The Tribune

• Social security fund slumps from over $1.7bn to $1.544bn

• Unemployment and short-term benefits tripled in pandemic

• While contribution income plunged by 21% or over $50m

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A $190m deficit blow-out triggered by COVID-19 resulted in the National Insurance Board’s reserves slumping to $1.54bn at year-end 2020, it can be revealed.

Draft 2020 financial statements, which have been obtained by Tribune Business, for the first time reveal the extent of the damage inflicted by the pandemic on The Bahamas’ national social security scheme which was already struggling in its worsening battle for long-term viability.

NIB’s reserve fund shrank by almost 11 percent, or nearly $189m, in just 12 months as it was forced to liquidate investments to meet unemployment payouts and other forms of COVID-related assistance when the Bahamian economy collapsed virtually overnight.

The figures reveal that short-term benefits payouts, which would have included NIB’s 13-week unemployment assistance initiative, more than tripled year-over-year - increasing by 209 percent from $41.868m in 2021 to $129.84m - due to the scale of terminations and furloughs sparked by COVID-19 lockdowns and other restrictions.

As a result, total benefits expenditure soared to $405.876m for the 12 months to end-December 2020, representing a 30.2 percent year-over-year jump from 2019’s $311.64m, with the increase driven almost entirely by unemployment and other short-term relief payouts.

And the benefits surge coincided with a 21.3 percent plunge in NIB’s contribution income from employers and their workers, which declined by more than $51m from $287.131m in 2019 to $225.984m the following year. Monies received from employers dropped by almost 20 percent, falling from $166.986m to $134.075m in 2020, while contributions from the self-employed fell by close to 22 percent. They plummeted from $116.11m in 2019 to $90.994m.

Investment income, too, was impacted by the pandemic’s impact on both local and international securities valuations. This fell by close to 39 percent year-over-year, dropping from $68.484m to $41.949m. Acting on instructions from the Central Bank, NIB was requested to liquidate and repatriate overseas investments to boost the nation’s foreign currency reserves as tourism inflows dried up, and the accounts reveal it sold-off some $51.421m in US treasuries.

The combined effect of the contribution and investment income decline, plus soaring benefits payouts, which were both products of the COVID pandemic, was to produce a record $189.5m NIB deficit. This measures by how much the social security system’s benefits payments exceed its income, and the 2020 deficit was more than 22 times’ greater than the prior year’s $8.482m.

NIB was forced to use its reserve fund to cover this deficit, resulting in a corresponding reduction from $1.733bn at year-end 2019 to $1.544bn just 12 months later. While multiple actuarial reports going back two decades have repeatedly warned that major reforms are critical to rescuing NIB, and shoring up its long-term sustainability, the COVID-induced blow-out has likely made this task even more urgent while increasing the amount of work required.

The scheme’s latest 11th actuarial report, tabled in the House of Assembly yesterday, aligned with the 2020 draft management accounts by forecasting that NIB was likely to run a combined $276m deficit over the three years between 2019 and 2021. With the deficits for 2019 and 2020 pegged at $8.842m and $189.5m respectively, and NIB last week revealing that 2021’s was $70m, that makes for a combined $268.342m.

“The cumulative deficit (total income minus total expenditures) over the period 2019 to 2021 is expected to be $276m, exacerbating the continuous decrease of the reserve,” the report asserted.

It affirmed that unemployment benefits payouts hit a record high of $108m in 2020 at COVID’s peak. Besides diverting monies away from funding pensions payouts, the report said the financial damage inflicted by the pandemic has also hiked the near-term contribution rate increase to ensure NIB can meet all expenditure obligations.

“The amount of unemployment benefits paid in 2020 is historically high at $108m when compared to the average annual unemployment benefits paid at $12m over the period 2014 to 2019,” the report, produced by the International Labour Organisation (ILO), said. “Since more contributions are needed to finance the short-term benefits branch this means less contributions to finance the pension branch.....

“The required contribution rate to pay all expenditures of all branches during the next 60 years is 22.55 percent. Higher unemployment benefits paid in 2020 due to the severe contraction of GDP because of the COVID-19 pandemic increases the required contribution rate to 23.05 percent from 2019 to 2023.” That rate, the NIB actuarial report said, fall back to the long-term 22.55 percent from 2024 onwards.

NIB’s reserve fund is now forecast to be exhausted one year earlier than previously projected, in 2028 as opposed to 2029, and the report recommended that the Government focus on shoring up the social security system’s short-term viability through “adequately financing” its pensions arm which represents longer-term benefits. This drove the recommendation to increase NIB’s contribution rate by two percentage points to 11.8 percent by July 1.

Further contribution rate increases, to be implemented every two years through to July 1, 2036, “could restore the short and medium-term financial sustainability of the scheme”. However, the 11th actuarial report warned that the contribution rate achieved by 2036 - even if its recommendation was to be adopted - would “likely not be sufficient” to address NIB’s long-term viability.

NIB’s present contribution rate is 9.8 percent, split 3.9 percent/5.9 percent between employee and employer, with the latter paying the majority. The 11th actuarial report is recommending that this rate increases by 72.4 percent, in percentage terms, in the near-term to 16.9 percent by 2029 before more than doubling over the long-term.

Any rate hikes, especially of such magnitude, besides increasing business costs will also cut into employee take-home pay and disposable income just when they are facing heightened inflation. However, 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.

Myles Laroda, the minister of state with responsibility for NIB, affirmed the grim outlook in addressing the House of Assembly yesterday. He confirmed that NIB is increasingly using its reserves to pay benefits since total payouts have exceeded the combined value of contribution and investment income for every year since 2016.

“The reserves for the pensions branch will be exhausted in 2028, one year earlier than in previous actuarial reviews,” the minister warned. “Immediate actions are needed to not only restore the long-term sustainability of the scheme but, most importantly, the short-term.

“A significant increase in contribution rates from 9.8 percent to 16.9 percent would be required to pay the full expenditure in 2029. The required contribution rate to pay all expenditure for all branches during the next 60 branches, ie up to 2078, is 22.55 percent..... The need to adequately finance the pension branch in order to make the scheme sustainable over the short-term, that should start now.”

NIB’s draft 2020 financial statements, meanwhile, show that is owed ever-increasing sums by the Government (meaning Bahamian taxpayers). They reveal that the Minnis administration, between January 5 and April 19, 2021, issued three separate promissory notes in NIB’s favour pledging to reimburse it a combined $72.4m.

The first, issued on January 5, was for $38m to cover monies paid by NIB with respect to the Chronic Diseases Prescription Drug programme. The latter two, worth $15m and $19.4m, were to cover redemption of an Education Loan Authority bond that matured in 2020 and NIB making payments on the Government’s behalf for the latter’s own COVID unemployment assistance initiative.