CARIBBEAN COUNTRIES have been warned to take note that social security schemes in the region may face increasing financial pressure in years to come

CARIBBEAN COUNTRIES have been warned to take note that social security schemes in the region may face increasing financial pressure in years to come. This stark reality is noted in an International Monetary Fund (IMF) working paper titled National Insurance Scheme Reforms in the Caribbean.

According to the report, Governments are being advised to pay close attention to their schemes which are projected to run significant deficits, with a possible depletion of the assets over the coming decades raising the possibility of government intervention. The report has highlighted a number of factors including unfavourable demographic trends, slow economic growth, rising employment, widening fiscal deficits, and increasing public debt levels since the onset of the 2008 global financial crisis.  The report adds that the economic downturn has impacted the schemes as declines in growth rates coupled with significant increases in unemployment rates have contributed to lower pension contributions to the schemes.

Most social security institutions in the Caribbean have been in existence for over four decades. In the case of Barbados, the NIS (National Insurance Scheme) is over 50 years old. These schemes are generally financed under what can be described as a “scaled premium” system, whereby the contribution rate is fixed at such a level that the income from contributions and investments is expected to exceed the expenditures on benefits and administration for a period of years, referred to as the period of equilibrium.  

During this period of equilibrium, the excess of income over expenditure is accumulated in a reserve. This reserve constitutes the resources available for investment.  

The investment challenge for social security institutions was to maximise the growth of these reserves during the period of equilibrium by achieving the best possible rate of return taking into consideration the basic principles that apply to the investment of social security funds of safety, yield, liquidity, and social and economic utility.  

The pension reform exercise undertaken in Barbados during the first half of the last decade was to address the long-term financial sustainability of the NIS. The actuarial projections for the Barbados scheme reflected that there would have been net positive contributions which should prevail for a period of time. Following that period of positive contribution, investment income would be expected to meet any shortfall in contribution, without the capital having to be impacted.  

For social security institutions, there are three main inflection points to consider. The first inflection point is when overall expenditure exceeds contribution income. In this case the scheme must draw on its investment income to meet expenditure payments.

The second inflection point is when expenditure exceeds total income (contribution income and investment income), and at this point the scheme should start drawing down its reserves to meet expenditure payments, and the third critical point is when the reserves are exhausted.   

As outlined in the IMF report, many Caribbean schemes have already crossed the first inflection point, with expenditure expected to exceed contribution income in Barbados and St Lucia within the next two years.  

In Barbados’ case this point is supported by the 14th Actuarial Review of the NIS Fund at December 31, 2011, where it was projected that the expenditure on benefits would exceed the contribution income during 2017.

Must be revised

When the NIS was initially established, the idea was that current contributors would pay part of their cost and they would depend on generations that came after them to meet part of the expenditure of their pensions. And so, it was known from the beginning that the contribution rate or even the benefit provisions would have to be revised at a later point in time.  

In the Caribbean, there have been significant demographic changes over the past 50 years.  In the case of Barbados, it is quickly entering a period where the oldest members of its population will very soon outnumber the youngest.  

Population ageing results from decreasing mortality, higher life expectancy and declining fertility. 

This combination has led to a relative reduction in the proportion of young people (aged from birth to 14 years) and to an increase of older persons in the population (aged 65 years or over).  

In Barbados, the percentage of older persons has increased from 7.5 per cent in 1990 to 9.1 per cent in 2010 and will continue to grow, based on projections.  The number of older persons is expected to more than double the 2010 level by 2040, with older persons in Barbados projected to exceed the number of young people for the first time by 2025.  

The old-age support ratio (number of working-age adults per older person in the population) is already low and is expected to continue to fall.   

This will create, or possibly exacerbate, fiscal pressures on existing support systems for older persons. The impact of an increased life expectancy, which is one of the highest in the region, is that pensions are expected to be paid for a longer period.

The IMF Report has identified actuarial deficits calculated as the present values of net future benefit expenditure ranging from 0.7 per cent of GDP in Barbados to 92 per cent of GDP in Jamaica. This is reflective of the potential cash flow deficits which are expected to emerge in coming decades and which become contingent liabilities on governments in the event that scheme is unable to meet their obligations and get to be a major source of fiscal risk.

Persons may argue that with approximately $4.5 billion worth of reserves that the NIS has right now, there should be no cause for concern, as reserves as a percentage of GDP was more than 40 per cent, which was one of the highest in the region. Those reserves are on hand so that when pension payments come due, they can be met.  

Per the Actuarial Report, you can expect to see increasing reserves for another few years but down the road these reserves would decline and ultimately be totally depleted (third inflection point).     

With a low actuarial deficit and high reserves to GDP, this should not be an opportunity to congratulate ourselves.  Our reserves-to-annual benefit expenditure ratio is sufficient to cover 8 years of benefit payments without additional revenue, compared to approximately 30 in St Lucia and Guyana at 2.5 years.

The performance of the investment portfolio can have a significant impact on the long-term financing of the social security institution. A good rate of return on the investment portfolio can reduce the extent of increases in the contribution rate necessary to fund the social security institution, beyond the period of equilibrium.  

At the outset of pension reform, it was also recognised that the reserves must increase substantially to meet future expenditure. This was necessary as contributions would be coming from a shrinking workforce. The growth of reserves meant that avenues had to be available for the investment of NIS funds, which would either be alternative effective channels of investment in substantially increased productive capacity at home supplemented by substantial foreign investments, to add to the investment returns obtained at home.   

Economic growth

It can be argued that investments in the productive sector of the economy can contribute to economic growth and improvements in the standard of living, by generating employment and providing further investment opportunities. 

The contention is that increased employment and economic growth will inevitably lead to an increase in contribution income.  Unfortunately, we have not observed this economic growth and increased employment for most of the last decade. 

For social security institutions, the concept of “long-term” involves a horizon that is generally measured in decades. With a long-term investment horizon, social security institutions should be able to invest in less liquid, higher yielding investments, such as infrastructure and real estate, as well as increasing investment in equities.  

The currently challenge facing the NIS, is that having crossed the first inflection point the investment focus of the NIS may now not be long-term, but on a shorter time horizon as the investment portfolio should now be structured to provide an increasing cash investment return to supplement the contribution income to meet expenditure and to prepare for the second inflection point, which based on the IMF report can be as early as 2024.     

The IMF report indicates that the Barbados NIS has one of the highest exposure to Government securities, including those issued by state-owned enterprises, at 68 per cent of the fund supporting their concerns that “investment of pension funds may lead to high exposures to government securities.” 

This anxiety was also raised by the actuary in the 14th Actuarial Review, where it was noted that “the heavy concentration of investments in Barbados Government and other public sector securities presents growing concerns for the fund’s long-term sustainability. 

The key risk factor here is whether the fund will receive cash when debentures and treasury notes will have to be liquidated to meet current expenditure”. 

The pay-as-you-go system used by the NIS and several social security pension systems in the Caribbean region have had to undergo significant structural changes in the face of population ageing to ensure their long-term sustainability.   

Some of these changes include increasing contribution rates, and the raising of the retirement age when members would be eligible for a pension. 

More pressure

Population ageing will increase pressure on governments to balance two priorities.  First there is the need to reduce government budget deficits and debt levels especially in the face of lower economic growth, and secondly the need to sustain public spending on public health care, pensions and other social programmes for ageing population.  

This has been compounded by the economic impact of the global financial crisis and natural disasters, which have resulted in higher unemployment and severe strains on government budgets.  

It should be noted that none of the concerns expressed in the IMF paper are necessarily new, as most schemes have advanced various reforms efforts, but in general most Governments have elected to take a “kick the can down the road” approach when it comes to changes that will ensure the long-term viability of the social security system.

Ensuring the long-term sustainability of the NIS is just one of the challenges that Government will have to face over the coming decades. Government will need to address elements like tourism, education, housing, transportation and crime, as well as finding ways to improve the country’s productivity performance in order to address the challenge of producing the goods and services the entire population will require.  These are all taking place at a time when Government is fiscally challenged with the prospect in coming years of lower NIS reserves to draw on.
 

• Gregory Hinkson is Managing Director and Principal Consultant of SAMDOR Services Ltd Limited

Read More

New Year must bring change

From my family to yours, I hope you’ve had a very good and meaningful holiday season with your family and friends.

Christmas is a special time for reconnecting before we reset for the start of a brand new year.  As I look back on 2016, what was meant to be a Golden Jubilee year didn’t quite turn out the way most of us might have wanted.  I won’t rehash all the details here but you know what I mean.

As we approach 2017, there is always the hope of turning a new page but the pragmatist in me (that little cartoon devil, if you like) keeps nagging away asking why would you expect anything different for 2017?

The spectre of a pending election is sufficient motivation for us to hope that things would get better.  What we must be mindful of, is to meaningfully discern the difference between the temporary fixer upper which the Government will attempt and that which we know will benefit Barbados over the next 25 years.

Given the financial strain that most Barbadians are feeling, it is hard to ask people to be forward looking when the last nine years have been a complete disaster.  Nevertheless, this in my view on what the focus ought to be, lest we fall into the fixer upper trap, only to be left disappointed at the end of 2017, hoping that 2018 turns out better.

Economics is often referred to as the dismal science but we are in fact a very hopeful bunch because those of us not steeped in ideology, know that there is always a way to get out of any financial mess. The deeper the mess, the bolder the actions required to extricate oneself. People have said to me that the current Government intends to run out the clock and leave the mess for the Barbados Labour Party to deal with.

My response is not one of dismay but only to agree that the Barbados Labour Party, as it has done in the past, will deal with any situation should the country decide to once again put trust and faith in us.  In short, our boldness will define the next 50 years for Barbados.

Sometime tomorrow, the auditors will physically count the foreign reserves at the Central Bank which is not unusual by any stretch of the imagination.  I recall during my time at the bank, the disappointment of those assigned such duties on Old Year’s Night because everyone else is out enjoying themselves.

As lady luck may have it, those assigned the task of counting the reserves at the end of 2016 may still be able to make merry on Old Year’s night as, from what I heard, there isn’t much to count this year.  A bizarre turn of fate if there ever was one!

Another Central Bank related matter. If you were in town this week, you probably experienced some traffic delays and a heavy police presence on Spry Street and Roebuck Street. The heavy police presence might also have been somewhat alarming but don’t panic. This was to facilitate the Central Bank receiving some freshly printed money.

It seems the printing presses at De La Rue in Basingstoke, UK have gone into overdrive and seem to be never ending despite promises by the Central Bank to stop the presses.

The optics on display are quite telling.  If you have more local currency already in circulation and more to be put out in 2017 relative to the amount of foreign reserves in stock, then one might be tempted to assert that the Central Bank may not be able to defend the currency peg of $2 to one US dollar.

I can see the spin machine dismissing this as Opposition alarmists at work. For some that would be enough to dismiss the concerns, but when the Bank of Guyana says it is no longer has faith in the Barbados dollar as a means to do business in Guyana, then all of us ought to sit up and pay attention.

As far as I’m aware, the Barbados Labour Party has zero influence on the monetary of policy of the Bank of Guyana and with that I leave you reach your own conclusion. In all this, one may be tempted to think that things cannot possibly get any worse than they already are. Whilst I am hopeful of a brighter future, I know that hope alone is not a strategy.   

One must see concrete steps being taken that gives one the assurance that that future will come to fruition. So as we leave this old year and enter a new one, I am indeed hopeful of a brighter tomorrow but, from where I sit, none of those critical steps have been taken and with that the same ole will likely continue.

I have resolved that in the new year, irrespective of the action or inaction of the Government, I will take concrete steps to bring a better life for our people into fruition. It is my intention to restore hope on the one hand but it must be accompanied by providing opportunities for all.

From my family to yours, Happy New Year Barbados.

(Ryan Straughn is an UWI Cave Hill and Central Bank of Barbados trained economist and the endorsed BLP candidate for Christ Church East Central.
Email: straughn.ryan@gmail.com)

Read More

No sense blaming the Bees

I am writing this article on Friday morning after a hectic week and my state of mind, at present, is quite frankly not a good one.

It is Christmas — a time for reflection and some merriment — but it is difficult to do so when it appears that our country Barbados, once known as the Gem of the Caribbean, is literally falling apart at the seams.

You are well aware that I am a member of a political party, and so there is an automatic filter that is applied to anything I may say or do. However, I want to invite you to go on a short journey with me and not let that be too significant a factor.

I don’t think there is anyone in Barbados who thinks that basic sanitation ought to be a political issue. As a matter of fact, basic sanitation was something we took for granted because we paid attention to it since we understood how important it was to everything we do. I digress.

In 2000, member countries of the United Nations set the target of halving global poverty by 2015. To achieve this, they established eight Millennium Development Goals (MDGs) and set targets to achieve each one.  Goal 7 was to ensure environment sustainability under which Target 7.C was defined as “Halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation”.

At that time, 16 per cent of Barbadian homes still had pit toilets which was reduced to six per cent in 2010 due to the construction of new homes across the island.  So, as a country, we improved basic sanitation in this category.

With respect to water closets linked to sewer, in 2000, some 428 occupied dwellings were linked to a sewerage system all of which were in St Michael.  By 2010, this number increased to 3,218 with nearly 2000 in St Michael (1,886) and 1332 in Christ Church.  This shows clear progress made under this target in the first decade of the 21st century.

On the surface, one may be tempted to give ourselves a pat on the back for making such strides but recent events have demonstrated that we must get back to the basics.  Simply put, water-borne toilets need a steady supply of water in order for the basic sanitation needs to be met.

When one upgrades from wells to sewerage systems, maintenance of such systems is essential to ensure basic sanitation needs are met.  Residents in rural Barbados have expressed pure frustration over the past year and a half about having to pay water bills but yet not receiving water on a consistent basis.

Residents on the south coast have to pay for connection to the sewer systems only to have faeces floating on their properties.  In both instances, the Barbados Water Authority (BWA) have failed the citizens of Barbados by not moving swiftly to alleviate their concerns.

It is a dereliction of duty on the part of the Government not to go to the affected residents and offer meaningful dialogue so that the affected persons can go about their business with some peace of mind.

It is a human right that people have access to clean water and basic sanitation and something that governments all over the world are required to provide for their citizens.  What is worse is that our citizens are continuing to pay for these services and their situation seems to be getting progressively worse day by day.

Earlier this week, someone asked me why the Barbados Labour Party didn’t fix the problem with the sewerage plant on the south coast when there was money to do it.  As we approach 2017 and closer to an election, I know we will start to hear all kinds of things from Government and about the BLP but that one nearly hit me for six.

Before I answered the question, I searched the person’s face to see whether they were being deliberately facetious.  When I saw that they were quite serious, I had to remind them that the Democratic Labour Party has been in office for over eight years now and that the Barbados Labour Party has been in Opposition for the same number of years.

Furthermore, the south coast sewerage plant was experiencing challenges for the past three years which have not been addressed.  Simple Mathematics and logic would suggest that the Barbados Labour Party could not possibly address a problem that was non-existent at the time it was in office.

The facial expression changed dramatically as the realization that attempting to blame the BLP does not make sense.  The person excused themselves when I asked how long will it take for the Democratic Labour Party to take responsibility for managing the affairs of the country?

As we close out the rest of 2016 and start looking at the year in review, it is difficult not to conclude that the DLP side has successfully secured their political pensions. Our Government, though, led by Freundel Stuart, has demonstrated incompetence infused with indifference.

(Ryan Straughn is an UWI Cave Hill and Central Bank of Barbados trained economist and endorsed Barbados Labour Party candidate for Christ Church East Central. Email: straughn.ryan@gmail.com)

Read More

Counting down to elections

I trust and hope that everyone enjoyed some aspect of the festivities put on for our recent 50th Anniversary of Independence celebrations. 

I don’t have the statistics immediately available but I think November 2016 has to be the wettest November I can remember for some time. If it was indeed the wettest, then perhaps that might also mean that there is no longer a drought facing Barbados. Therefore, the water issues that have plagued Barbados over the past year will quickly be resolved since there is now water in abundance. 

Whilst the pomp and pageantry at Government House, Ilaro Court, St Ann’s Fort and Kensington Oval were in full swing, communities like Wotton in Christ Church, especially Cherry Wood Circle, were busy assessing damage caused by pre-Independence Day flood waters, as was also the case last May Day.

It was clear for much of this year that the Government was focused only on the Independence celebrations and there was no issue that affected Barbadians that could have possibly made them lose sight of that focus.  In essence, no water, then buss luck.

Funnily enough, buses then buss luck too. Garbage piling up across the country then buss luck.  Roads literally deteriorating before our eyes, buss luck. Raw sewage flowing in the streets, buss luck.  However, every morning at sunrise, we all knew how many days were left until the 50th anniversary of Independence.

Over the course of the last week since Independence, a number of persons have been asking when elections are due.  When they are informed that the next elections actually are constitutionally due in 2018, there is an immediate expression of despair where almost man for man and woman for woman express the following:  “Cheese on bread! Yuh mean we have another year with these fellas”.

It is somewhat uncanny that these views are openly expressed in such a uniform manner.  I try to offer some solace by indicating that elections can be called anytime between now and when they are constitutionally due and so the torturous ride we’re currently on need not last as long as we think it might be. 

I must admit that this doesn’t seem to raise their spirits but the response usually IS that the Prime Minister “gine call um when he feel like it”. In the meantime, the rest of us grin and bear the neglect being meted out by Freundel Stuart and his government.

So, as we all start preparing for this Yuletide Season and we reflect on this past year and the things we’d like to do in 2017, I want you to focus on the following.

Do not lose heart or hope because of the inability of a few people who have betrayed the public trust.  We must resolve that this kind of behaviour is unacceptable and will not be tolerated any longer and that we, the people, will hold to account any person seeking to perpetuate such. 

We are all victims in this malaise, yet at the same time we have become willing participants by our lack of action.  Silence has always been consent and so our collective silence has given Freundel Stuart and the members of his administration the confidence to continue to look after their political interests at the expense of the people. 

Economic systems are by their nature quantifiable and so metrics are often used to show performance. Credibility and trust, however, are two key elements that significantly impact economic systems but are somewhat intangible and not easily measurable.  Without them, systems crumble and it appears as if things are literally falling apart right before our very eyes.

It is a difficult thing to ask people to hold strain but I would like for you over this holiday season to reflect on why you and yours deserve better representation and what that looks like.  We must first believe again that Barbados is worth fighting for and therefore we must fight for each other.  We must root out

mediocrity and incompetence and not accept them in any form.

As we move into 2017 with the expectations that a new year generally brings, let me remind you that the life of the 2013-2018 Parliament is coming to an end.  Its first session commenced on Wednesday March 6, 2013 and so its dissolution will be sometime between today and March 6, 2018.

With that, I am happy to inform you that there are at most 452 days before Barbadians get the opportunity to decide the fate of Freundel Stuart and his Democratic Labour Party government.

(Ryan Straughn is an UWI Cave Hill and Central Bank of Barbados trained economist and the endorsed Barbados Labour Party (BLP) candidate for Christ Church East Central.
Email: straughn.ryan@gmail.com)

Read More

‘Ode to the taxpayer’

Between 1988 and 2001, I participated in every Independence Day Parade playing in the mass band which comprised the Royal Barbados Police Force Band, Regiment Band and the Combermere School Cadet Band. 

I cannot describe the pride and joy of standing next to Cortez Callender from the Police Band as a youngster playing clarinet and getting goose bumps trying to emulate his playing of the melodic runs in Cavalry Brigade or his complete mastery of Pack She Back, Brown Girl or Matilda. 

Looking back on those years, first as a cadet rising within the ranks and then as a member of the Zouave Band, the experience made my Independence very memorable and the sense of patriotism it engendered seemed surreal.  Cortez Callender retired this year from the Police Band after 52 years of service and therefore will not be participating in this year’s parade.

Left to me and if he was willing, I would give him the opportunity to be the Parade Director of the Mass Band as an appreciation of his long service to Barbados. 

In this our 50th year of Independence, I cannot help but reminisce about the ‘good ole days’ but I also feel compelled not to wallow in what once was.  There is a deep sense in me to want to take pride in what Barbados has been able to achieve but one still has a very strong nagging sense that better must be done today, otherwise that pride may very well be misplaced.

Anthony Walrond, if you don’t know him, is a local songwriter who has penned a calypso entitled A Golden Jubilee which represents an Ode to the Taxpayer.  It hasn’t received much airplay on the radio stations but I feel compelled to share the lyrics of his composition with you and hope that perhaps you may share in the sentiments he has expressed.

Verse one

50th Anniversary Independence Celebration

For you the dignitary with a special invitation

Did they reserve a seat for you up in the front row?

With the pompous and the elite for the ceremony and show.

Someone the ushers had missed,

For there was an empty spot

When they check the guest list,

It was you they forgot

Who should receive any tribute paid

for the best national contribution made

It is you, it is you, it is you

Who is it time and time again, stop the economy gine down the drain

It is you, it is you, it is you

Who is the country’s greatest asset,

To raise revenue and to pay out debt

To replenish Treasury funds,

Cover up them overruns

It is you, it is you, it is you

If anyone truly deserves,

Honours for these 50 years served

And respect long over due

Taxpayer it is you

It is you, it is you, it is you, it is you

Verse 2

Our Golden Jubilee, an appropriate celebration

Of an epic winding journey, down the hard road as a nation

Our leaders just like Moses headed for the promised land,

With no guide to their bed of roses, only footprints in the sand.

Politicians steady and good, they arrived on the shores

Only then they understood, all those footprints were yours.

Who gave him all that confidence,

To go and demand Independence

It is you, it is you, it is you

And gave him all the faith he did need

to make ambitious programmes succeed

It is you, it is you, it is you

For example, education free

Now cut back up there at UWI

National Insurance Scheme and no one supporting me

It is you, it is you, it is you

Other leaders emulate the Skipper of ship of State

Who made up their tireless crew

Taxpayer, It is you

It is you, it is you, Taxpayer, it is you

Verse 3

50th Anniversary, an affordable celebration

Of sacrifice and bravery, by the builders of this nation.

On faith and trust it was founded, pillars never to be shaken

And workers by whom it was grounded, should never be forsaken

Like an anniversary pardon, grant them a little gift

An ease in the tax burden, the nation’s spirit will lift

Who feeling the loss of spending power, though we didn’t devalue we dollar

It is we, it is we, it is we

Land, income, NIS and VAT,

tipping solid waste who absorbing that?

It is we, it is we, it is we

These questions for Ministers ask

Who paid pensioners in the past?

And this golden 7 mil and

10 percent members back pay bill?

It is we, It is we, It is we

50 Barbados who gine cheer

Hip pip… Hip hip hooray

And launch their 5 year Jubilee

Taxpayer, it is we, it is we, Taxpayer it is we

Calypsos and their lyrics have a way of capturing the essence of Bajans and so with these few words, I wish you and your family and very Happy Independence.

(Ryan Straughn is an UWI Cave Hill and Central Bank of Barbados-trained economist who is the endorsed Barbados Labour Party (BLP) candidate for Christ Church East Central at the next general election. Email: straughn.ryan@gmail.com)

Read More