by Prof. C Justin Robinson, Professor of Finance & Principal, UWI Five Islands Campus
The financial sustainability of the vast majority of Social Security Funds across the Caribbean has been undermined by the rapid growth in benefits expenditure relative to the growth in contribution income over the last 20 years.
A major factor driving this reality is the changing relationship between the number of persons working and contributing to the funds relative to the number of persons retired and receiving benefits from the funds.
As shown in Table 1 the number of contributors per pensioner has typically declined across the funds over the 2003 to 2021 period and significantly so in a number of funds.
Table 1. # of contributors per pensioner
| Country | # Contributors per Pensioner 2003 | # Contributors per Pensioner 2012 | # Contributors per Pensioner 2021 | Percentage Change 2003 to 2021 |
| Antigua & Barbuda | 3.9 | 4.4 | 4.1 | 5.1% |
| Bahamas | 5.1 | 4.3 | 3.7 | -27.5% |
| Barbados | 3.4 | 3.3 | 2.2 | -35.2% |
| Dominica | 4.7 | 4.2 | 3.9 | -17.0% |
| Grenada | 8 | 4.6 | 4.4 | -45.0% |
| Guyana | 4.9 | 3.8 | 5.11 | 5.0% |
| St Kitts-Nevis | 7.7 | 6.11 | 3.9 | -49.4% |
| St Lucia | 10.7 | 8.5 | 6.6 | -38.6% |
| St Vincent | 9 | 6 | 5 | -44.4% |
| Turks & Caicos | 14.19 | 10.8 | 8.4 | -40.8% |
| Trinidad &Tobago | 4.10 | 3.7 | 2.5 | -39.0% |
In a Pay-as-You-Go Social Security Fund, the model is that current workers pay contributions that are used to fund benefits to current retirees. When these current workers retire, there is an expectation that new workers will replace them and therefore make contributions which will continue to fund benefits at the agreed levels. If there is a steady decline in the number of contributors relative to the number of retirees, then the fundamental structure of the fund is being undermined. It appears reasonable to conclude that the changing demographics in Caribbean societies where fertility rates are declining (fewer new workers) alongside increases in longevity (longer periods in retirement) appear to be the major factors negatively impacting the financial sustainability of Social Security Funds across the region. In addition, there may be changes in the labour market where there are growing numbers of self-employed persons and compliance within this group has always been a challenge for pension funds.
In reforming their Social Security Funds, policymakers should adhere to sound actuarial principles and, as advised by experienced actuary Derek Osborne seek to ensure
- Benefit Adequacy (The ability of the Old-Age Contributory Pension to meet a defined portion of the basic living needs of an elderly resident separate and distinct from other welfare benefits provided by the state)
- Contribution Affordability: (The ability of employers and employees to meet the cost of future NIS contributions without negatively affecting employer costs, workers’ disposable income, and compliance and the overall labour market and economy), and
- Fund Sustainability (Projected Social Security Fund Reserves being adequate to meet future benefit obligations. In effect, undertake reforms that extend fund depletion for 25–30 years and pay-as-you-go rates that do not increase as the population ages)
Some specific guidelines and recommendations as countries undertake absolutely essential reforms may include:
- Establish strong governance systems to build and maintain public trust. Boards comprised of representatives of government and civil society groups may go a long way in enhancing trust. Major elements of the governance systems should include boards and investment committees with the requisite levels of independence and expertise
- Introduce “Automatic Adjustment Mechanisms” linking benefits levels and retirement ages to demographic changes such as life expectancy and fertility
- Seek to enhance compliance by the self-employed by creating contribution payment schedules and actuarially sound benefits packages that are flexible enough to match the cash flows and social security needs of the self-employed
Social Security Funds are one of the best examples of social solidarity in our societies and they have been an unmitigated success in improving the lives of our people, especially the most vulnerable. As such, preserving these funds is an imperative, and if we are to do so in the face of current circumstances, reforms are required and should be urgently undertaken.
