By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The National Insurance Board’s (NIB) unfunded pension liabilities, equivalent to almost 50 per cent of Bahamian GDP, represent a “major fiscal risk” that demands at least a 5.4 per cent increase in contribution rates.

The stark warning was contained in an International Monetary Fund (IMF) working paper, released yesterday, which said that a combination of reforms, such as increasing the retirement age, a two-year pension benefit freeze, and 1 per cent contribution rate rise, would be insufficient to eliminate a multi-billion dollar funding gap.

“For countries with relatively large unfunded pension liabilities (Antigua and Barbuda, the Bahamas, Belize, Jamaica, and St Vincent and the Grenadines), these measures will not be sufficient to address the actuarial deficits, despite having quite a large benefit in reducing pension costs,” the IMF paper warned.

“Furthermore, these countries would have to implement far-reaching structural reforms or risk even higher taxes, lower growth and unsustainable debt dynamics.”

The paper, entitled ‘National Insurance scheme reforms in the Caribbean’, said implementation of its three proposed reforms would produce a significant reduction in NIB’s unfunded pension liabilities - from a figure equivalent to 49 per cent of GDP, to 7.6 per cent.

But, based on current Bahamian GDP numbers, the latter still represents a sum of more than $600 million, which the Government (and Bahamian taxpayer) may ultimately be required to cover.

To completely eliminate NIB’s unfunded pension liabilities, the working paper estimated that a retirement age increase and two-year benefit freeze needed to be accompanied by a 5.4 percentage point rise in NIB contribution rates.

This would involve increasing NIB’s contribution rates to 16.2 per cent, compared to the current 10.8 per cent, split 4.4/6.4 between employees and employers, representing a significant drag on take-home pay and businesses.

The IMF paper gives a clear insight into both the scale and urgency of the social security reform task awaiting successive Bahamian governments between now and 2029, the year that NIB’s existing $1.7 billion reserve fund is projected to become exhausted.

Drawing on its own estimates and the Bahamas’ own figures, the paper projected that NIB’s total expenditure in 2030, of some $1.466 billion, would be almost five times’ greater than its $322 million income. For 2050, it forecasts that NIB expenditure will be $3.346 billion, and income just $608 million, without far-reaching structural reforms.

None of the ‘NIB sustainability’ concerns expressed in the IMF paper are necessarily new, but they highlight how successive Bahamian governments have elected to ‘kick the can down the road’ when it comes to changes that will ensure the survival of the nation’s social security system.

Hurricane Matthew’s impact is likely to further postpone talk on reforms to address a ticking social and economic ‘timebomb’ for the Bahamas, which is also linked to the Government’s unfunded public sector (civil service) pension liabilities.

The KPMG accounting firm previously warned that the growing $1.5 billion unfunded public sector pension liability would become unsustainable within 10 years, and hit $4.1 billion by 2032, if no action was taken.

While NIB’s issues are separate from this, both are connected, as the IMF warns that unfunded pension liabilities now represent a “major fiscal risk” to the Bahamas, which is already struggling with a $6.695 billion national debt, equivalent to almost 75 per cent of GDP.

Both NIB and the public sector pension liabilities are not included in national debt calculations, but the IMF paper warned: “Since fiscal positions are already over-stretched, and public debt-to-GDP ratios are very high in the region, these [social security] contingent liabilities are major sources of fiscal risk.

“In several cases, failure to disclose and prepare for contingent liabilities has led to large increases in public debt and triggered fiscal crisis. In other words, countries with both large debt-to-GDP ratios and unfunded pension schemes need to implement far-reaching pension reforms now or risk even higher taxes, lower growth and unsustainable public debt dynamics.”

The warning to the Christie administration could not be clearer, and the IMF suggested that the first step in addressing this risk was “disclosure of information” - meaning greater transparency and accountability.

“Given the large fiscal risk associated with pension schemes in the Caribbean, it is good practice that governments adhere to... codes of international best practice,” the IMF working paper added.

It said unfavourable demographics, such as falling birth rates and an ageing population, would exacerbate the issues - and need for reform - at NIB and other Caribbean social security schemes.

The IMF paper also suggested that the Bahamas required a 10 percentage point contribution rate increase if no other reforms were enacted, the second highest rise in the region behind St Vincent & the Grenadines.

It estimated that containing pension eligibility, by increasing the retirement age from 65 to 67, would save NIB a sum equivalent to 5.3 per cent of GDP over the five years between 2016 and 2021.

And a two-year freeze on pension spending would save a sum equivalent to 3.2 per cent of GDP over the same period.

The IMF paper also noted NIB’s relatively high administrative costs, something that is common to the region, given the limited ability to obtain economies of scale.

“In the Bahamas, for example, one–quarter of contributions is used to run the NIB, and staffing costs constitute around 70 per cent of administration expenses, mostly reflecting the scheme’s relatively large role, staff size, and the difficulties of rendering social services on all the islands,” the paper added.

“The Bahamas NIB has 579 employees in up to 20 locations across the country, and performs numerous functions, including registration, collection of contributions and the administration of various benefits. It will begin registration of beneficiaries under the soon-to-be launched government’s National Health Insurance.”