The Tribune

By YOURI KEMP

Tribune Business Reporter

ykemp@tribunemedia.net

The International Monetary Fund warns that a “significant” share of the elderly would be without pensions if reform to the pension system is not dealt with immediately.

The fund warned in its Selected Issues Report: “The Bahamas is ageing fast, so there is limited time to ensure sustainability of the pension system. It finds that the combination of high accrual rates and last/best earnings reference wages with relatively low or absent contribution rates leads to high internal rates of return. Moreover, the retirement age for civil servants is very low, while the minimum years of contribution requirement in the private sector could leave a significant share of the elderly without pensions.”

Essentially, the fund is warning that for both the private and public sector, people are not paying into the pension system what they have historically made over their career and subsequently receiving pensions not based on their input to the system.

The Fund said: “The Bahamas has one of the youngest populations in the region, but it will be ageing fast. Currently The Bahamas has a relatively low old age dependency ratio of 11 people over the age of 65 for every person of working age, compared to an average ratio of 16 among Caribbean countries. However, the old-age dependency ratio in The Bahamas is expected to more than double to 27 by 2050, almost catching up with the average of the region.

“Rapid population ageing means that ensuring fiscal sustainability of the pension system is urgent. To avoid sudden disruptions and large intergenerational differences a gradual implementation of reforms is preferable. However, equitable pension reforms are slow to take full effect. Therefore, the relatively low current old-age dependency ratio provides the perfect opportunity to start this gradual implementation of pension reforms and would prevent the need for an abrupt adjustment in the future.”

The Fund added: “The current pension system in The Bahamas consists of two earnings related pension schemes, one for civil servants and one for the private sector. In 2020, The Bahamas spent 1.2 percent of GDP on the civil servants’ scheme and 2.1 percent of GDP on the private sector scheme, which includes a minimum pension for those with entitlements below a certain threshold.

Out of all of this, over 80 percent of the population had worked in 2019 with one out of five being a government employee.

The fund said: “Compared to other countries in the region, accrual rates in The Bahamas are high. Average accrual rates for the private sector for a full career from age 22 to age 65 (the retirement age) are 1.4 percent per year. In addition, a full career civil servants worker receives 1.67 percent accrual per year.

“The accrual schedule in the private sector scheme disincentivizes long careers. The concave accrual schedule implies a very high accrual rate for the first 10 years of contributions (three percent per year, which is common in Caribbean countries but very high in international comparison), a much lower rate for later years (one percent) and no accrual at all after 39 years. Taken together with the ceiling on pensionable earnings this is likely to disincentivize high earners with long careers the most.

It continued, “The low ceiling on the reference wage for the private sector discourages high earners from reporting the full wage. This wage ceiling will fall further in terms of the average wage because of price indexation of the ceiling, impeding the scheme’s ability to provide income smoothing for those who earn more than the ceiling. The lack of valorization of past wages makes replacement rates dependent on inflation and real wage growth. Considering that the reference wage is based on the best five years only it is not likely to have a substantial impact at the moment. But if the reference wage period were to be extended, rule-based valorization of past wages with the economy wide average wage growth will be necessary.”

The report also noted that the lack of income taxes makes the “generosity” of the pension system difficult to compare because in other countries they do the exact opposite where other countries pay lower taxes during their retirement compared to their working life because of progressive income tax rates. But in The Bahamas we have flat based customs duties and value added tax that affects everyone no matter the age.

The fund is urging The Bahamas to expand the reference wage to include average full career earnings in both the public sector schema and private sector scheme, lower the accrual rates in both schemes, apply equal accrual rates to all years of contribution and reform survivor pensions, limiting it to those “close to or above the retirement age”.