The National Insurance Board estimates that more than 99,000 pensioners received $1.6 billion in “system” subsidies in its 2016 fiscal year and $10.7 billion in “top ups” in the 13 years between 2003 and 2016, the institution’s executive director Niala Persad-Poliah confirmed on Wednesday.
Persad-Poliah was clarifying remarks made by NIB’s actuarial manager, Feyaad Khan, at a seminar organised by the Chamber of Commerce on Monday.
In expanding on Khan’s comments, Persad-Poliah said: “At the end of fiscal year 2016, only 3,141 pensioners were in receipt of a retirement benefit in excess of $3,000. This was out of a total number of pensioners of 102,454 and thus accounted for approximately three per cent of all pensioners at that time.
“The remaining 97 per cent of pensioners earned a pension below $3,000 when their contribution history was applied to the pension formula. These 99,313 pensioners were then paid a “subsidy” or “top-up” from the system in order to meet the minimum pension requirement.”
The NIB executive director said if the subsidy for fiscal year 2016 was estimated at $1.6 billion and is included in the total long-term benefit expenditure of $4.2 billion, “this means that about 38 per cent of the system’s long-term benefit payments were as a result of “topping-up” 99,313 people who earned less than $3,000.”
She said that this subsidy was “a strong indication of the strain being placed on the system,” a point that was emphasised at the seminar, when it was noted that the NIB’s assets would be exhausted in 13 years if the National Insurance System (NIS) is not reformed.
Already, the NIB says the system’s expenditure exceeded its contributions in the 2013-2014 fiscal year with the NIB being kept afloat by the investment income from its $25.5 billion portfolio. The NIB’s realised investment income in 2016 was $1 billion.
But in his presentation, Khan estimated that the NIB’s total expenditure will exceed its contributions plus its investment income by the 2019-2020 fiscal year, at which point the national insurance provider will start to eat into its investment portfolio’s assets, if the system is not reformed.
Khan also noted that the NIB’s standard $3,000 per month pension represents 115 per cent of T&T’s minimum wage, while the international range is between 40 and 80 per cent of minimum wage of countries.
At the seminar NIB chairman Michael Toney said T&T’s increasingly ageing population has caused the cost of maintaining the National Insurance System (NIS) to balloon over the last 40 years.
Toney pointed out that a society is considered to be aging when at least 10 per cent of its population is over 60 years.
“In the case of T&T, the data indicate that in 1975, 7.5 per cent of the population were over age 60, by mid 2015 it had increased to 13 per cent. It almost doubled. The trend is clear as we are now an ageing society.”
Toney said this trend has impacted on NIB’s finances and he gave figures to show how payments over the last 40 years have jumped.
“In 1977 we were spending $2 million in retirement pensions, by 1987 this figure grew to over $69 million, in 1997 it was approximately $139 million. For the financial year ended June 30 2016, NIB paid approximately $4.2 billion to more than 135,000 long-term beneficiaries,” he said.
A steady rise
Toney said, according to NIB’s most recent actuarial review of the national insurance pension plan, retirement pensioners are projected to steadily increase in the future. For the sustainability of the system it is important to have an increasing number of people of working age and productive employment paying contributions.
He gave statistics to show that right now four working persons’ contributions support the pension of one pensioner.
“Given this aging society trend, it is estimated that in 50 years’ time, one pensioner’s pension will be supported by only one working person. Just think about the burden that will be transferred to future generations and what the typical person will be required to pay in contributions at that time to ensure the relevance of the National Insurance System.”
He said whenever the topic is brought up, people say that it is a worldwide problem.
“We all agree that it is a worldwide problem, but saying so does not solve the problem. It is one that we here in our space have to confront and resolve and we have to face the fundamental question as to the relevance of the NIS as it is presently configured in the light of this ageing population.”
He concluded: “The national insurance is truly national in its reach and affects and will affect everyone as long as we remain in T&T as an employer, an employee and other beneficiaries.”
Toney spoke on Monday at a seminar on pension reform as it relates to the NIS at the T&T Chamber of Industry and Commerce, Westmoorings.
According to information provided by Khan, the executive manager, actuarial services, NIB, “the old pension is $3,000 which represents 115 percent of the minimum wage; 97 per cent of existing pensioners receive a subsidy and the cost borne by employees and employers is 13.2 per cent vs 8.5 per cent.
Pensions in the economy
Economist Dr Ronald Ramkissoon—who spoke on the topic of the economic rationale for pension reform at the seminar—said pensions are important part of the social infrastructure of any modern economy.
“If we were to distinguish between a developing economy and a developed ones, then we would see how pensions in the developed world work.”
He said pensions help what economists call “consumption smoothing.”
“In effect, what this model seeks to do is to transfer consumption from the working age to your retirement years. Secondly, pension surplus insurance covers when people get ill, accidents, pregnancies and so on. So insurance manages uncertainties. Once there are uncertainties then pensions help mitigate some of the risks,” he said.
Ramkissoon added that pensions also help with income distribution as pensions can help to provide a supplementary income. Pensions also help with poverty alleviation as it provides social assistance and it can also encourage savings which spurs growth and development.
“So if pensions are important then it is important to ensure that the existing system is fit for its purpose. A pension system must be able to meet the objectives. We live in a dynamic world and must examine the existing pension system ever so often to ensure that the funds are appropriate.”
He also said that the national pension system should be outside of the reach of politicians so that ad hoc, economically ill advised decisions will not be made.
“We need to pay attention to reforms of automatic adjustments to ensure that we have a sustainable pension system.”
He referred to the conclusion of the 2013 actuarial review of the pension system which showed that the financial situation of the NIS has deteriorated.
“The general average premium of the scheme has increased from 17.6 to 23.8. On that account, major actions must be taken in order to restore the financial health of the system. The report also sees a marginal increase in the population decline in the future. This has an adverse impact on the labour force and the number of persons of pensionable age will grow.”
Ramkissoon described the findings of the 2013 actuarial review as “serious.”
“The fact that income from the mainstay of the economy, oil and gas have declined considerably means that our system needs to be reformed as quickly as possible. I agree that an adjustment should be made from age 60 to 65 for the retirement age. The truth is the situation at the present time is bad as the state of the NIS has come under increasing pressure. If nothing is done then the level of taxation is likely to be much higher as future adjustments are made, or people might get lower benefits when they are older,” he said.
He said pension reform must be considered as part of a cultural shift.
“There are too many that are unaware as to the importance of pensions and education should be made a priority by all relevant agencies. Can reforms of the system stimulate economic growth as in the case of some countries? Chile is one country that is very popular,” he said.
Ageing population costs
Mariano Browne, a former Finance Minister who also spoke at the seminar, said although T&T has an ageing population, no one has asked the question: what is the government’s capacity to maintain public healthcare?
He said government expenditure on healthcare is 5.9 per cent and if there is an aging population, it can be expected this figure spent on health to double in the next 20 years.
“If this is taking place and the level of healthcare is expected to increase then look at a hospital that is still to be opened. The country does not have staff and the income to fund it. The reality is in terms of recurrent expenditure we must talk of priorities and how we will allocate it. What are we not going to spend money on, to move money into healthcare.”
He said the problem is the government and their policy of budgeting for only one year is “putting the country in problems.”
He argues that budgeting should take a longer-term approach.
Browne like Ramkissoon believes that decisions to reform the pension system must be taken out of the hands of politicians.
“We should thank the founding fathers for putting into the legislation an actuarial review into the NIB. Because we are kicking the can down the road with the NIB and we are not making the necessary adjustments,” he said.