Safety net concerns
Dr Marshall Hall, Contributor
PARAGRAPH 12 of the Memorandum of Economic and Financial Policies accompanying the Letter of Intent to the International Monetary Fund (IMF) boldly states that "to help protect the poor the social safety net will be significantly enhanced". This clear statement of concern for the most economically disadvantaged in our society enjoys very wide support. The traditional safety nets, however, of pensions, NIS payments, health care, etc. are severely challenged.
Consider the plight of a typical member of the middle-income group, who was earning say, $500,000 annually at the end of 2000, just prior to going on pension. Assuming they had been contributing to a Defined Benefit (DB) pension scheme for at least 34 years, they would be entitled to a maximum pension of 67 per cent of their annual salary of $500,000 - $335,000 per year or $27,916 per month. Most pensions are not indexed to the rate of inflation and therefore, the pension would remain the same in 2010 as it was in 2000. Since that time, however, inflation, as measured by the consumer price index, has been of the order of 244 per cent, making the spending power today worth about 2.5 times less than it was in 2001.
In US-dollar terms, the pension in 2001 was equivalent to US$7,052.63 and, today, the conversion to US-dollar of that same pension yields only US$3,743 per year. The individual in that pensioner's job, adjusted simply for inflation, should currently be earning about US$14,000 annually. The pensioner and the current holder of the job now live in different worlds. Ten years into retirement, if the sole income of the pensioner is his pension, then he is in desperate financial straits looking for handouts from his children, and unable to afford proper health care.
Happy pensioner myth
The rates of inflation in Jamaica over the last 40 years have destroyed even the myth of the happy pensioner enjoying his freedom from work. A realist would say to the prospective pensioner: try not to live longer than five years after retirement if you do not have a nest egg at least comparable to your pension. The comment advanced by the Government in Vision 2030, "Many long-retired public servants are challenged to maintain themselves with their retirement benefits," sounds nicer but is no less stark.
The Government, to be fair, has from time to time increased the pension of many retired former government employees, but the pension was meagre to start with and the increases lag far behind inflation. The current government subsidies for a range of the most 'in demand' medicines have been a lifeline to pensioners.
To a degree, the plight of the prospective pensioner has now worsened. Most companies, urged on by the regulator's correct requirement that Defined Benefit schemes be properly funded, have switched to Defined Contribution (DC) schemes. DB schemes are schemes where the employer promises a specific pension tied to the final or average earnings of the last few years of employment. DC schemes are schemes where the pensioner receives a pension as an annuity purchase from his own contributions and those of the employer plus the earnings from those contributions. Although the funds are managed as a Group each individual is credited with his share of the Fund. There is, however, no specific pension guarantee and the value of the annuity or pension is tied to the expected earnings from the sum credited to the prospective pensioner and advanced to the annuity provider. As interest rates and earnings from long-term assets fall, the expected earnings of the annuity provider falls and the pension offer is reduced accordingly.
A situation, such as now exists, where interest income is expected to be lower than inflation exacerbates the problem, as the sum to purchase the annuity could be worth less in real terms than when it was initially contributed. The end game answer to the maintenance of the purchasing capability of the pensioner is to reduce inflation and to provide for increases in the pension payment as prices increase indexation. Indexation without significant surpluses is normally not wise and is simply not feasible, given the earnings problem that trustees and fund managers now face. While we are optimistic that, with the JDX acting as conductor, inflation will be curtailed we remain concerned about the impact of increased taxes, oil prices and the exchange rate on price increases.
It is difficult if not impossible today, to prevent some price increase and, therefore, we urge the introduction of annuity schemes that allow the pensioner to purchase a part of their annuity in securities that allow for flexible pensions that can grow with inflation. Equity-linked annuities sourced worldwide with a portion of the pension denominated in a foreign currency are obvious choices. This is not a new suggestion. Many pension schemes around the world allow for annuities that have a fixed and a variable component. This will require the prospective pensioner and trustee to understand the inherent risk in this type of annuity. Actuaries and investment houses must be proactive in both the education of the prospective pensioner and the development of the appropriate variable return annuities. We simply cannot continue to encourage a pension annuity programme that guarantees poverty for hardworking Jamaicans.
Given the severity of the income loss to the middle-income pensioner we need not dwell on the disaster faced by the NIS beneficiary, save to say that for this group retirement is not an option. They must try to get the NIS benefit, but they are forced to continue to work even as job options decrease with age.
The percentage of the eligible population contributing to the NIS is less than 40 per cent compared to the 80 per cent plus pension coverage for industrialised countries. It is safe to say that pension scheme contributors are also NIS contributors thus the pensioners, whose problems we highlighted above, represent the privileged as at least 60 per cent of the eligible population simply has no pension or NIS expectation. This is not surprising, given the large percentage of employees and employers who operate in the informal sector. Many individuals who have worked regularly for 50 years - from age 20 to 70 - but are not registered in NIS and are not members of a pension scheme are destined to become wards of the State or their children and extended family, as with age and failing health they become increasingly challenged to sustain themselves.
The problems awaiting us are even more startling as some 80 per cent of the population is under 50 years old, and more pressing, some 45 per cent are between 20 and 50 years old. Despite the commitment to providing adequate safety nets, the Government will find it impossible to meet the retirement needs of those who have no coverage. Remember we are not including the young poor who are the preferred group to benefit from safety nets.
The end game solution is obvious. We must increase the NIS coverage. I favour (DC) type coverage for all but allowing those companies who contribute along with their staff to an approved pension scheme to opt out of a universal NIS scheme. The state should define a minimum, mandatory equal percentage of salary contribution for all employers and employees with no exceptions, other than those who are members of approved schemes. A maximum age entry say 40, to allow for a substantial period of contribution, should be required for all new entrants. By making the scheme a Defined Contribution scheme the state has no residual liability. Opposition to this recommendation will come from two quarters. Those who support but argue that they should not be included because they operate in industries or areas that can absorb no more cost, and those who argue that it is unenforceable, and in any event, the costs of enforcing outweigh the benefits. The pleas of the special interest groups should not be entertained and the cost benefit argument can be shown to be totally false.
Dr Marshall Hall is a former CEO and professor. Feedback may be sent to