EDITORIAL - An unsustainable pension scheme

Four years ago, the Jamaican Government paid out $12 billion in pensions. By the end of this fiscal year, that figure will have jumped by two-thirds, to $20 billion.  The pension obligation is additional to the Government's wage bill of approximately $134 billion, which is subject to so much scrutiny, particularly from the International Monetary Fund (IMF).

But like the wage bill, the Government's pension scheme is unsustainable in its current form. Unfortunately, perhaps because it is not publicly known to be in the scope of the IMF, pension reform has not been attended sufficient attention. Yet, the pension obligation is a significant contributor to the country's deepening crisis of debt.

First, no one here suggests that Jamaican government pensioners guffaw all the way to the bank and are able to live high on the hog. Indeed, the 28,000 on the books, on average, receive $29,000 a month.

But the figures mask deep structural problems with the pension scheme that will cause either a further ballooning of the country's debt, already at $1.6 trillion - and rising - or the long-term collapse of the scheme. Or, both.

Government employees retire at age 60 and are part of a guaranteed benefit scheme, which pays a prescribed pension based on their years of service and their salaries. Unlike employees in the private sector, most government workers do not contribute to their future pensions. For the handful who do, mainly to ensure benefits to their spouses and underage children, their contributions go directly to the Consolidated Fund. There is no segregated, invested fund from which the pension is paid.

Finance with borrowings

Put another way, the Government's pension bill is a direct charge on the Budget, which the Government has to finance with borrowings. For instance, the last fiscal year, debt servicing of $230.5 billion accounted for approximately three-quarters of the $314.5 billion collected in taxes and grants, leaving a mere $84 billion, or a third of the wage bill, to cover all the Government's other expenses.

There are other problems regarding the pension scheme, including the fact that people are living longer. The average worker who retires now from a government job is likely to receive pension for another 20 years. Moreover, given the age profile of the public sector, about a fifth of the employees will be eligible for pension in the next decade, and nearly 60 per cent over the next 35 years.

Indeed, over the next decade, the Government's implied pension debt will move from the current 36 per cent of gross domestic product to more than 50 per cent. At the same time, most people who retire from the Government - more than 5,000 are eligible this fiscal year - exercise their option to take a substantial chunk of their pension, placing added burden on a stressed Budget. Further, if those who retire this year all opted for the cash, the payment would be $4.8 billion.

Other countries in similar circumstances have acknowledged this situation cannot continue. It demands a suite of reforms, including, among other things, moving to a contributory scheme and an increase in the retirement age.

Our political leaders have to frank about the issues and engage in serious dialogue about how to manage the change.