Disclaimer: The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY.
by Charles Herbert
Overview
The topic of reform of the National Insurance Scheme is a large one. This analysis is not exhaustive and deals primarily with the principal long-term benefit of NIS pensions, which is by 75 per cent of the benefit cost.
By law the NIS Scheme is subjected to an actuarial review every three years.
The most recent one was undertaken at December 31 2020 and the previous one of 2017 was finalized in December 2021.
The long-term patterns presented in this report are not substantially different from previous reports except that the fund exhaustion has been brought forward by the depletion of the fund by $1.3 billion. This is a result of national debt restructuring, and the lost revenue and increased benefits occasioned by the pandemic. The broad picture is unchanged from what we always knew and some of the recommendations made, and ignored, are in previous reports:
1) reduce investment in Barbados Government debt (target 40 per cent actual 70 per cent),
2) improve administration, and
3) improve corporate governance and accountability (The last completed audit was in 2010).
There is no doubt that we need to take decisions and action. Often there is the will to do so only when the crisis looms closer. Some decisions need no debate just action; others have social consequences and need the broadest possible support of all Barbadians.
History
The introduction of the NIS in 1966 was a great step for Barbados but it should not blind us to thinking that every aspect of its implementation was ideal. If we do not acknowledge the errors we will not improve for the future.
The NIS provided pension benefits for many employees that would never have received pensions, mainly transient workers such as artisans and persons employed by individuals or smaller companies. For these it has really been a “lifeline”. At the same time:
A) It was not needed for public sector employees who already had an adequate if not generous pension arrangement; for them (hired before 1985) it duplicated benefits at a cost that the nation could not afford and these benefits will continue to be paid for many years. For post 1985 hires the Government pension is abated and the duplication has been largely eliminated and employees now contribute to a large part of their pension.
B) For the employees of private sector companies who had pension plans there was no change in benefits but the total benefit now came from two sources.
C) There was also a category who saved and provided for their own retirement but these numbers are not known.
For employees in categories B & C the effect was to transfer significant amounts of future savings from private arrangements to NIS control. These funds should have been invested to build private sector businesses and start new ones. Unfortunately, most of these funds were lent to Government and new investment was left to foreigners who bought our companies and started new ones. While others were never started. In short, the economy did not grow as it could have and where it did the growth did not belong to Barbadians.
NIS has traditionally been suspicious of the private sector:
A) It trusted employers to collect contributions but not to pay benefits.
B) It will not report to employers on benefits paid to employees.
C) I was once told by a former NIS Director that they would never invest in a private sector company because the private sector’s governance was too weak! This requires no comment as NIS has not published an audit for 10 years while our listed companies publish quarterly financial results and audits within 4 months of year end.
“A” is important because paying benefits through employers is faster and could result in reduced administrative expenses by NIS. Late payment of sickness benefits can be a huge burden on employees.
“B” is important because it would allow employers to accurately “harmonise” benefits and plan better employment packages for employees. Despite what some think, many employers care about their employees and would like to be able to better plan the “total” benefit package to employees.
Vague statements are made about outstanding contributions that give the impression that employers deduct from employees and do not pay over to NIS. I would like to see the facts:
• What proportion of expected contributions is outstanding after one month, six months and longer that one year, and,
• What proportion of each category are public sector employers?
I expect that their track record will show that the vast majority of private sector employers pay promptly and have been good partners with NIS, BUT let the facts speak and put a stop to idle speculation! Certainly, all defaulters should be pursued and action taken where possible and written off where not recoverable. This happens in all businesses.
3. What fixes should not need debate
Although it is unlikely that the NIS Reserve will grow, there will be Government Bonds that mature, and where not all of the funds are required to pay benefits and expenses. These funds available for new investments should be managed by private contractors to invest in local businesses. Details such as rules, tenders and removal of low performers should be developed by the Social Partners.
Improved administration for better records and faster payment possibly in partnership with employers is also not controversial, as is a reduction in the cost of this administration. A reduction from 7 per cent of contributions to 5 per cent would be similar to 0.5 per cent increase in contributions (2 per cent x 21 per cent = 0.42 per cent).
4. Options that do deserve deep debate
These are the thorny issues that DO need debate:
A) If we increase contributions then when should we do it:
a. Now when earnings are already under strain?
b. In 2 years after some recovery and in the meantime draw on the Reserve?
c. Should the increase be split equally between employer and employees?
d. Should we increase the ceiling for earnings so that higher paid employees pay more?
e. Should we draw down the fund then contribute at the “pay as you go rate”?
f. Should we transition in some way to a “defined contribution” arrangement as is popular in Latin America?
B) If we alter benefits then we should consider alternatives such as:
a. Longer accrual rates.
b. Lower benefit rates for higher paid employees while we maintain the safety net for the lowest paid.
c. Should retirement ages be increased further?
d. Should retirement ages be held but benefits increased at a later age to reflect increasing dependence with age?
C) How can we encourage more contributors into the Scheme? We know that many self-employed and contract workers do not contribute and that some number of employers and employees agree not to contribute to so achieve higher net pay and/or reduced costs. This will get increasingly difficult as contribution rates increase.
D) Do we need to increase our population either through incentives to have more children or through immigration? My own opinion is that the size of the population is not as important as the number of jobs that the economy can support. To have a larger population than there are jobs will not help NIS and will increase all other social benefits and costs. This needs full debate and consensus.
I do hope that over the next few weeks there will be meaningful national consultation and that the key issues will not be clouded by political mud slinging, “red herrings”, and pontificating that so often overwhelms similar discussions.
To conclude, my own suggestion is that the NIS sponsor publicised debates on key issues where the panel tries to clearly enunciate the pros and cons of alternative courses of action. The objective of these debates would be to inform and educate the public and not to score political points (perhaps politically aligned persons should be excluded).
Charles Herbert is a retired actuary. This column was offered as a Letter to the Editor.
