New study sug­gests rais­ing re­tire­ment age

Jamaica Gleaner - - BUSINESS - Mcpherse.thomp­son@glean­

ANEW study by staff of the In­ter­na­tional Mone­tary Fund (IMF) has sug­gested that re­gional states, in­clud­ing Ja­maica, should raise the re­tire­ment age, freeze old-age pen­sion ben­e­fits and in­crease the con­tri­bu­tion rate to put the schemes on a stronger fi­nan­cial foot­ing.

While the ap­pro­pri­ate com­bi­na­tion of re­forms nec­es­sary to elim­i­nate the ac­tu­ar­ial deficits varies de­pend­ing on each coun­try’s cir­cum­stances, most coun­tries need to un­der­take re­forms now or risk even higher taxes, lower growth and un­sus­tain­able debt dy­nam­ics, the staff said.

In the last mem­o­ran­dum of eco­nomic and fi­nan­cial poli­cies sub­mit­ted to the IMF un­der the ex­tended fund fa­cil­ity, the Ja­maican Gov­ern­ment said re­forms to im­prove the sus­tain­abil­ity and cov­er­age of the Na­tional In­surance Scheme are on­go­ing.

In a dis­cus­sion pa­per pre­pared in Oc­to­ber, the IMF staff pointed out that, weighed down by pop­u­la­tion age­ing, slow eco­nomic growth and high un­em­ploy­ment, Na­tional In­surance Schemes in the Caribbean are pro­jected to run sub­stan­tial deficits and de­plete their as­sets in the next decades, rais­ing the prospects of gov­ern­ment in­ter­ven­tion.

With the re­gion highly in­debted, the pa­per quan­ti­fies the im­pact of three para­met­ric re­forms – freez­ing pen­sion ben­e­fits for two years, rais­ing the re­tire­ment age and in­creas­ing the con­tri­bu­tion rate by one per­cent­age point – that, if im­ple­mented, would put the pen­sion schemes on a stronger fi­nan­cial foot­ing.

Not­ing that pen­sion schemes have be­come un­sus­tain­able, the staff said that in ad­di­tion, there is a con­cern that in­vest­ment of pen­sion funds may lead to high ex­po­sures to gov­ern­ment se­cu­ri­ties.

“These de­vel­op­ments, to­gether with anaemic eco­nomic growth, ris­ing un­em­ploy­ment, and limited room for macroe­co­nomic pol­icy in­ter­ven­tion, sug­gests that pen­sion re­forms are un­avoid­able,” they ar­gue.


They sug­gest that a range of re­form mea­sures, with vary­ing so­cio-eco­nomic im­pact, could be im­ple­mented to con­tain the pro­jected in­crease in pen­sion spend­ing.

In ad­di­tion to con­tain­ing demographic pres­sures, rais­ing the re­tire­ment age would not only be in­ter­gen­er­a­tionally fair, but could also have a pos­i­tive ef­fect on eco­nomic growth in the long run by in­creas­ing par­tic­i­pa­tion in the labour force, said the dis­cus­sion pa­per pre­pared by Koffie Nas­sar, Joel Ok­wuokei, Mike Li, Tim­o­thy Robin­son and Saji Thomas of the West­ern Hemi­sphere De­part­ment.

At the same time, they said, it will re­duce the wel­fare of older work­ers and the un­em­ploy­ment of the young. An across-the­board 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.

Fi­nally, a one per­cent­age point in­crease in the pen­sion con­tri­bu­tion rate would bring the con­tri­bu­tion rate closer to global av­er­ages and im­prove the sus­tain­abil­ity of the pen­sion sys­tems, but it could also dis­cour­age labour mar­ket par­tic­i­pa­tion and ag­gra­vate in­ter­gen­er­a­tional im­bal­ances, said the staff.

Ac­cord­ing to the IMF staff, for most coun­tries, im­ple­ment­ing these three re­form mea­sures con­cur­rently would suf­fice to put the pen­sion scheme on a sus­tain­able path. For other coun­tries, such as An­tigua and Bar­buda, Belize, Ja­maica, and St Vincent and the Gre­nadines, these mea­sures would need to be com­ple­mented by im­prove­ment in the cov­er­age of the pen­sion schemes.

“It is im­per­a­tive that the au­thor­i­ties be­gin to build na­tional aware­ness of the fis­cal risk as­so­ci­ated with the pen­sion schemes and the need for re­forms,” said the pa­per.

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.

“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,” it added.

These de­vel­op­ments will take place as the au­thor­i­ties aim to scale up in­fras­truc­ture spend­ing, while at the same time pur­su­ing debt sus­tain­abil­ity.

“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,” said the IMF staff.

IMF-Ja­maica Cal­en­dar


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