Editorial | Clarke must report on pension debt model

When Finance Minister Nigel Clarke does his major economic review at Budget time next month, he should also provide an analysis of the public-sector pensions system, including the implied debt associated thereto.

Dr Clarke may even consider reopening the conversation on the merits of the continuation of a defined-benefit scheme, for which the Government opted when it modified the plan more than two and half years ago.

The Government’s pension debt, that is, its obligation to former employees from the time of their retirement to their deaths, doesn’t show up as a contingent liability on its regular fiscal accounts. Yet, it was a burden that, as many other countries that were forced to reform their pension arrangements, was clearly becoming unsustainable.

Indeed, a decade ago, when Jamaica began to seriously look at the weight of its obligation to government retirees, the implied pension debt – what it owed current pensioners and would owe future retirees – was estimated at 36 per cent of gross domestic product (GDP) and was projected to reach around half of the national output in the mid-2020s. By 2075, the implied debt would be heading towards 60 per cent of GDP.

The administration’s solution, codified in the 2017 amendments to the public sector pension law, was to incrementally increase the age at which Government employees retire, from 60 to 65. That five-year transition is to end in 2023.

Additionally, government workers, most of whom paid nothing, would contribute five per cent of their salaries to an investible pension fund, starting at a rate of 2.5 per cent and reaching the cap in 2019. The Government would also contribute to the fund, in an amount agreed by the administration.

However, unlike the pension schemes that are increasingly the norm in the private sector, where people’s pensions largely depend on the performance of the investment fund, in this one the workers are guaranteed a specific benefit. If the fund does badly, and isn’t able to meet its obligation, the shortfall “shall be charged on and paid out of the Consolidated Fund”. In other words, taxpayers will foot the bill.

NO PENSION FUND IN PLACE

Policymakers don’t expect any such thing to happen. The fund will be able, in time, to meet the pension payments, projected at J$38 billion this fiscal year to March, and close to J$40 billion in 2020-2021. Indeed, by the estimates of the Government’s analysts, based on a Green Paper published in 2011, under the model it chose, at no time would the implied debt go beyond 50 per cent of GDP. And by 2075, the pension debt would be no more than a third, and declining, of the national output.

There is a small catch, though. While government employees have begun contributing to the scheme, there is no pension fund in place. That’s because the law says one shouldn’t be established until the debt-to-GDP ratio, now at 97 per cent, falls to 60 per cent. That is projected to happen by 2025-2026, or in five years.

The assumption, it seems, is that the burden on the Government of paying current pensions, while at the same time putting aside cash for future obligations, would be too great, given the existing fiscal circumstances. That will become easier when there is greater fiscal space. In the meantime, the pay-as-you-go regime would remain in place, at least partially.

That, however, doesn’t mean Minister Clarke can’t update the public on any work being done in preparation of the fund, as well as report on how much has, thus far, been deducted from the salaries of employees, and what, if that cash had invested in, say, a private pension scheme, might have been the return, to date.

On this basis, he might also indicate how well the Government’s pension debt model and assumption are standing up.