Pension deficit

Demographic challenges threaten the sustainability of national pension schemes in the Caribbean.

National insurance schemes in the Caribbean are expected to run significant deficits as a result of population ageing, slow economic growth and high unemployment in the region.

An executive at a regional private sector insurance firm confirmed, “The pressure is on the medium term. The ageing population is just one reason why social security systems in the Caribbean need reforming. Other pressures stem from the maturing of existing systems, increasing deficits and design problems that sometimes create perverse incentives.”

A senior manager at a state pension fund in the Caribbean confirmed. “There is a general overall concern about ageing populations and declining fertility but there are also economic problems: fewer people are working so the demand for state benefits its growing.”

“There is a general overall concern about population ageing and declining fertility but there are also economic problems.”

Senior manager, state pension fund, Caribbean

Earlier this month, the Inter-American Development Bank (“IDB”) warned that demographic changes posed the most immediate threat to pension schemes in the region. Moises Schwartz, head of the institutions for Development unit of the IDB warned that by 2050, adults aged 65 and older could constitute 20% of the population in the region, compared to the present 9%.

Most governments in the region have hardly addressed demographic challenges. Notably, the UN International Organisation for Migration considers the Caribbean the largest and most highly skilled diaspora in the world, with a significant amount of well-educated young population migrating to the US and Europe. The World Bank claims that regional states can address their demographic challenges by catalysing market investment opportunities, setting up solid regulatory frameworks to attract investment, engaging with diaspora communities to channel investments and facilitating mechanisms to provide investors with fast-track opportunities.

The state pension fund manager also agreed that more had to be done to stimulate migration, “There needs to be consideration of the migration policy. We need to encourage people to stay here and come here so they can work and increase the contributory base. We also have to look at creating higher earnings jobs, tourism is great but it attracts lower-paying jobs that place a burden on the social insurance system.”

Many regional systems have also been undergoing reforms, as the insurance firm executive described, “Barbados has begun reforming its pension system including several actions that have reduced the life value of the defined benefit programme. These include an increase in the contribution rate and increase in the retirement age.”

The IDB called on Caribbean governments to implement policy changes focused on reducing poverty, boosting economic growth, safeguarding financial institutions and public finance management as a structural strategy to reduce the burden imposed on pension funds.

Some have advocated for smaller states to centralise pension administration, according to a former economic advisor to several governments in the region, “Small and emerging economies should consider adopting a regional system in which centralised regulation and administration would reduce costs. Each country could adopt basic parameters to fits its fiscal and demographic realities but the structure of the national pension systems would be common and coordinated.”

“Small and emerging economies should consider adopting a regional system in which centralised regulation and administration would reduce costs.”

Former economic advisor to several Caribbean governments

The insurance executive saw the benefit in such a proposal but had some concerns, “A regional supervisory entity would promote efficiency and independence and reduce political interference in pension regulation that is common in politically volatile emerging economies. However, the creation of a regional authority should not be seen as an alternative to strengthening financial market regulation and supervision at the country level.”

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