As part of our preparation for understanding Social Security operations and as part of our study in preparation for reform, the Reform Committee took a look at different pension systems and how they operate.” Let us now extend that discussion to our readers. Here in the Federation, we operate a defined benefit system. That is, we have made a promise to you about what your benefits will be and the legislated formulae under which you will receive those benefits.” There is no gratuity.” Such a system is a partially funded, pay as you go, scaled premium paid system.” This means that no one pays the full cost of any benefit and that the length of your entitlement is limited only by the duration of the condition that gave rise to the payment in the first place.” That is why age pensions are paid for life, and why you can receive short term benefits for as long as you currently can. As such, your benefit is not truly dependent on how much you have put into the system. There is also a defined contribution system whereby the focus is on the amount of premium that is paid and there is no fixed promise for benefit payments. Such a system allows tracking of individual accounts, and allows exhaustion of these accounts. In theory, when ever the funds are exhausted, the system has no further obligation to the individual. This is the type of social insurance against which an individual can borrow and may actually bequeath benefits to particular persons.” It is this type that is ultra-sensitive to the vagaries of the financial markets. Both of these pension systems can also be tiered.” Tiered” pension systems can have up to” three pillars: a statewide pension that offers basic coverage as a poverty alleviation measure, a funded system whereby both employer and employees contribute jointly and a saving and insurance pillar which is usually voluntarily funded by the individual. The concept for the first or public pillar is to provide a minimum amount that is linked to the poverty line and is means tested.” This is very similar to our “welfare” programme where people who are determined to be in need but have no entitlement to a pension may be granted a monthly payment of EC$210.00. The second pillar is intended to boost financial market development and capital accumulation, ensure the actuarial costing of benefits, reduce the pressure on the public first pillar and take the form of personal saving or employer related plans.” This, for St Kitts and Nevis equates to the statutory pension from Social Security. The third pillar is voluntary occupational and or a personal savings plan. This may be particularly attractive to persons because it is against this plan that loans are allowable.” Some are also attracted to this because it allows them to top up their pension to a level that is closer to what their working lifestyle allows them to enjoy. The concept of tiered is different to what I will call a “parallel” pension that some persons enjoy.” To my mind the fundamental difference between tiered and parallel pensions is that the former anticipates a capping towards a total figure while the latter runs totally independent of each other. The former is a summation while the latter is mutually exclusive. I recall the heated debate at one of our reform meetings when the pension rights of civil servants was raised.”” Civil servants, the argument went, can earn 67% of their wages as an occupational pension and still earn 60% of EC$6,500.00 as their Social Security pension.” In other words, a civil servant, upon reaching age 62, can potentially earn more than he was earning before he attained age 62.”” This is parallelism.” This situation is not unique to civil servants: anyone whose workplace offers an occupational pension becomes so entitled (maybe not at the 67% rate).” However, private sector occupational pensions are often contributory while that of the Government is not for the time being. Parallelism becomes even more interesting as it applies to persons, who by virtue of their employment profile have earned multiple occupational pensions along with the Social Security Pension. Some countries have dealt with this situation of “overfunding” by combining the pensions to a predetermined maximum. Others have made them mutually exclusive. For example, if a person retires from the job before the state’s pension age is attained, then that person would receive the occupational pension until the statutory age is attained when either the state pension then kicks in or the occupational pension continues, whichever is higher ” or some combination of the two.” Of course, this is only possible where the pensioner is a retired public servant and where there was no co-payment. On the recent course that I attended in Cuba, one presenter noted that they have a tiered defined contribution system, and that they are moving towards a 50% overall pension replacement rate of which half would be derived from their social security and the other half from a voluntary tier.” Of course he was quick to point out that this is coupled with a strong state welfare component.” That caught my attention, and it should catch yours too. We should do all in our power to avoid ever having to reach such a situation.
