With all the concern over government’s “social nightmare” on pensions, it is time to seriously consider privatising The National Insurance Board (NIB) scheme. There are several reasons for doing so. The fact that the system is designed on the pay-as-you-go basis, government’s un-funded liabilities for future retirees and the lack of accountability all leap to mind as insurmountable problems.
The pay-as-you-go system uses contributions from current funds paid in to fund pension payments to people that have already retired. Little is invested to pay future retirees. What changes in this type of scheme is the number of workers making retirement payments relative to number of retirees receiving the retirement benefits…as the years pass the number of retirees that each worker supports increases steadily to the point that it becomes unbearable. Literally, the system becomes bankrupt. This is the reason for NIB executives warning that demands will outpace receipts by the year 2030 or before.
When the retirees, collecting a pension, out number the workers paying into the fund, an un-funded liability is created for the government, and by extension the Bahamian taxpayer. Accordingly, the governments promise to provide an NIB pension for the workers of the Bahamas becomes a burden for the rest of the country and there will be many disappointed Bahamians.
While the National Insurance Act requiring audited financial statements to be placed on the table at the House of Assembly is good for transparency, the manner in which the NIB fund is utilised should be opened up for debate. For example, should the NIB build buildings from these retirement funds for the government to rent?
Therefore, the current structure of the National Insurance scheme leaves it open to abuse by a cash starved government. Like Enron and other deviant corporations (who have now been made accountable), that got away with violating sound accounting principles for a period of time, the NIB could find themselves in a similar predicament in the future if they try to be “creative” with the way their piles of cash are invested when future retirees look for their “benefits”.
Where to now?
Privatisation of the NIB scheme seems inevitable. But the question is how should privatisation happen?
Some people, no matter how the evidence mounts that the government cannot manage money, would prefer to have the perceived comfort of the present scheme. So for these taxpayers, they should have the option to stay in the NIB program until it becomes bankrupt.
The many more, and growing community, that have lost faith in governments ability to provide for them, should have the opportunity to opt out of the NIB scheme and have their NIB contributions paid into their choice of private systems to ensure they at least receive the principal they paid in and any accrued interest.
Of course, this forces government’s hand to pay the un-funded liabilities today rather than in 2030 when there will be nothing left, and eventually there will be no more NIB scheme.
What are the benefits?
There are numerous benefits to an open privatised system of pensions. Individuals should be able to choose how they would prefer their money is managed. They could increase their portion of payments rather than a defined contribution like NIB is presently structured. They can continue with the present scheme, choose to invest through a trust deed with their employer, or utilise the services of a pension plan provider.
This also makes it easier for pension plan providers to sell the contributors that choose their services on the benefits of saving for their retirement rather than expecting government to force workers and employers to pay for the NIB scheme and a private plan.
The net result of this would be a free market system that allows Bahamians to provide for their future themselves rather than depending on governments that cannot live up to their promises.
The Nassau Institute