A Caribbean conundrum

Caribbean countries try to balance the cost of pensions

Pensions cost a lot of money and in countries where fiscal policy is already stretched, mandarins often lose sleep at night pondering how this most pressing of financial obligations will be met. In the Caribbean where administrations are faced with a milieu of challenges including chronic underinvestment in infrastructure and a need to diversify economies away from an over-reliance on commodities exports, servicing pensions poses a very real threat to fiscal stability. Indeed, the Inter-American Development Bank recently published a report which highlighted that pension expenses could erode governments’ ability to provide other relevant services to the population.  

We spoke to a senior manager at a regional private sector insurance firm which specialises in pension funds, “There will be a lot of pressure in the medium-term, i.e., 10 or 15 years from now, on Caribbean countries’ fiscal accounts in order to provide pension payments. Adults aged 65 years and older would constitute 20% of the population of Caribbean countries by 2050 or before, as opposed to the 19% we observe today. So, population ageing will certainly put pension schemes in the Caribbean under increased pressure in the coming years. The ageing population is not the only reason for pressures to reform social security systems.” 

“There will be a lot of pressure in the medium-term, i.e., 10 or 15 years from now, on Caribbean countries’ fiscal accounts in order to provide pension payments.”

Manager, regional insurance firm, the Caribbean

Countries across the region are facing the reality of steep declines in GDP if public pension expenditures remain constant. This will leave little leftover to be spent on health and particularly education where investment levels are among the lowest in the Americas.  

Of course, the Caribbean is not economically homogenous and in larger, more diversified, and more globally integrated economies there is scope for more ambitious reforms. On this, the senior manager at the private sector insurance firm commented, “In Trinidad and Tobago, a number of reforms were put in place in October 2003 and March 2004. Although the defined benefit system was kept, coverage was increased. The minimum retirement pension was raised, and wage ceilings were increased by 25% so that approximately 80% of wages were covered.”  

He continued, “Small emerging economies should consider adopting a regional system in which a centralised regulatory or administrative mechanism would reduce costs through economies of scale—which typically are quite low in small emerging economies. Under such a structure each country would adopt basic pension parameters to fit its fiscal and demographic realities. Each country would also design and manage its own tax collection system. But the structure of national pension systems would be common across countries and coordinated by a regional body.”

Small emerging economies should consider adopting a regional system in which a centralised regulatory or administrative mechanism would reduce costs through economies of scale.”

Manager, regional insurance firm, the Caribbean

It remains to be seen whether administrations in the region will be willing to take bold steps which may be difficult to sell to the electorate. For example, having a more liberal approach towards investment – removing caps on foreign investment would be a good start – would go some way to alleviating fiscal pressures. Other ambitious options abound – these include increasing the retirement age due to the rising life expectancy rate and reducing minimum defined pensions. Getting such policies approved in legislatures across the region however will be another battle entirely.

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