies, those aged 65 or older amounted to 10 per cent of the population. Today, they account for 25 per cent, and by 2050, they will account for 50 per cent.In the US, the 1,500 company pension schemes that make up the Standard &Poor index are underfunded by US$560 billion. The country's state and municipal pension schemes are even deeper in debt.A 2016 Citibank report estimated that the 20 OECD countries, the world's richest countries, collectively have a pension shortfall of US$78 trillion.

"Social-security systems, national pension plans, private-sector pensions, and individual retirement accounts are unfunded or underfunded across the globe," pensions and insurance analysts at the bank said in the report.

"Government services, corporate profits, or retirement benefits themselves will have to be reduced to make any part of the system work. This poses an enormous challenge to employers, employees, and policymakers all over the world."

Our late attempt at pension reform, necessary though it is, is dealing with the tip of an iceberg. We will have to revert to families caring for their old people.

- Martin Henry is a university administrator.

Email feedback to and