By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The widening gap between benefit payouts and contribution income is an “urgent alert” for National Insurance Board (NIB) reform, a multilateral lender is warning, as it urges cuts in administrative costs.

The Inter-American Development Bank, in its latest Caribbean Quarterly Bulletin report, praised The Bahamas for seeking to place NIB and civil service pensions “on the right track” by implementing the initial stages of pension reform given the growing signals that the present circumstances for both are unsustainable.

In particular, it noted that prior to the 2008-2009 global financial crisis, NIB’s total contribution income from both employers and employees was equal to 1.05 percent of Bahamian economic output and outpaced benefits at 0.86 percent of gross domestic product (GDP).

However, the IDB report said the financial crisis represented an “inflection point” for the Bahamian social security system as annual benefits paid out have exceeded contribution income ever since. And the gap has been widening ever since, growing from 0.1 percent of GDP in 2010 to 0.15 percent of GDP in 2014 and 0.4 percent in 2019.

“In response to the COVID-19 pandemic, as expected, the gap increased further, reaching around 1 percent of GDP in 2020 and 2021,” the IDB document said. “Although the gap seems manageable, it poses an alert about the lack of sustainability of NIB and signals the urgency to adjust the scheme.

“This is relevant, considering not only that its sustainability will be further constrained by the compromising demographic trends, but also by the challenges inherent to the system characteristics.” The Government has already moved to start addressing NIB’s challenges by increasing the overall contribution rate by 1.5 percent with effect from July 1 this year, splitting the burden 50/50 between employer and employee.

The increases raise the employer and employee contributions by 0.75 percentage points each. The employer contribution will rise to 6.65 percent from the existing 5.9 percent, while that for employees will grow from 3.9 percent to 4.65 percent, as the total rate jumps to 11.3 percent.

But financial studies, known as actuarial reports, state this contribution rate is still too low to ensure NIB’s medium and long-term survival and prevent the $1.5bn reserve fund from being depleted in 2028 as predicted.

“An increase of the contribution rate by 2 percent (over the existing 9.8 percent) every two years starting on July 1, 2022, and ending on July 1, 2036, could restore the short and medium-term financial sustainability of the scheme,” the last NIB actuarial report said.

“Starting in 2029, the required annual contribution rate to pay for all expenditures becomes the pay-as-you-go (PAYG) rate. As an illustration, the contribution rate will have to increase from 9.8 per cent to 16.9 per cent in 2029, and will reach 32.3 per cent in 2078.”

This is further than the Government wants to go at present, with the next NIB rate increase decision due in 2026 based on the two-year cycle, which is likely to be a general election year. As a result, any further NIB rate rise decisions are likely to be deferred until after the general election.

The IDB report, meanwhile, recommended that The Bahamas’ tackle NIB’s relatively high administrative expenses which, at 24.37 percent of contribution income in 2021, are more than double all other Caribbean countries. The next highest, according to the sample, was Guyana at 9.61 percent of contribution income, while Barbados and Jamaica were at 5.63 percent and 3.94 percent, respectively.

“Higher administrative costs imply fewer resources available to pay out benefits. The Bahamas has the highest proportion of administrative expenditure as a share of contribution income at 24.37 percent, double the share in Guyana, which is the next highest,” the IDB study said.

“Caribbean pension funds are limited by (dis)economies of scale and, therefore, unfortunately, administrative costs are particularly high. While scale almost inevitably drives up administrative costs per beneficiary, data show that the degree of administrative efficiency varies substantially across Caribbean countries.”

Successive administrations, though, have always argued that The Bahamas unlike all other Caribbean nations is an archipelago with numerous populated islands. As a result, it has to replicate NIB and other government and public services on multiple islands, which drives up administrative costs. It is now focusing on technology as a means to reduce this.

However, NIB was found to have relatively generous pension payouts - standing at an average $297 per month - that are more than double what the IDB identified as the international poverty line. Only Barbados was shown as having a more generous social security system with its benefits as a percentage of the international poverty line standing at 149.6 percent compared to The Bahamas 106.1 percent.

“While payment levels in The Bahamas, Barbados and Guyana exceed the poverty line twice over, programmes in Jamaica and Suriname fall significantly below it. In Trinidad and Tobago, the Senior Citizens Programme provides a range of benefits that can go above or beyond the poverty line, since the benefit varies depending on existing sources of income of the prospective beneficiary,” the IDB report said.

“In terms of adequacy, the monthly benefits of social assistance pensions have consistently remained above the purchasing power parity (PPP) poverty line of $6.85 per day, as defined by the World Bank, which amounts to PPP $205.50 monthly,” it added of The Bahamas.

“Since 2003, monthly benefits in terms of 2017 PPP dollars have increased modestly from around 110.5 percent of the poverty line to around 115.1 percent in 2021, suffering a sharp decline the last couple of years to 105.8 percent in 2023. In terms of the share of benefits with respect to monthly GDP per capita, the trend is modestly upward, reaching 9.9 percent in 2023 versus 9.2 percent in 2003.”

Noting that NIB’s contribution rates do not support the relatively high income replacement rates offered to retirees, the IDB report said: “This has led to important shortfalls, which states that, all things being equal, NIB funds will be depleted by 2028. It also prompted the recent increase in contribution rates, which has reduced the need for budgetary transfers to make up for the difference.

“Using the average wage of a formal sector worker who contributes continuously to the pension system from the time of reaching working age until the minimum retirement age, replacement rates in The Bahamas are around 58 percent, which approximates the Caribbean median....

“In The Bahamas, the rate of decline in current support ratios still favors gradual implementation of reforms rather than abrupt adjustments. Having said that, timely action is still important. Regarding the increase in NIB contribution rates, according to its last actuarial review, achieving sustainability of the NIB would require that contribution rates continue increasing in the coming years.

“The proposed schedule for rate increases is 1.5 percent every two years over the next 20 years.”