Towards universal pension coverage – Pt 1

The high degree of income inequality and an ageing population in Jamaica means that any meaningful pension benefit, with near universal coverage, must be very progressive in its benefits.

“Jamaica’s very poor pension coverage requires immediate attention,” warns Dr Marshall Hall.

JAMAICA'S VERY poor pension coverage requires immediate attention. This need is well documented in several studies and reports done for and by the Planning Institute of Jamaica.

One recent study conducted by the Inter-American Development Bank (IDB) reported that pension coverage in Jamaica in 2012 was 21.4 per cent of the employed workforce as compared with 68.2 per cent in Barbados, 62.1 per cent in Grenada, and 54.9 per cent in Trinidad and Tobago.

Pensions are provided either through the government-run National Insurance Scheme (NIS) or private pension and superannuation schemes. Only 9.4 per cent of the employed labour force belongs to any private pension scheme. Most, if not all, of this group are also contributors to the NIS.

The available data do not suggest that there has been a dramatic improvement in pension coverage since 2012.

The concern here is with the employed workforce as it is not beyond the capability of the State to establish a modest funded pension benefit for all persons who have worked a designated minimum of years and reached the agreed national retirement age.

UNSUSTAINABLE CONTRIBUTION LEVEL

The high degree of income inequality and an ageing population in Jamaica means that any meaningful pension benefit, with near universal coverage, must be very progressive in its benefits. To provide pensions with replacement incomes of, say, 70 per cent of the average of the last three years of income requires contributions totalling of at least 15 per cent from employee and employer.

This level of contribution is simply not sustainable for most employers and employees and definitely not for individuals who earn $15,000 per week or less.

The proposal, therefore, is to provide the same basic flat-rate pension for all pensioners.

This flat rate is not intended to replace the need for proper pension programmes that yield desired replacement incomes or to remove the obligation to save for retirement. It is designed to provide a guaranteed basic pension for all employed workers in an economy where the clear majority of workers do not earn enough to generate any savings for their retirement.

Unless some basic funded support is provided, programmes like PATH will have to be expanded to meet the barest of necessities for the retired worker. PATH-type programmes are neither sustainable nor an answer to the more than 60 per cent of the workforce who do not belong to the NIS or any other pension programme.

We state baldly that any scheme that attempts to provide a minimum acceptable benefit for all will require that the benefit cannot be a wage-related benefit given that the minimum wage is $5,200 per week, and many above the minimum wage level earn less than $15,000 per week.

Accordingly, this universal pension is conceptualised as a flat rate, with all participants receiving the same benefit

Given the existence of the NIS with a flat-rate payment already in place, we treat our suggestions as revisions to the existing NIS Fund.

The solution is not simple, however, as the most recent (2014) actuarial study done by the actuarial firm Eckler deemed the NIS Fund to be insolvent.

Sustainability requires a fund that is solvent without government support. The Government would, of course, be required to contribute to the fund and remit its employees’ contribution just as any other employer.

See the suggested fix by Dr Hall next Sunday.