By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The underfunding of The Bahamas' public sector pensions "poses a serious long-term challenge" because these liabilities are collectively larger than this nation's economy.

The Inter-American Development Bank (IDB), in latest Caribbean Quarterly Bulletin, warned that the Government's National Insurance Board (NIB), civil service and state-owned enterprises (SOE) retiree commitments collectively equal 160 percent of Bahamian gross domestic product (GDP).

This means their total value is greater than annual Bahamian economic output, and the IDB report warned their underfunding is set to be exacerbated as the ratio of retirees to workers increases as persons live longer.

"Current pension liabilities appear to pose a serious long-term challenge," it said. "Liabilities for government pensions, which include coverage for public entities and social security commitments, are roughly 160 percent of GDP, and some agencies, including the International Monetary Fund (IMF), indicate those commitments are currently underfunded.

"There appears a strong need for a contributory scheme to ease the burden that will soon be exacerbated as the retirement population grows to 41.6 per 100 workers by 2060... Work is needed on reforming the public servants pension system and restricting any further escalation of the contingent liabilities of state-owned enterprises."

The report echoes previous warnings by both the IMF and IDB, each expressing concern over The Bahamas' growing social and retirement "ticking timebomb" as a result of chronic under-funding for both NIB and civil service pensions.

The IDB, in its 2018-2022 country strategy with The Bahamas, earlier this year called for NIB contribution rates to more than double to over 20 percent to prevent a long-term Bahamian pension crisis.

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.

Besides NIB, the IMF's 2018 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 added 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.

The IDB's Caribbean Quarterly Bulletin, meanwhile, said "low social returns" were acting as a drag on Bahamian economic growth by creating "human capital deficiencies" as a result of low educational achievement.

"Despite significant per capita spending levels in education and health, The Bahamas continues to struggle with high levels of students of both genders who leave school without diplomas or certifications," the report said. "With rising education failure rates, especially among males, there is the indication of a beginning of a structural deficiency within the labour market.

"The country is impacted by low social returns and appropriability due to a large and inefficient government sector and a private sector weakened by an inadequately trained workforce, operating within a vast geographic expanse of islands and cays with weakened infrastructure.

"The archipelago does have access to international finance, albeit with a weaker sovereign credit rating. Historically, however, the high cost of financing, along with elevated unemployment rates (especially among youth), have further weakened domestic consumption and demand."

Assessing the challenges facing the business community, the IDB report added: "The private sector faces challenges in the form of high energy costs and frequent power outages, financing access and rising costs, and low research and development expenditure.

"Limited infrastructure quality (air and maritime connectivity), poor public services (road network and transportation services), weak protection of minority investors and property rights, rising crime and violence, and low levels of coordination between the Government and the private sector to develop industries that encourage diversification and sophistication have all diminished the country's ability to mitigate its dependence on exogenous factors and improve factor productivity.

"The Bahamas needs to develop a framework and programmes that encourage economic incentives for diversification and intra-linkages, as well as the respective institutional capacity to implement them. Policy interventions that aid private sector growth by improving the business environment would go a long way towards placing The Bahamas on a higher growth trajectory."