Part 2: Challenges facing Barbados’s state pension scheme.
Introduction
Barbados’s Old Age Pension and Non-Contributory Pension is an important source of retirement income. My first article in this series, focused on how the National Insurance and Social Security Service (NISSS) pension scheme works. This article identifies key challenges facing the NISSS.
Barbados National Insurance Scheme 17th Actuarial Review, July 22, 2022
The following is a direct quote from the report, “At current contribution rates and pension provisions the NIS is not sustainable as future generations will be required to contribute substantially more, or receive substantially reduced benefits, than previous and current generations.”.
Key reflection points are:
- In the 10 years prior to 2020, Barbados population was in declined.
- The Barbados Economic Recovery and Transformation (BERT) wrote off $1.32 billion debt owed to the NIS.
- NIS investments did not follow investment policy limits.
- NIS reserves were $4.2 billion, or 5.2-times expenditure in 2020.
- The NIS has not issued annual NIF (National Insurance Fund) annual reports since 2011.
- The fund will deplete by as early as 2034 or at the latest 2041.
- 69% of all NIS investments are with the Barbados Government and 87% in total is in Barbados.
Barbados has an ageing and declining population
Population in decline
A population being, youthful, ageing or growing, is dependent on it’s birth rate, death rate, and net migration.
The Total Fertility Rate or TFR is a measure to determine whether a population is growing or in decline. “A Total Fertility Rate (TFR) of 2.1 represents the Replacement-Level Fertility: the average number of children per woman needed for each generation to exactly replace itself without needing international immigration. A value below 2.1 will cause the native population to decline.”
The Total Fertility Rate (TFR) for Barbados in 2023 was 1.6 (Live Births per Woman, 2023). Source: www.worldometers.info, September 23, 2023.
An extract from the Barbados Statistical Service website, “For the first quarter in 2023, male registered births – 345 exceeded those of females – 288.
Registered deaths in the period under review for 2023 were reported as follows: males – 476 and females – 453.”. This means that in Q1 of 2023, the death rate in Barbados exceeded its birth rate.
Net Migration measures migration vs emigration. Barbados Net Migration rate in 2023 was -0.276 percent per 1,000 population. This means that more people left Barbados to live and work abroad than those who migrated to Barbados.
Aging population
The above line graph reflects data from the Barbados 2021 Population and Housing Census Report. The following are some points that I think are important to highlight in relation to this article:
- The population significantly declines after the age group 65 – 69. Current pensionable age is 67, with plane to increase to 88 by 2034.
- The highest population age groups are between 45 to 64.
- If you look at the age groups between 0-4 and 60-64, it shows how the total population is growing old.
- The future working population is shrinking. This impacts future NISSS contributions, availability of work force to fill job vacancies and future demand for goods and services.
- The population of the 0-4 age group is jumping out as low compared to historical data as seen in the older 5-year groupings.
- In 2021 estimated 0-4 age group was 11.916 vs 17,352 in 2010.
- Total estimated population in 2021 was 269,090 vs 277,821 in 2012.
The NISSS needs a workforce, whose contributions to the scheme are sufficient, to cover its obligations. The situation where expenditure exceeds contributions means the NISSS is using its investment funds to bridge the gap.
Taxation on pension contributions
In 1992, the government of the day remove all personal income tax incentives, for contributions to the NIS or personal pension. This means that all contributions made to the NISSS and personal pension plans are taxed.
Pension income received from NISSS or registered retirement plans, are treated as taxable income. This creates the potential for individuals to pay double tax.
If you receive a pension and are over the age of 60:
- the first $40,000 of your earned income is tax-free,
- any income earned above $40,000 is subject to a 33.5% tax rate.
There are no tax incentives for an individual contributing to the NISSS pension or private pension.
Government policy impacts NISSS pension fund
2014
In NIS’s 15th Actuarial Review, December 31 2014, it notes, “After falling behind on its contributions and rental payments, the Government of Barbados covered some of its arrears by issuing Treasury notes and debentures to the NIF”.
As far back as December 2014 the auctorial review identified the risk of government defaulting on its debt. It was identified at that time that the NIS faced the risk of fund depletion as early as 2045.
2019
Two excerpts from, “NIS in good shape after debt restructuring”, published by Barbados Today, on June 28, 2019:
- “The National Insurance Scheme (NIS) will not be hampered in the long run as a result of the major haircut that the state-run social security system took when Government restructured the domestic debt under the Barbados Economic Recovery and Transformation (BERT) program. This revelation was made by NIS Manager of Investments Luther Jones.”
- “The reduction in the bonds will result in a reduction in the principal and interest. However, the interest rate in the latter half has increased by one hundred per cent and it is anticipated that the amount of money to be received at the end of the 25-year period will compensate,” he said, as several members of the audience asked for more specifics.
The idea that government can wipe out 1.32 billion in NISS investments and avoid severely impacting the fund and its contributors is a fallacy.
2023
A statement from the Minister of Labour and Social Security, Minister Colin Jordan, “The National Insurance Fund is strong … Even though the Fund is not in crisis now, we know that we have a date with destiny between 2034 and 2041. We refused to kick the can down the road and instead decided to ensure the people of Barbados will have a social security system that is sustainable and will be able to provide benefits for all, particularly the most vulnerable.” Article by Jonteau Coppin, The Nation News, July 28, 2023.
The history of NIS and NISSS shows the credit risk of the organization to the will of government’s national policy, which may not be aligned with NISSS contributors and future pensioners.
Investment challenges
The above table is from the Barbados National Insurance Scheme 17th Annual Actuarial Review, July 22, 2022. The NIS has an Investment Policy Statement (IPS) that guides the NISSS investments. The table compares as at December 2020, how the NIS has invested its funds vs its IPS.
It is clear that NISSS continues to not follow its Investment Policy Statement. This was noted in consecutive actuarial reviews, raising diversification concerns, with 69% of NISSS fund assets in public sector (government and SOE) securities, and 87% of total investments in Barbados.
A fully diversified investment fund can reduce investment risk, by spreading its investments through different types of assets, across industries, markets, and countries. NISSS’s unwritten investment policy of supporting national government policy, is not likely to change, and to its own detriment, as experienced in 2019.
Conclusion
With a population that is both ageing and in decline, the NISSS is spending more than it is earning.
To achieve sustainability of the NISSS past 2035, requires a wider national discussion and consultation on the future of Barbados, its economy, desired population size, debt management, social security, tax structure.
The NISSS needs to diversify its investments and follow its Investment Policy Statement.
