Thu | Jan 20, 2022

Editorial | Review public-sector pension

Published:Monday | March 22, 2021 | 12:11 AM

If they are following the law, interpreted as most people believe it should be, a committee of both Houses of Parliament should soon start reviewing the act under which public servants are required to contribute five per cent to their pension. That contribution was to be phased in over two years, up to 2019. The legislation also lifted the retirement age for government employees from 60 to 65, in a phased adjustment.

However, another fundamental undertaking required by the law – the establishment of a segregated pension fund – has been implicitly pushed back because of the necessary extension of the time Jamaica has given itself to lower its debt to 60 per cent of gross domestic product (GDP). The new deadline is now 2028, two years later than originally planned. Yet, it might have to be stretched out further to provide the administration the fiscal space within which to respond to the COVID-19-induced economic recession.

This arrangement, the contribution of employees to their pensions, and the Government’s payment of pensions out of the Consolidated Fund, paradoxically, both masks and highlights the danger of a huge implicit pension debt that, if not attended to, might overwhelm future generations of Jamaicans. At the same time, as this newspaper has highlighted in these columns recently, the country faces a broader crisis of pensions, which is being exacerbated by the greying of the population.

PERIODIC REVIEW

Against this backdrop, the provision in the Pension (Public Service) Act, which calls for the law’s periodic review, and the requirement that the first of these “shall be conducted not later than two years after the commencement of this Act”, is useful, and timely. It is an opportunity for legislators to have another go at Jamaica’s pension problems – or more to the point, the absence or inadequacy of the post-retirement income for most Jamaicans. They should look beyond the public pension issue to fundamentally overhaul the system.

For the new fiscal year, the Government has budgeted J$38.1 billion for pensions, accounting for around 4.6 per cent of total expenditure. The bill is 4.1 per cent on the previous year’s and, in nominal terms, nearly eight per cent higher than in 2019-20. It is projected to rise 19.5 per cent over the next three years. So, between 2019-20 and 2024-25, the Government’s pension expenditure, based on its projections, will increase by J$10.1 billion, or approximately 29 per cent. That is, on the face of it, a fast clip.

There is no readily available analysis of how the older retirement age, inflation and the nominal expansion of GDP have, or will, impact the medium-term pension bill, or the Government’s implicit pension debt over the long haul. But a decade ago, when reforms were being discussed, the implicit debt was approximately 36 per cent of GDP. But based on the arrangements then in place, it was projected to reach 57 per cent by 2075.

However, in a scheme where the Government and employees each contributed five per cent of the wages while retaining the system of defined benefits, the debt would gradually fall, reaching 33 per cent by the outlier period. That, however, would depend on the rate of accrual. Such a scheme seems similar to what is now in place, but not quite the same.

DEFINED CONTRIBUTION

The best way to eliminate the debt, over time, the analyses showed, was a defined contribution (DC) scheme, in which the Government and workers pay into a fund an agreed proportion of employees salaries, to be invested in savings and returns thereon, used to purchase annuities at retirement. That, primarily, is the way of the private sector. Defined contribution schemes are expected to be appropriately managed to ensure healthy post-retirement incomes for contributors.

Parliament, however, with consensus across the aisle, decided to maintain a scheme that assured specific pension benefits, but asked those public servants who did not contribute to pay five per cent of their wages into the fund. The Government would also make contributions to the fund “in such amount and manner as may be determined by the minister by order, subject to affirmative resolution by the House of Representatives”. A parliamentary committee has recommended that the Government pay J$17 billion a year into the fund for 40 years, as protection against the implied pension debt. That payment, today, would approximate eight-tenths of one per cent of GDP.

The segregated fund, however, has not yet been established. It was written into the law that it should wait until the debt – which in 2017 was still over a 100 per cent of GDP – was to be reduced to 60 per cent by 2026. Under the fiscal responsibility rules, before the coronavirus crisis, the deadline was 2026. The requirement, instead, was for the five per cent deducted from workers to be remitted to the Consolidated Fund. In effect, it offsets a portion of the Government’s allocation for pensions – this year, approximately J$2 billion of the J$38.1 billion. Nonetheless, the bulk of the Government’s pension obligation, and the implied debt, is still a pay-as-you-go arrangement.

As they review the public-sector pension issues, legislators should be reminded that 60 per cent of working Jamaicans have no pension cover. And of those who have, the bulk, perhaps half, are members of the troubled National Insurance Scheme. Indeed, only 12 per cent of the employed labour force are in private plans. Further, people 60 and over are among the fastest-growing segment of the population – a demographic that most urgently faces the challenge of retirement without income.