Recently we were told by one government commission that national health insurance was on the way (but no-one said how much it would cost).
Now another panel says National Insurance payroll taxes must be raised and benefits expanded.
And we can also look forward to a major overhaul of our entire tax system, which you can be sure will be handcrafted to extract as much as possible from those of us who actually pay.
Income tax originated in England as an emergency measure during the Napoleonic wars. And social security dates to the 1880s when Germany provided the first contributory insurance for workers.
By the early 20th century, taxation came to be seen as a way of supporting the welfare of the people. Old-age pensions were introduced in Britain in 1908, and universal contributory pensions implemented after the Second World War.
The United States enacted social security in 1935. It is currently a 12.4 per cent payroll tax, paid half by employees and half by employers up to a maximum of $68,400 of earnings. In return, workers get pensions, disability and survivor benefits.
Most traditional state pension systems are financed on a pay-as-you-go basis. That means the money put in by each generation of workers is not invested to pay for their own retirement, but goes straight out again to finance the pensions of those already retired.
This works as long as the active labour force greatly outnumbers the retirees. In 1889 Europeans retired at 70, but their average life expectancy was only 48. Since then life expectancy has risen dramatically. And this ageing of the population is being combined with falling birth rates in developed countries, a relatively new phenomenon.
We face a similar situation here. Right now there are 11 Bahamians of working age for everyone over 65. But that ratio will drop to 2.7 by 2061, while the median age of the population will rise to 41 (from 26 now).
According to last year’s NIB review, “under all reasonable scenarios, depletion of reserves is expected within 35 years unless reforms are made….the contribution rate in the future will have to be much higher than the present average combined rate of 8.4%… and/or reduced benefit promises will be required.”
“It’s a fundamental problem”, Larry Gibson, vice president of Atlantic Pensions, told Tough Call. “At the lower income levels National Insurance is the best thing since sliced bread because they get far more than they will ever put in. But that’s not sustainable over the long term.”
Now the commission wants to add unemployment benefits to NIB. They plan to pay for all this by doubling contribution rates, raising the taxable ceiling to one and a half times the average wage (now $700 a week), halving administrative costs (to 10 per cent of contribution revenue) and seeking better investment returns.
As you would imagine for a government enterprise, NIB’s costs are outrageous. One industry observer put it this way: “On a small island like this why does NIB need so many outlets and so many vehicles. And that is not to mention the gross overstaffing and low productivity.”
In the 1990s spending actually exceeded contributions at one point. This reflects one of the other big problems – evasion (by both private employers and the government) which can be as high as 50% regionally. And since government is often the largest employer, this has a huge impact.
As for investment return, a third of NIB’s billion-dollar fund is simply stashed in the bank, often earning no interest. The rest is used to build government offices, buy government securities, or finance losing state enterprises like Bahamasair.
“Government investments are an absolute horror story,” Gibson pointed out. “They tend to operate like a slush fund and are essentially non-performing.”
With fiscal disaster staring them in the face over social security, some governments began to change course In the 1980s. Chile turned its bankrupt pay-as-you-go system over to a system of individual retirement accounts managed by the private sector.
Other Latin American nations followed suit. Britain introduced private retirement accounts in 1986. Canada's system includes tax-supported retirement savings plans. And the US is considering personal retirement accounts now. These vehicles let people build extra savings during their working years, or actually divert portions of their payroll taxes to regulated private accounts.
In the mid 1990s, the World Bank argued that simply tinkering with rates and benefits was not enough. A systemic reform of social security systems was needed, with greater responsibility and freedom of choice given to contributors.
According to some analysts, since Chile converted its system, worker participation, pension fund assets, and benefits have all grown. The average real rate of return in Chile has been 10.9 per cent a year.
Every month workers deposit 10 per cent of the first $22,000 of earned income in their own individual pension savings accounts, which are government regulated and managed by the pension fund company of their choice.
At retirement, workers use their funds to buy annuities from insurance companies or make programmed withdrawals from their accounts. The government provides a safety net for those who, at retirement, do not have enough funds for a minimum pension.
The objective is to provide security for low income earners while ensuring that people who can save both have the opportunity to do so and actually increase the amount they are saving.
In the Bahamas the stated goal is to provide a pension that will pay contributors 80 per cent of their pre-retirement income.
To achieve this, the commission is evaluating three options: A larger NIB that sets a high payroll tax to meet all pension needs. A two-tier system in which NIB would turn over some contributions to private sector funds (not accounts). Or mandatory private pensions for everyone to supplement the existing NIB system.
Whichever way the wind blows, it seems we are in for a full cradle to grave state-sponsored welfare system. We can already make out the skeleton of this plan (which is being pushed by the International Labour Organisation):
• Higher NIB taxes – to pay existing sickness and pension benefits
• More NIB taxes – to pay new unemployment benefits
• Supplementary private pensions
• Full health insurance for the entire population
• Bigger overall tax system to fund government
• More and more regulatory legislation
Riding on top of this costly framework are the restrictive labour laws and padded union contracts that make doling business difficult and costly. Plus, a civil service that eats up half the national budget while producing very little. And inefficient state corporations that provide jobs for the boys and opportunities for graft.
To call a spade a spade, this is major income redistribution without income tax.
As a reconstructed socialist I make no value judgement here. But the government’s own studies say that the proportion of our population in real poverty is only about 10 per cent. And according to the Centre for Economic Policy Research in Britain, the equivalent figure in the US is 17 per cent and it is 9 per cent in Europe.
One view of all this is that the ‘all for me crowd’ has determined that to prevent social disorder from undermining their privileged position, the responsible business sector and middle class must be forced to subsidise the ‘free lunch crowd’.
This is not a question of fighting for the rights and welfare of the oppressed common man, this view holds. It amounts to allowing the evasion of individual responsibility – bankrolling irresponsible citizens so they don’t upset the apple cart.
That’s because bribing the underclass is seen as a lot easier than making the hard choices and effort to fix what is wrong with this country. Or at least make a start.
As one social worker told Tough Call, “We believe someone else will always be there to solve our problems and bail us out of trouble. The role of the colonial ruler has been transferred to our governing party.
“Of course the motivation for this is the feeling of power government officials get when everyone looks to them, and the motivation for the rest of us is being able to avoid taking responsibility for our own lives.
“Every time Shane Gibson opens a new low-cost housing subdivision, with all his rhetoric about how much the government is doing for poor Bahamians, I want to shake him and ask if he's ever wondered why it is that so many working Bahamians need to look to government for housing. Because the people getting the keys for these houses are civil servants, teachers and police officers, who in other countries do not need public housing.”
This is a failure of imagination and leadership at the most basic level. It can easily be attributed to sheer laziness and greed. In this scenario we can all get something for nothing – except the few poor hardworking, honest sods who have to pay up for everyone else.
Consider the intersection of two of our existing welfare structures – NIB and the civil service. Public servants currently earn more money when they are sick than when they are at work because their NIB benefit is added to their pay.
Consider unemployment insurance (which the commission wants to add to NIB), on top of the several months of severance pay that employers must cough up when someone is laid off. Another glaring example of double dipping.
And we won’t even discuss the outrageous inroads that our pot-bellied politicians make into the public purse.
The commission looking into NIB (read raising taxes on those who comply) says it is worried that few Bahamians save for their retirement. However, it acknowledges that at least 30 per cent of the work force is covered by private pension plans.
This figure includes 20,000 civil servants, 15,000 hotel workers, 5,000 financial sector employees and 10,000 in other industries. The total workforce is 160,000, of which about 10 per cent are unemployed.
There is general agreement that – as economist Ralph Massey put it – the country is already “shackled with high operating costs that put it at a competitive disadvantage in all businesses, including tourism.”
What is not so readily quantified (but of equal importance) is the appallingly low productivity of the Bahamian work force. Although experts say that to maintain a generous welfare system it is necessary to have a very efficient economy to generate the revenue to pay for it.
As economists in developed countries now realise, paying for a welfare state requires increasing the number of hours worked, legislating more flexible labour markets, raising the retirement age, allowing immigration to rejuvenate the work force, promoting privatisation and encouraging greater use of private pension schemes.
We seem to be going the other way in every case. But can we afford a European style cradle to grave welfare system in addition to a civil service gravy train while wasting hundreds of millions of tax dollars in failing state enterprises like Bahamasair and ZNS and tolerating goldbricking on a national scale?
Tough calls have to be made – or the economy will eventually go down the tube, taking all of us with it.
The column 'Tough Call' by Larry Smith is published in The Tribune every Thursday and is reprinted here as a courtesy. Mr. Smith founded and successfully grew an advertising agency over 20 years. Under his direction Media Enterprises diversified into short-run commercial printing and publishing, and is now the largest non-fiction book wholesaler in the Bahamas. He has 30 years experience as a journalist and publicist and has contributed numerous articles and columns to the Bahamian press. A former reporter at the Nassau Guardian, local correspondent for Reuters and editor at the Bahamas News Bureau, he conceived and edited the Bahama Almanac (published 2000 by Media Enterprises), wrote the commentary for Mike Toogood's Portrait of an Archipelago (published 2004 by Macmillan Caribbean), and edited the Bahamas Environmental Handbook (published 2002 by the government). In 2003 he took a year's leave of absence from Media Enterprises to lead a transition management team at the Nassau Guardian after the paper was acquired by local investors. After leaving the Guardian he was contracted by the Tribune as online manager/editor and columnist. He has a degree in political science and journalism from the University of Miami. Mr. Smith can be contacted at: email@example.com