The Tribune

• ‘Radical reform’ required after ‘can kicking’

• Initial contribution hike of up to 2% points

• 2029 exhaustion forecast two decades ago

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas cannot “let the National Insurance Board (NIB) go broke”, top business executives warned yesterday, with financial analysts asserting: “You cannot kick the can down the road any further.”

Larry Gibson, chief operating officer of CG Atlantic Pensions, who has long advocated for comprehensive pension and social security reform in The Bahamas, told Tribune Business that without “radical reform” businesses and workers will be faced with contribution rate hikes “every three to four years” to maintain NIB’s long-term sustainability.

“What happens is when the can is against the wall, you cannot kick it any further,” he said. “You have to deal with it, and like so many things we’ve ignored and kicked it down the road and it’s somebody else’s problem to deal with. There’s a time when that ‘somebody else’s problem’ sits squarely in your lap and becomes a problem.

“It’s absolutely no surprise whatsoever, and if there isn’t radical change, radical reform, you’re going to see it [rate rises] every three to four years for a while. This is a combination of things that have been in the works for years. We knew it had to be reset, and what we’re finding is that the time between resets is getting shorter and shorter.”

Multiple contribution rate increases are precisely what could be coming. Myles Laroda, minister of state in the Prime Minister’s Office with responsibility for NIB, yesterday said the just-completed 11th actuarial review had recommended a contribution rate increase of between 1.5-2 percent that could come as early as this year depending on whether the Davis administration agrees to implement it.

And this will not be a one-time rate increase, as the minister warned Bahamians to brace for “numerous increases” over several years in a bid to shore up NIB’s $1.6bn reserve fund which, according to the actuarial review’s projections, will be completely exhausted by 2028 - just six years away.

“Yes,” Mr Laroda responded, when asked if an NIB contribution rate increase could be implemented this year. “I will temper that by saying we have not voted on that yet [in Cabinet], but a decision is being prepared and I would not be surprised if that happens for the mere fact we are in this unsustainable position.”

Asked about the magnitude of the rate increase, the minister replied: “Anywhere from 1.5-2 percent [points]...annually, bi-annually. For a period of time. So it is not just going to be one. You can expect numerous increases. That hasn’t been decided yet but, to be fair, an increase is coming soon.” Such an increase would take the total contribution rate to between 11.3 percent and 11.8 percent.

NIB’s present reality was predicted more than two decades by its seventh actuarial review, completed in 2001, which forecast that “reserves are projected to become exhausted” by 2029 if comprehensive reforms are not implemented to address the fundamental problem of benefit payouts exceeding contribution income. The recipient of that review, which was only one year out, on September 11, 2002, was then-NIB chairman and now-Prime Minister, Philip Davis QC.

Now, with just six years left to the NIB Fund’s total depletion, the magnitude of the correction will be that much more severe for businesses and workers already grappling with surging inflation, COVID recovery, rising gas prices and a potential minimum wage increase. Private sector executives described the prospect of NIB contribution hikes as a “double” or even “quadruple whammy” for a business community still fighting for “survival.

Yet there was also an acknowledgement that NIB cannot be allowed to fail, given that for thousands of Bahamians it represents a key source of retirement savings (pensions) while also ensuring that others remain above the poverty line through the provision of unemployment, sickness, industrial accident, maternity and death/funeral benefits.

Agreeing that the social security system’s importance to wider Bahamian society cannot be ignored, Sir Franklyn Wilson, the Sunshine Holdings and Arawak Homes chairman, told Tribune Business: “The question about kicking the can down the road is an absolutely true statement. I’ve heard that said by at least one prior minister of NIB. Successive ministers have run that entity in way that raises questions about the level of payroll, the number of people, the investment policy....

“In this climate, any rate increase is not a good time given where business is. All we can do is hope and pray the minister holds off for as long as he can, but as a social security system we cannot let it go broke.”

Sir Franklyn said Mr Laroda’s comments were tantamount to advocating for a contribution rate increase, adding: “He’s already talked to his Cabinet colleagues to get them in a frame of mind to vote yes. The point I’m making is that any cost increase in this climate is not good, whatever form it takes is not good, but we cannot let NIB go broke. That’s the consequence.”

Asked what the fall-out would be if this occurred, Sir Franklyn replied: “Oh my God. That’s too difficult to imagine. We cannot let NIB go broke. The pensioners, all the people that depend on that, that’s something we don’t want to imagine.”

Peter Goudie, the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) labour division head, agreed that this nation “has no choice” but to rescue NIB given the dire social and economic ramifications if it were to fail.

“The timing is awful but I don’t think they have a choice,” he said of the Government. “No one has ever wanted to deal with it. To some people, NIB is the only pension they’re going to have. If that runs out, they’re in trouble. I know it’s going to be difficult for everybody, bad timing for everybody, but this country has been putting it off for far too long. For years and years, it has been putting reform off.

“That’s no different that the unfunded civil service pension liabilities. We’ve been putting it off for years. We can’t keep kicking the can down the road for ever. I just don’t think we have any choice. It’s most unfortunate, and bad timing. It’s got to happen otherwise we’re all in trouble, and everything and everyone will be hurt.” 

With a minimum wage increase also in the pipeline, Mr Goudie said an NIB contribution hike will be akin to “a double whammy” for many businesses at a time when they are also dealing with supply chain woes, surging inflation, COVID recovery and rising gas prices. “We knew this was coming,” he added of NIB. “It has to come, or you’re going to have an awful lot of people not getting a pension.”

NIB contributions, which take the form of a payroll tax, are currently split 3.9 percent/5.9 percent between employee and employer, respectively. They have seen only one increase this century, when the combined rate rose from 8.8 percent to the present 9.8 percent in 2010. Any new rate hikes, besides increasing business costs, will also cut into employee take-home pay and disposable income just when they are facing heightened inflation.

Mr Laroda did not break down the recommended 1.5-2 percent increase between employer and employee, although he said the $1.6bn NIB reserve fund’s depletion has been hastened by a year between completion of the 10th and 11th actuarial reviews. He added that the “issue” facing NIB is that contributions have exceeded benefit payouts for the past six years.

NIB’s 2017 annual report, the last to be publicly disclosed, revealed that the year’s $277.5m contributions were exceeded by $286.5m in benefit payouts. The same occurred the previous year, when $275.2m in benefits overshadowed $261.2m in contributions. NIB’s income only remained positive as a result of earnings on its investment portfolio.

Mr Laroda yesterday described this as “unsustainable”, and added: “The reality is that NIB has been running deficits for the past six years. So this pre-dated COVID. The can was kicked down the road too many times. From the fund was established, there’s been one rate increase, from 8.8 percent to 9.8 percent in 2010. If we take all that has been going on, we are where we are.”

With the 11th actuarial report and reform recommendations shared with his Cabinet colleagues, the minister added: “We have tough decisions to make, and we are prepared to make those tough decisions. We are talking about tens of thousands of NIB individuals (beneficiaries) who have contributed, some of them for decades, and it would be a shame for those who have paid in not to be able to receive their benefits. We are prepared, willing and able to address these concerns.”

Mr Gibson yesterday suggested that the Government may seek to raise NIB’s current $710 per week wage ceiling as a means to gain increased contribution income from higher earners. He added that NIB’s issues also related to the fact that The Bahamas has an increasingly elderly population that is living longer, but which is supported by a workforce whose growth has failed to keep pace, meaning that the ratio of retired persons versus active is growing.

The Inter-American Development Bank (IDB) reported in 2018 that NIB contribution rates must more than double to over 20 percent to prevent a long-term Bahamian pension crisis. It projected that the Government’s total pension liabilities - including those owed to the civil service and public corporation workers - will ultimately grow to 160 percent of GDP.

Pointing out that all Government pension commitments are “underfunded”, the IDB’s 2018-2022 strategy said eliminating this deficit will require NIB contribution rates to rise from the present 9.8 percent to 20.3 percent.

“Beyond the medium term, pension liabilities for which the Government is directly responsible - including social security commitments, pensions and public entity pensions - amount to 160 percent of GDP and are underfunded,” the IDB said. “Fully funding these pensions would require increasing the social security payroll tax from 9.8 percent to 20.3 per cent - a 107 per cent increase.

“Pension liabilities are also projected to increase faster as a percentage of GDP in the Bahamas compared to the United States by 2060, reaching 41.6 retired Bahamians per 100 workers (from a current 1:10 ratio) compared to 36.8 per 100 workers in the United States,” the IDB country strategy said.