Caribbean countries have been warned that they need to build national awareness of the fiscal risk associated with pension schemes and need for reforms.
“At a minimum, the actuarial deficits should be systematically monitored and reported to the public with more frequency and a degree of detail to allow proper evaluation of the fiscal risk,” according to a new study released by the International Monetary Fund (IMF).
Since their establishment in the 1960s, 1970s and 1980s, contribution incomes have exceeded benefit payments and administrative expenses for most countries and the systems have accumulated a large fund.
“The schemes appear relatively sound until about 2017. Thereafter, they are projected to incur substantial deficits and eventually run down their assets, raising the prospects that the government would have to bear a share of the promised pension benefits,” the study warned.
“To avoid crowding out other priority expenditures, the authorities could, in the short term, implement parametric reforms that would help offset the impact of demographic pressures. Phasing in these reforms now will prevent a significant buildup of pressures and avoid the need for drastic measures in the future.”
The study on National Insurance Scheme Reforms in the Caribbean, notes that National Insurance Schemes (NIS) in the Caribbean are weighed down by population aging, slow economic growth, and high unemployment.
It said as a result of these factors, the NIS’s in the region are “projected to run substantial deficits and deplete their assets in the next decades, raising the prospects of government intervention”.
The study, part of the IMF Working Papers, notes that population aging is putting increasing pressure on public finances in the Caribbean.
“Long term projections point to continuing unfavourable demographic trends. Thus, pension schemes have become unsustainable. In addition, there is a concern that investment of pension funds may lead to high exposures to government securities.”
The study warns that these developments, together with anemic economic growth, rising unemployment, and limited room for macroeconomic policy intervention, suggests that pension reforms are unavoidable. But it pointed out that a range of reform measures, with varying socio-economic impact could be implemented to contain the projected increase in pension spending.
The study quantifies the impact of three parametric reforms, highlighting their implications for economic growth, intergenerational equity, and fiscal savings.
“In addition to containing demographic pressures, raising the retirement age would not only be inter-generationally fair, but could also have a positive effect on economic growth in the long run by increasing participation in the labour force,” the authors of the study said.
They said that at the same time, it will reduce the welfare of older workers and the unemployment of the young.
“An across-the-board freeze in old-age benefits for two years is shown to improve the financial position of the pension systems but it could somewhat dampen economic growth and, at the margin, could increase old-age poverty.
First Published CMC