Biting the Bullet

Social Security

As a country seeking to transition to developed-nation status, it is incumbent on us to bring resolution to key issues that continue to impede Trinidad and Tobago’s development. These challenges are broad based, affecting the economy, government’s finances and social security, to name a few. We have known for a long time that we must move to address these issues, but only seem motivated to do so when tough economic times bring them into sharper focus. As such, there have been many initiatives announced, several started, but very little follow through. When it comes to bringing rectitude to these failings, the general approach has been to kick the proverbial can down the road. Today, I begin a series titled “Biting the Bullet”, where I intend to highlight some of these issues.The first matter I will deal with is the state of the National Insurance System (NIS).

The tenth actuarial review of the NIS, conducted in 2016 indicated that if no changes are made to the way it operates, the assets of the National Insurance Board (NIB) will be depleted by 2036. Since 2013, the benefits paid from the system exceeded the contributions made. To fund the shortfall, some of the income generated by NIB’s investment fund has been used to pay benefits. It is worth noting that 23 benefits are paid from the NIS, including pensions, disability grants and maternity benefits. Given the important social protection the system provides, mechanisms must be put in place to significantly enhanceits long-term viability.

The actuarial review recommends an increase inthe contribution rate of employers and workers to the NIS from 13.2 percent to 16.2 percent, starting in July 2019. This increase is expected to push back the date of depletion for NIB’s assets to 2043. To ensure that depletion does not occur over the next 50 years, the rate of contribution is required to increase to 25.5 percent. It was also recommended that the minimum monthly pension of $3,000 be frozen for the next nine years or until pensions equal 80 percent of the minimum wage. Currently, minimum pensions from the NIS equals 115 percent of the minimum wage, whereas the international norm is for it to average between 40-80 percent. The freeze will help to protect the system from additional pressure and bring pension payments closer to international standards. Finally, the review indicated that the retirement age should be increased to 65, with the application of reduction factors for persons taking early retirement. In particular, the report suggests that the minimum pension should be reduced by 6 percent for every year before age 65 a person chooses to retire.

The NIB has indicated its intension to gradually increase the retirement age from 60 to 65 over a ten-year period starting in 2025. Individuals will still be allowed to retire at age 60. However, the appropriate reduction factor will be applied to the pensions of those individuals who chose to retire below 65 years. If the contribution rate is also increased to 16.2 percent and the freeze is adopted, the year of depletion is expected to be pushed back to 2054.

Admittedly, there are quite a few countries now facing similar challenges with their social security programmes. As a result, the situation in Trinidad and Tobago is by no means a new phenomenon.Additionally, it will be extremely naive to think that the recommendations presented in the actuarial review can be implemented without significant difficulty or sacrifice. Not all the recommendations are new. For example, the need to increase the contribution rate was highlighted before. However, with the increasing demands placed on NIB’s investment fund, the urgency of the situation cannot be overstated. Although the authorities have acknowledged the need to act, it remains to be seen how quickly and to what extent initiatives are implemented to significantly enhance the long-term viability of the NIS. What we all should bear in mind, is that the longer we take to rectify the problem, the more drastic the policy adjustments that will be needed. That is, the longer we delay, the greater will be the pain in the future. Considering the need to consult with key stakeholders such as the labour movement, the reform process is likely to be complicated and lengthy, so let’s get to it.