Aging population and retirement planning
Poor health typically results in high health-care expenses which can consume a high proportion of a retiree’s pension income

INCOME security comes with a certain level of social stability and so many describe it as the core of social protection. Jamaica is experiencing an ageing population as fertility and mortality rates have decreased.

Stuart South, an actuary at Employee Benefits Administrator Ltd, commented that, while people are living longer, we are seeing greater incidence of obesity and other lifestyle diseases, such as diabetes and hypertension, especially at younger ages. He explained that these underlying trends are more concerning to him as they signal that the population is becoming unhealthier, and even though there are improvments in some areas, regression is seen in others. “This poses a serious problem in retirement as poor health typically results in high health-care expenses which can consume a high proportion of a retiree’s pension income, thereby reducing overall pensions adequacy,” he said.

But the adequacy of the National Insurance Scheme (NIS) is being challenged.

A 2016 actuarial report projected that, without reform, the National Insurance Fund (NIF) would be completely depleted by the year 2037. To improve the sustainability of the fund the Cabinet decided in 2018 to gradually increase the contribution rate by 0.5 per cent each year until it got to 6 per cent in April 2020. A decision was also made to increase the national insurable wage ceiling to $3 million per annum in 2021 and $5 million per annum in 2022. The insurable wage ceiling refers to the maximum amount of gross income assessed to calculate NIS deductions.

Easton Williams, senior director for social policy planning and research at the Planning Institute of Jamaica (PIOJ), said, “We consider the National Insurance Scheme to be that minimum level of guarantee, but the occupational pension, whether you are working in the public or private sector or self-employed, in terms of other private pensionary arrangements, we consider very critical for income security.”

He further added, “If you don’t have that minimum guaranteed pension from NIS, then you can imagine just how vulnerably you can become.”

The ageing of our population caused concerns and led to the initiation of pension reforms in Jamaica.

“A decrease in fertility means that there will be a smaller pool of working age Jamaicans available to pay taxes to the NIS. While at the same time, if morality rates are decreasing, it means that older Jamaicans who are receiving benefits are expected to do so for a much longer time. Taken together, these trends increase the burden for current and future Jamaicans in the workforce as they will be required to pay higher taxes to ensure that the benefits of the NIS can be met,” South commented.

Dr Nigel Clarke, however, pointed out that of a working population of just under 1.3 million only under half a million Jamaicans are enrolled in the NIS.

But everyone’s experience and realities with NIS is different.

Fifty-four-year-old Kurdel Maxwell, a self-employed construction worker, recalled a time when he was an active contributor to the NIS, but said he stopped making contributions when the company he was employed to ceased operations. He explained that the reason he did not continue to contribute to the scheme was because he thought going to the NIS office and having to wait long periods was inconvenient and inefficient.

“But I regret not continuing to contribute [be]cause when I see my friend getting NIS pension now, I say to myself, ‘I should’ve still been contributing so that when I reach that age I can be on that train.’ Now, I’m not sure if I will be.”

Annie Cox has been a seamstress all her working life and has always been a contributor to the NIS. However, she said, “While I was working at this sewing company, I used to get a slip on pay day showing me all the money they withdrew. After a few years of working there, my mother, from experience, asked me if I knew for sure that they were handing over the money that they drew out of my pay, I told her no.”

Cox said her mother went to the NIS office to check and found that the money was being paid, but the payments stopped two years before that check was made. After this experience, Cox made it her point of duty to pay her NIS contributions herself.

Constance Hall, an actuary, is of the view that the NIS is a “properly funded” system. “We collect contributions, we invest contributions, and the way the scheme is being run, the intention is that the monies collected and invested should pay the pension for the people who become pensionable, provided they contribute the correct amount based on the actuarial studies.”

Hall expressed that in a private sector pension scheme there is a fund, that fund is invested, and the expectation is that even if along the way the company went out of business and there are no more employees, because they had built up that fund and that fund was invested, they would be able to continue to pay the pensioners from the fund. Hall further explains that she only worries about two things:

1) Pitching the contribution rate at a correct level

2) Ensuring that the money is invested properly and is held for the pension

She stressed that, if the invested money is not syphoned or spent for anything other than the insurance scheme, the decline in population should not mean people will not get the returns.

Notwithstanding, South highlighted that private pension schemes will most likely be impacted by improvements in life expectancy since the cost of benefits at retirement will increase if people are living longer. He elucidated that for employers with defined benefit plans, increases in life expectancy will increase the employer’s required contributions and/or trigger a more aggressive investment policy in order to offset the higher benefit costs. In addition, for individuals in defined contribution plans, increases in life expectancy will likely decrease their expected pension benefits since insurers will likely charge higher premiums to cover the increasing costs of providing annuities.

In a defined benefit plan, pensions are calculated using a formula, and payable pension is set and usually stable; however, in a defined contribution plan the amount received for pension is dependent on the amount contributed and the returns on that investment.

Despite the negative impacts caused by decreases in fertility and mortality rates, South believes that low pension coverage and persistently high inflation are broadly greater issues for Jamaica’s local pension system.

Inflation decreases the purchasing power of money. Since April 2018, there has been an increase in payable pensions. For the old age benefit category, the half rate increased from $1,400 to $1,700 weekly. In November 2018, the Statistical Institute of Jamaica reported an inflation rate of 4.1 per cent; however, in May 2022 the inflation rate was reported to be 10.9 per cent. The basket of goods that could be bought with $1,700 in 2018 would cost more in 2022.

There are several factors to consider simultaneously if Jamaica is to effectively manage the issue of income security and all the other implications of an ageing population.

“The policy response is to ensure that more and more persons entering the age group of the retired have passive income that comes from pension entitlements; that is, they’re not working but they’re receiving an income from pensions, and if they’re receiving an income from pensions then the Government, out of its revenue base, would not have to divert revenue to support. That is why policies that enhances the attractiveness of pensions as a savings mechanism are so important,” Clarke said in the interview.

One such way that the Government is attempting to enhance the attractiveness of pensions is by proposing reforms to allow for the portability of pensions, meaning that an individual changing jobs can transfer their pension to another fund.

Of the approximately 1.3 million people in the workforce, about 1.2 million are employed to the private sector. The pension coverage in the Jamaican private pensions industry has been increasing gradually over the years. The Financial Services Commission (FSC) in the Private Pension Industry Statistics reported that from December 2018 to March 2021 there have been an increase in coverage from 9.55 per cent to 11.56 per cent. The first of its kind, the Tourism Workers Pension Scheme (TWPS) that the Minister of Tourism Edmund Bartlett piloted through Parliament was officially launched in January 2022 and is expected to increase the private sector pension coverage ratio substantially, according to Clarke.

Among the recommendations from South was that the Government could consider implementing policies aimed at improving overall socio-economic conditions and financial literacy in the population. These initiatives would help adults to improve their financial planning at all life stages and provide greater incentives for couples to have children without significant detriment to their economic prospects.

But Clarke emphasised that the changes are happening slowly, over time, which gives Jamaica the opportunity to align its policies for saving and pensions to ride out the demographic change in a way that is compatible with the changes in technology and benefits Jamaica.

BY BRIANNA PALMER Observer intern

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