By NEIL HARTNELL
Tribune Business Editor
National Insurance Board (NIB) contribution rates must more than double to over 20 percent to prevent a long-term Bahamian pension crisis, it was revealed yesterday.
The warning, which will likely be greeted with dismay by workers and employers alike, was delivered in the Inter-American Development Bank's (IDB) latest Bahamas country strategy, which projected that the Government's total pension liabilities - including those owed to the civil service and public corporation workers - will ultimately grow to 160 percent of GDP.
Pointing out that all Government pension commitments are "underfunded", the IDB's 2018-2022 strategy said eliminating this deficit will require NIB contribution rates to rise from the present 9.8 percent to 20.3 percent.
"Beyond the medium term, pension liabilities for which the Government is directly responsible - including social security commitments, pensions and public entity pensions - amount to 160 percent of GDP and are underfunded," the IDB said. "Fully funding these pensions would require increasing the social security payroll tax from 9.8 percent to 20.3 per cent - a 107 per cent increase."
NIB contributions, which take the form of a payroll tax, are currently split 3.9 percent/5.9 percent between employee and employer, respectively. Should the IDB's forecast prove accurate, The Bahamas' 200,000-plus workforce will all take a hit from reduced "take home pay" and suffer a loss of disposable income, leading to reduced living standards.
And the corresponding increase in employer contributions will cut into corporate profits and cash flow, acting as a significant drag on economic growth by deterring job-creating investment and expansion. With the Government's pension liabilities projected to exceed Bahamian economic output (GDP), the issue effectively represents an "iceberg" that can sink the economy long-term.
The IDB's projection thus emphasises the need for The Bahamas to urgently enact NIB reforms, which successive governments have elected to "kick down the road" to the next administration, despite knowing the social security system's $1.6bn reserve fund will be exhausted by 2030 without fundamental change.
The 2018-2022 "country strategy" added that demographics were also working against The Bahamas, with the number of retirees projected to increase as a proportion of the population due to persons living longer. At the same time, there will be fewer working-age Bahamians to support them.
"Pension liabilities are also projected to increase faster as a percentage of GDP in the Bahamas compared to the United States by 2060, reaching 41.6 retired Bahamians per 100 workers (from a current 1:10 ratio) compared to 36.8 per 100 workers in the United States," the IDB country strategy said.
All this highlights the need for wide-ranging pension reform if the Bahamas is to escape what some have described as a 'ticking timebomb', which will add to the current fiscal crisis and further burden future generations of Bahamians with large liabilities.
Besides NIB, the International Monetary Fund's (IMF) recent Article IV report warned that the unfunded civil service pension liabilities alone are projected to hit $3.7 billion by 2030 if no corrective action is taken.
It warned that the current system - where civil servants contribute nothing to funding their retirement - is "unsustainable". The IMF said: "Government employees draw pensions at retirement without contributing to the system while employed.
"Staff analysis in the 2016 Article IV Staff report noted that accrued government pension liabilities totaled B$1.5 billion in 2012, and would rise to B$3.7 billion by 2030 as the population ages."
The IMF called for reforms that involve "moving to a contributory regime in the near term, and to a defined-contribution scheme in the medium-term". This would require civil servants to contribute a portion of their salary to funding their retirement, rather than having this financed 100 per cent by the taxpayer through the Budget - as is done currently.
Meanwhile, the IDB warned that the Government will find it "challenging" to "pursue a pro-growth path" in the medium-term due to a combination of fiscal constraints and reduced Bahamian economic competitiveness.
Its report blamed "low total factor productivity", which measures how efficiently inputs to the production process are used, for creating "a key obstacle" to faster GDP growth that would impact more Bahamians.
Pegging the Bahamas' annual average GDP growth at a sluggish 0.53 per cent for the past 10 years, the IDB said the country's two main industries - tourism and financial services - faced growing headwinds.
"The Bahamas, a small, open archipelagic economy dependent on its services sector, has continued to experience suboptimal growth rates and rising debt levels since the global financial crisis," the IDB said.
"The tourism sector appears to be approaching maturity in its destination life cycle, while the financial sector is challenged to maintain its compliance with rigorous international regulatory standards.
"Fiscal results and national debt levels are deteriorating, and fiscal space is limited. Additionally, overstaffing and other operational losses of state-owned enterprises (SOEs) increase requirements for transfers that amount to 7 per cent of GDP or 33 per cent of annual government spending."
The IDB report said the liabilities of the Government's 35 SOE corporations and agencies equalled almost 9 per cent of GDP, a sum greater than $900 million based on the recently-revised national accounts statistics. It said 7 per cent was associated with debt incurred by their operations, while the 2 per cent balance related to unfunded pension liabilities.
The Government will likely challenge the IDB's assertion of tourism "maturity", given this week's completion of Baha Mar's full opening, and additional room inventory that has come online via the Warwick, Courtyard by Marriott, and recent renovations at the RIU and Atlantis.
However, the IDB report revealed that foreign direct investment (FDI) inflows as a proportion of GDP had almost halved over the period 2012-2016 compared to the previous five years.
"FDI inflows for 2013-2017 represented on average 2.6 per cent of GDP less than the previous average of 5 per cent of GDP for the period from 2008-2012," the country strategy said. "Pursuing a pro-growth path for the medium term will be a challenge, especially in an environment of declining fiscal space and weakened external competitiveness.
"Low total factor productivity (TFP) is a key obstacle to Bahamian prospects of achieving a higher, more inclusive growth trajectory. Negative productivity growth and declining contributions from labour and capital have reduced the economy's growth potential for the past decade, as the archipelago has seen average growth levels fall below its regional neighbours."
The IDB report said the Bahamas' TFP score had declined by around 1 per cent when measured against a group of rival Caribbean economies, with "deteriorating potential growth influenced by weak TFP growth".
It added that "targeted investment" in technological innovation by both the Bahamian private and public sectors can reverse the decline in TFP, but warned that "Government efforts at improving productivity and growth-inducing policy measures will be challenged" by structural obstacles.