By Elvin Bailey
“I don’t believe there is a problem looming with Social Security!”
“You have not convinced me! How can you know that all that money could finish by 2050?”
These were some of the comments emanating from the audience at the public consultation that was held in Nevis on Wednesday 23rd January at the Cultural Center, Low Street.
And that is exactly the point. Because there is a lot of money (EC$900 million at December 2007, unaudited), and because the erosive drift is so small, very few can grasp the enormity of the problem. But advanced warnings are never well received. Look at Noah!
Mr. Derek Osborne, Actuary to the Social Security Board warned in the 7th and the 8th Actuarial Studies that there is a problem ahead and strongly recommended that, as a preparatory measure, members and managers of the Fund must begin to prepare now for the challenges ahead. Those challenges stem from a number of factors, not least of which are the demographic factors. But economic, social and cultural factors also combine to challenge the secure future of Social Security. This article examines the impact of demographic factors; future articles will examine other aspects.
Otto von Bismarck first introduced Social Security in Germany in 1889 when, even though life expectancy was approximately 45 years, pension age was set at 60+ years. As such, not many persons would have qualified for old age pensions. In the early years in St Kitts and Nevis, as life expectancy increased, insured persons have been receiving their lifetime contributions plus employer’s portion within 7 years of attaining retirement, and some pensioners have begun to draw from the larger pool that is made up of everybody’s money. If life expectancy continues along this path of longevity – and we expect that it will – then a pensioner will be drawing out of the fund for up to 18 years! That is, today’s 7 year old child, on becoming a pensioner, will be drawing the equivalent of 3 of today’s pensioners. This climb is already happening: the average amount paid to new pensioners in 2003 was about $850.00 per month. By 2006, the average pension amount rose to $1,000.00 per month. In other words, a higher average monthly pension is paid at each age compared to the previous year.
When Social Security started in 1978, almost every one was a contributor, or put another way, there were over 40 contributors for every pensioner. This and the fact that pensioners could not yet qualify for maximum pension, allowed the Institution time to build up reserves. Compare that situation with that of 2007 when there were only seven contributors per pensioner, and pensioners are qualifying for up to 90% of their maximum pension. This means that Social Security will not be able to accumulate reserves as it used to. In fact, between 2000 and 2005, Social Security experienced a reduction in its reserves from a factor of 27 to a factor of 23; and, projections are that by 2035, it will reach a one contributor per pensioner ratio, and will no longer be able to build reserves. This is not a fairy tale – Barbados’ reserves fell to a single digit factor at one time and the USA continues to seek ways to rebuild its reserves. Persons who are 27 year olds and younger (born in 1981) should take particular note of this statistic as they will be most affected!
Add to the mix the queue for pensions. According to the Annual Report for 2006 of the St Christopher and Nevis Social Security Board, published in January 2008, there were 1,642 pensioners in payment for that year. What the report did not show is that by year 2011, an additional 760 persons will qualify for pension, by year 2016 we expect another 1,470 will mature, and by the year 2021, we can expect another 2,400 to attain age 62. Notice the acceleration in each 5 year term! 700, 1400, 2400… With a low mortality rate and better health care, these pensioners will be with us for a long time.
Only death can separate an insured person from his or her pension; and we have often heard the defence, given by contributors, that they may not live to draw pension. In the 5 year period 2002 to 2006, 617 persons became pensioners and for the corresponding period, 321 pensioners died, a net gain of 296 persons.
On the inflow side, new entrants as monitored by registration information, have been fairly steady, hovering between 1,200 and 1,600 per year, between 2002 and 2006. What is especially significant about these new contributors is that more than half have of them are young people between 16 and 19 years old. Their contribution, of necessity, starts small and takes a working lifetime to build up.
An aging population, increasing life expectancy, steady registration comes together as is presented in the chart following. The graph encapsulates how the forces of population come together from 1993 to present and projects to 2015. The number of persons in the age range 10 – 29 years is declining as are persons 0 – 9 years old; while those 30 to 49 years and those aged 50 and over are increasing. The steepest increase is in the middle-age group, 30 to 49 years. Records at Social Security list those between 50 and 61 years at 3,101, those aged between 30 and 49 at 11, 998. There is no complete data on persons younger than 16 years old.
But even as expressions of disbelief were stated by some members of the audience, others offered solutions to the problem. One such suggestion: adjust the pension age upwards in three stages; no move for those within sight of the pension (those over 50), a mid range move for those between ages 30 – 50 and a further adjustment for persons under 30 years old.
The issues of Social Security Reform are never simple, but together we are confident that we can find critical solutions to address these problems. Therefore, we would like to hear from you on this or any other relevant issue. Send us your comments at email@example.com; call us at 465 2535 or 469 5245, fax us at 465 5053 or 4691046; write us or visit us at the Bay Road, Basseterre or Chapel Street, Charlestown. Alternately, contact any member of the Reform Committee.
Members of the committee are Llewellyn ‘Duke’ Parris, Oscar Walters, Mrs. Adina Taylor, Mrs. Dianne Dunrod-Francis, Ms. Patricia Claxton, Eugene Hamilton, Damion Hobson, Carlyle James, Ambassador Ms. Roslyn Hazelle and (newly appointed) Clifford Thomas.