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EDITORIAL - Get moving on pension reform

Published:Monday | August 25, 2014 | 12:00 AM

Jamaica can't kick the pension reform can much farther down the road. It's too heavy with debt.

That is why this newspaper insists that the administration reopen the conversation on the issue, ahead of the planned 2016 deadline for the resolution of the matter under the government's agreement with the International Monetary Fund (IMF) and rational, though tough decisions, be taken. The danger of failing to act is to undervalue much of the effort to bring the country's finances, including the bulging national debt, under control.

Here is the problem. People who work for the Government, largely, retire at age 60 and most of them receive relatively generous pensions, in many cases, close to their final salaries. Unlike private-sector employees, however, government workers, for the most part, do not contribute to their pension scheme. Those who do pay in total around J$4 billion a year.

The Government, on the other hand, pays its pensioners around J$23 billion a year, or a net outflow of J$19 billion. There is no special fund from which it meets this benefit to its retired employees. It is treated as recurrent expenditure taken from the Consolidated Fund.

The pension obligation is a kind of non-transparent debt. It is not part of the J$1.7 trillion that the government reports that it owes to creditors. Yet, that implicit pension debt, to the amount that the actuarial studies say is required to cover future pensions is now around J$600 billion and is heading towards J$760 billion and higher in the early 2030s, when the bulk of the younger public-sector employees begin to reach retirement age. Indeed, pension payments, now hovering at 1.5 per cent of GDP, could by that time be much higher.

The bottom line: the pension system as it now stands is unaffordable and will become increasingly so. If the government has to pay wage and pension bills, it has to cut back on critical services such as education and health, or security, or it has to borrow more to cover the obligation. Or, as our A.C. Countz proposed - and we agree - it has to change the way it runs its pension system.

Contributions for gov't workers

As in the case with private-sector workers, all government employees should contribute to their pensions and, as is also increasingly the case in private firms, the government should shift to a defined-contribution scheme, rather than a defined-benefit arrangement.

In the latter system, workers are guaranteed specific pensions. In this kind of system in private firms, the enterprises cover any shortfall if the returns from the invested pension funds are insufficient to meet the obligation. In the case of government, pension payments are guaranteed by taxpayers and political fiat.

The administration knows well that the system can't be sustained, but has partly been constrained by public-sector unions that do not want radical shifts. Transitioning to a shared payment scheme - the government and the employee each contributing say five per cent of the worker's salary - will initially cost more: the value obligations to current pensioners, plus the new contributions under the new scheme.

That could undermine the government's fiscal programme and its agreement with the IMF. We agree with A.C. Countz that the administration should engage the Fund on a waiver to allow it the room to produce such a scheme. In the long run, it's better for Jamaica.

The opinions on this page, except for the above, do not necessarily reflect the views of The Gleaner. To respond to a Gleaner editorial, email us: editor@gleanerjm.com or fax: 922-6223. Responses should be no longer than 400 words. Not all responses will be published.