In an earlier article, I raised the issue of whether Social Security could be self-regulating and suggested that there are certain triggers or co-efficients that could indicate a need for and set the level of self adjustment that is required. I identified three such triggers: The coefficient between the ceiling and average insurable wages, the co-efficient between pensionable age and life expectancy and the reserve to expenditure ratio. This article presents my arguments.
The first issue targets the wage ceiling on insurable wages. It stands at $6,500.00 per month. That is to say, persons who earn over EC$6,500 per month do not pay regular social security dues (5% + 5% + 1%) on the amount higher than EC$6,500.00 (they pay increased levy, however). This amount was last set in 1998 rising then from $70,200.00 per annum at the last adjustment.
When this was done, the differential between the ceiling and average insured wages was 3.1 That is to say, we the working poor were getting, on average a third of what the best paid people were paying contributions on (not what they were working for!) Average insurable wages has moved over the years – thank God – and as of 2005, the differential stood at 2.7, and it is continuing to decline. My educated guess is that it was about 2 in 2007.
One way of looking at this is that the wages have increased, but the more realistic explanation is that the ceiling has not moved as average wages have increased. In the glory days of Social Security, we enjoyed a factor of 3.5! Against this background, I suggest that whenever the data shows catch up at the lower level, then there should automatically be movement at the ceiling level in order to keep the floor to roof space.
I would therefore suggest that when and if our ratio falls below 2.5, then the ceiling should automatically adjust and by a factor that would restore it to at least 3. Furthermore, as an increasing percentage of the working population is earning wages higher than EC$6,500.00 per month, this movement would help strengthen the solidarity and universality principles of Social Security. This, then is my first trigger: an average insurable wage to ceiling ratio of 3.
My second trigger deals with pension age. Worldwide, pensionable age varies, but in the Caribbean it ranges from 60 to 67 years. When ours was set at 62, life expectancy was lower than the 75 years that it is now. Pension payments exhaust contributions and accumulated interest within 7.5 years, rounded to 10 years. Since life expectancy is 75 and “accounts” are exhausted within 10 years, then it does little harm to re-set the pensionable age over time, to 65 years.
I am sure that this will generate much discussion, and much of it will be centered on the rightness or wrongness of a possible pensionable age, as has been suggested to us, of three score years and ten! Nor is this to suggest that after 10 years, pension payments should cease. Trigger number 2 is therefore pensionable age vs life expectancy.
Interestingly, we are not the only ones grappling with this situation. On a CNN television programme of March 28, 2008, a commentator stated that American pensioners are receiving pensions for 19 years beyond the pensionable age; are 85% better off than they were 20 years before, and indicated how unsustainable this situation is.
The third trigger is the reserve to expenditure ratio. This is a measure of how many years the Fund would be able to honour claims if everything is frozen in time. No more contributions made, no more benefits approved – just payments of existing benefits and costs. Currently the reserve to expenditure ratio stands around 20 and is declining, down from 27 five years ago.
When Barbados underwent reform of its Social Security, their ratio had fallen to 5. By the year 2011, when ours is projected to fall to around 15, then it will be time to restore it to 20 by whatever adjustments would become necessary. Thus, the reserve expenditure trigger would be 20. I will leave the details of this aspect to people who are smarter than I am.
The number of contributors per pensioner is another trigger that ought to be considered. Over the years, this has fallen to a ratio in 2005 of 7 contributors to each pensioner, down from 11 to 1 in 2002. We expect by now that it is in the range of 5 to 1. All I can say to this one is to repeat the Biblical admonition to citizens and residents of the Federation to ‘go out and multiply’. Experts state that we need 2.1 children per reproductive couple in order to sustain and grow our population. We are way below that mark. Enough said!
And then there is the return on investments. It is a strong argument, that if we were to obtain higher returns on our investments that the Fund would be healthier. It is a fact that there are investments that yield higher returns than the average 6.5% that the Fund is attracting now. When the inflation rate is applied, we see a real rate of return hovering around 2.5 to 3%. If we collectively set a benchmark of a real rate of return of 4% (as indicated in the 7th Actuarial report as the rate which we should target), then it makes the case for placing more of our assets in high yielding investments. Such investments are almost exclusively available on the external market. While it is up to the Investment experts and the Economists to work out the exact details, as a Manager, I would want to invest more in high yielding instruments when I see a real rate of return less than 4%. I remind readers that the law now restricts external investments to 1% of existing assets. That may not be enough.
I have presented five triggers. Are there any others that you would like to share? Then e-mail us at ssb.reform@socialsecurity.kn or call us at (869) 465 2535/469 5245 or write us at P.O. Box 79, Basseterre, St. Kitts. Or visit our offices at Chapel Street, Nevis or Bay Road, Basseterre between 8:30 a.m. – 4:15 p.m.
On Wednesday April 16 our committee will hold meetings in St Kitts at the St Johnston Community Center and the Sandy Point High School and in Nevis at the Pond Hill Community Center and the Combermere Methodist Church. Come to one of these meetings and share. It is your duty to do so.
Country above self!
