Close pension gap quickly

Paul Golding and Michael Nicholson, Guest Columnists

The controversial policy recommendation made by Senator Ruel Reid has prompted further analysis of the demographic changes outlined in the 2011 Population and Housing Census and its implications for economic growth.

Jamaica is experiencing what demographers refer to as demographic transition, an evolution from high to low levels of fertility and mortality. The census indicates that the population is increasing at an annual growth rate of only 0.36 per cent since 2001, and continues an annual reduction in growth since the 1970s. This fertility decline can be considered a success story of the National Family Planning Board, which launched the 'Two is better than too many' campaign in the 1970s, encouraging families to have no more than two children. The typical nuclear family size at the time was five. The life expectancy of Jamaicans in the 1970 was 64.6 years; it is currently 72.2 years and improving.

This transition creates conditions favourable for accelerated economic growth, referred to as a demographic dividend. Central to this view is the concept of age dependency. Age dependency compares the number of young persons (0-14 years old) and elderly (65 years and older) to those in the 15-64 age group. The theory is that the first two groups are expected to depend on the third group for economic support.

The census indicates that Jamaica's population structure is favourable for economic growth. Between 2001 and 2011, the number of persons in the under-15 age group declined by 136,000, while the under-four age group has declined by 63,000. In contrast, the older age group of 45-64 has increased by 127,000, or 36 per cent. The younger working-age group of 15-44 years has increased by more than 80,000 persons, representing 1.3 million, or 48 per cent of the population. This indicates that the proportion of the population in the working-age group has increased significantly.

Potential increase

Assuming fixed output per worker, labour-force participation rates, unemployment and an increase in the share of working-age population should lead to an increase in the output per capita. This increase in output per capita is the demographic dividend.

Andrew Mason of the University of Hawaii argues that the economies of Eastern and Southeastern Asia have provided compelling and consistent evidence that the demographic dividend was an important contributor to the region's economic success. He provided evidence that about one third of the region's increase in per-capita income was because of the demographic dividend.

Based on Jamaica's current population age structure, there is a temporary window of low age dependency that is favourable for economic development. The economic outcome from this change in population structure is not deterministic, but policy dependent. Within the policy focus should be improvements in formal education outputs, managing the education system to build social capital, improving social mobility, creating employment, and forging social cohesion.

As mentioned earlier, the older working-age group, 45-64, has increased by 127,000, or 36 per cent since 2001. Among other things, this suggests that the population is also ageing, and this trend will also have implications for development. The main risk when one reaches old age is poverty or income insecurity owing to the loss of one's ability to earn income. Protection against this possibility was one of, if not, the main justification for establishing pensions. Jamaica must, therefore, ensure that there is adequate pension coverage for its ageing population. This will require pension reform.

Pension reform is not a light matter, and we're glad that recent governments, of both stripes, have recognised this. Parliament passed a series of acts that have cumulatively led to a much more structured and properly regulated sector.

The Financial Services Commission Act 2001 provided for the establishment of a body to regulate and supervise non-deposit-taking financial services providers. The Pensions (Superannuation Funds and Retirement Schemes) Act 2004 made provision for the governance of a number of areas of superannuation funds and retirement schemes. It addressed regulation and approval of these arrangements, the licensing of administrators and responsible officers, fit-and-proper criteria, and solvency standards. Regulations 2006, also passed in Parliament, covered registration, licensing, and reporting procedures, as well as governance and investment standards. There can be little doubt that, as a direct result of these legislative moves, pension schemes and funds are better regulated than before.

Preparing for retirement

Notwithstanding these developments, there must be much concern about the preparedness of the general population for life after retirement. Estimates vary as to the extent of coverage of the workforce by these various pension arrangements. Available figures (2009) suggest that private-sector pension schemes cover about 60,000 employees and public-sector arrangements cover about 180,000. From a workforce of about 1.3 million, it is easy to see the dimensions of the problem.

Roughly 20 per cent of Jamaican employees are included in any pension arrangements. As bad as this is, the reality is even worse. The Society of Actuaries found that more than 50 per cent of pensions are below the minimum wage and "virtually all" are fixed pensions, with no formal arrangements for increases. Any increases granted are of an ad hoc nature. The implications of small, fixed pensions in a high-inflation environment are clear.

A great deal of work is to be done to increase the proportion of the Jamaican workforce covered by pension arrangements. Even the National Insurance Scheme (NIS), established in 1966 to provide basic pension benefits to a wide cross section of Jamaicans, has resulted in only about 30 per cent of people over 60 years old qualifying to receive an NIS pension.

That Jamaica has made much progress in this matter must be recognised. That much more needs to be done, as a matter of priority, is also clear. There must be urgent efforts to broaden and widen employees' access to pension arrangements.

Creative designs and instruments must be developed to make it possible for small and medium-size businesses to set up pension schemes. Individual retirement plans must be designed to attract those of more modest incomes than that which currently obtains.

There is another side to this issue than simply reducing the dependence of the aged on the State and on family. Pension funds could strengthen the economy by providing a large pool of funds for long-term investment and capital market development. Even at the current low level of employee participation, pension funds currently hold approximately $300 billion under management. This is a substantial sum, and in the nature of things, is long-term money. The value of this kind of money in financing viable projects is obvious and is already being used in that way by public-sector entities like the National Insurance Fund, as well as private companies.

Paul Golding is dean of the College of Business and Management, UTech. Michael Nicholson is lecturer in business administration at UTech. Email feedback to columns@gleanerjm.com.