Under pressure: Bermuda’s pension system looks increasingly unstable
There is consensus that vulnerable people in society need to be taken care of. This is true for children, people with disabilities and the elderly.
This principle is why Bermuda has a basic pension, funded through the Contributory Pension Fund, which guarantees the vast majority of retirees a secure, albeit limited, income.
In a society as wealthy as Bermuda, it would be morally indefensible to have destitute and desperate elderly people. It’s also pragmatic – financially secure older people are essential to the functioning of a society. And it also makes economic sense. Retirees who can pay themselves keep the economy moving and people working.
There is therefore no real debate on the need to have a well-funded and thought out pension system.
But there are questions about how it should be funded, what level of support people should have, and how much people should be individually responsible for their own financial security.
Some countries like Singapore have systems where almost all the responsibility lies with the individual and the employer through a forced savings system.
At the other extreme, there are countries where pensions are provided entirely by the state, augmented by progressive taxes on society as a whole.
The Bermuda pension system has two main parts. One is the private pension system made mandatory in the late 1990s whereby all employers were required to have a pension scheme in which employers and employees contribute a total of 10 percent of a employed by matching donations. This was to be the retiree’s main pension. Civil servants have another pension fund, which works slightly differently.
The second pillar is the Contributory Pension Fund, which was created in the 1970s. Employers and employees each contribute a fixed amount, and the retiree receives between $1,100 and $1,600 per month, depending on the frequency of his retirement. contributions. This pension has always been designed as a complement to the main pension and individual savings, other forms of income or family support.
This system is increasingly shaky and unstable. More than a decade of economic stagnation, government decisions to allow the looting of existing pension funds and the suspension of payments and the unstoppable push of an aging population are creating a real storm.
The CPF was set up as a “pay-as-you-go” fund, which means that it started paying pensions long before those pensions were fully funded. All was well in the early years, when contributions were much higher than benefits, and the fund also received occasional top-ups from government budget surpluses to offset anticipated deficits.
Government budget surpluses will be a foreign concept to young readers, and anyway the system has always been flawed given the changing demographics of the island.
As with health insurance, the system has benefited from a large number of young workers who are becoming increasingly rare. At the same time, the number of retirements is increasing considerably. The number of people aged 65 or over is expected to peak in 2045.
Until then, if nothing changes in the meantime, there will be no contributory pension fund. It should be exhausted by 2044, according to the latest actuarial report. So someone who is 43 today will have paid into the fund for their entire working life and will have nothing to show for it.
Something has to change. Several generations of politicians have known this and, with a few notable exceptions, have done nothing.
One solution proposed in the actuarial report released in February was to raise the retirement age to 70. It makes a lot of sense. Many people now in their 50s will not be able to afford to retire anyway, especially if they have made the government authorized withdrawals from their pensions. Advances in health mean they are also physically and mentally able to carry on much longer than their elders when the retirement age was arbitrarily set at 65.
According to the report, this will extend the life of the fund until 2070. If contributions were regularly increased by 4% more than benefits, the fund would last even longer.
David Burt, the Prime Minister and Minister of Finance, did not address the retirement age when discussing the CPF last Friday. He announced that benefits would be increased by 2.5%, in line with Progressive Labor Party election promises.
Given the precarious state of the CPF, it would have been reasonable and normal to expect Mr. Burt to increase contributions at the same time, and preferably by an amount greater than the increase in benefits, thus reinforcing the bottom.
He did not do so, saying instead that the method of funding the CPF will be changed in the next budget.
Noting that the government said four years ago it would change payments to the CPF from a block grant to a grant based on a percentage of income, he said: ‘As such, the historic and unfair system which sees a CEO earning $400,000 a year paying the same amount, in dues, that a worker earning $40,000 a year cannot and will not continue.
“Social insurance contributions based on a percentage of income is not a concept unique to Bermuda, as it has been implemented in many other countries around the world, including the UK over 45 years ago. . This change will increase the take-home pay of low-income workers, while ensuring the sustainability of our pension fund for future generations.
Maybe it’s okay for someone who for some reason got a high income to pay more in dollars, so that someone who for some reason earns a lot less can get exactly the same same pension when they both retire. There will be those who will disagree, but that is democracy. Whether the $400,000 CEO will think that’s fair and whether he’ll decide if he wants to continue working in Bermuda is another matter.
However, this does not, in itself, solve the problem of ensuring the solvency of the CPF, or that the CPF alone is insufficient for retirement.
Raising the retirement age helps to some extent in this respect and should be reconsidered.
But the real problem is that the whole system is fundamentally flawed.
When the actuarial review of the CPF was first made public in February, the pension reform committee together with high-level consultants were tasked with reviewing the CPF and the civil servants’ pension fund, which are in a similar situation. It would make sense for them to take a closer look at the whole pension situation.
They must answer certain fundamental questions, such as:
What level of basic income should retirees have?
What funding is needed to achieve this?
To what extent should individuals be responsible for their own retirement and to what extent should it be left to society as a whole?
To what extent should they be legally compelled to take personal responsibility?
It would also make sense for them to look at other systems, including Singapore’s.
There are no contributory pension funds in Singapore. Instead, all employees must join a central pension fund to which they must pay a percentage of their earnings. Employers must also contribute a slightly higher amount.
This system, introduced in the 1950s, is surprisingly successful. Not only can seniors count on a subsistence pension, but they can use their savings to cover their health care and, in some cases, buy a house.
There is also a supplemental support system for the small minority who have not been able to earn enough to build up a subsistence pension.
At first glance, the amount of contributions might seem nasty at 17 percent of employee income and 20 percent coming from the employer, although it should be noted that there is a cap on income.
And it is essential to note that Singapore’s economy has been one of the most prosperous in the world for decades. Whether that’s because of its all-out approach to capitalism or its location at the heart of the Asian economic miracle is debatable.
But there should be no doubt that having a growing economy and a government committed to establishing the conditions that allow for economic growth are essential to the success of any pension scheme and should be the top priority of the Bermuda government.
Mr. Burt has opened the debate on this issue, and that is to be welcomed. But the debate should be much broader and more comprehensive than a simplistic appeal to squeeze the rich.