The recent announcement by the IMF states that Barbados is in line for reform to it’s pension system. With drastically reduced revenue intake due to Covid-19, the expenditure associated with pensions , gratuity and retirement benefits will of course take the spotlight .
The intended pension reform is preparing government for the reality of an ageing population, declining birthrate, declining workforce which will be further depressed by further digitization of the public service and by extension agreed retrenchments under the BERT plan along with high youth unemployment in the public sector. As government now seeks to prioritize limited revenue, funds will be redirected to other areas in order to free up revenue . The amount of funds will be determined by the depth of the cut to the pension budget.
The budgeted expenditure for financial year 2020 is $298 million. The expenditure for 2021 is $335 million and projected total for 2022 is $369 million which suggests that pension expenditure is increasing $36 million on average yearly. Such a rapid increase in spending will pose financial challenges to government especially in this environment. Any intention to maintain this level of expenditure will result in more borrowing or increases in taxation.
To curb these economic and social challenges posed ahead the following measures are likely to face Barbadians from a legislative angle via bills of parliament which may be amended to match IMF’s fiscal affairs policies on pension reform.
- An increase in the retirement age across all pension schemes which will decrease outpayment from government while linking the retirement to average life expectancy.
- Limiting retirement benefits for highly paid civil servants which may come in the form of reduced direct contribution now to save output later. The reduction maybe recouped through an increase in contribution on other groups.
- An end to specific offerings e.g non-contributory pension as it should be noted the IMF is on record stating that such schemes are programs poorly targeted at poverty alleviation.
- New entrants will face strict regulations as it relates to digital payments only, increased contribution rates, increased penalties on early retirement.
- The NIS will be restructured from the board level to revamp its operations i.e relaxed regulation to allow the fund to invest in riskier financial options in order to increase financial rewards. Increased payment of NIS contributions are likely and a legal restriction on buying government paper similar to the restrictions the central bank has on printing money. Although funded by private citizens any strains on the fund as seen with unemployment claims will expose government to financial liability The main aim of amendments to the NIS act will be to protect government from being shouldered with debt from the institution which will starve off a potential crisis when payments of financial obligations to vulnerable groups become due.
The social implications are grave to bear with the BERT plan in place. As a new Barbados will emerge with less state responsibility to its citizens.