By Elvin Bailey
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When social insurance started in the Federation, Anguilla was still with us. It started as a DC plan, that is, a Defined Contribution plan, whereby employees – and employers – were mandated to submit a certain percentage of their salary to a “pool”, but individual accounts would be maintained for each person who did so. The funds would be invested collectively, but the interest gained would be pro-rated and distributed to each account, but the investment risk was that of the individual although he had no say in how much of his money would be invested and where. If there was a loss, that loss would be passed on to the individual to the point where people could possibly get less out of the system than they put in. For the great Trinity of Islands, it was called National Provident Fund (NPF), and lasted for 10 years from 1968 to 1978. Back then, employment levels were not very high especially amongst women. In fact, those were the days in which an unwed woman could lose her job if she became pregnant!
Within the NPF, persons were allowed to draw at age 60, upon invalidity and or death, just 3 options for obtaining benefits; and the money was paid as a lump-sum. It became possible therefore for some persons to outlive their money and become wards of the state. The nice thing about NPF is that it allowed the member to say who their surviving beneficiaries would be.
The late St. John Payne, the first Minister for Social Security, wrote in 2001 that Social Security replaced an old age pension system that was based on “parents, grandparents, aunts, uncles, brothers, sisters and guardians waiting for some son, daughter, grandson, or some other relative to come on weekends or payday to provide a contribution from the earnings to the upkeep of the house during the next week or month”. This sentiment was echoed by the Director of Social Security, Mrs. Sephlin Lawrence, who, writing upon the 30th anniversary of Social Security stated that the NPF was ineffective in eliminating poverty as many old persons were still destitute, and were still dependent upon family, friends, the church and other philanthropic organizations for sustenance. It was this undignified existence that largely led to our transition into the Defined Benefit (DB) system in 1978.
Solidarity, equity and universality are conceptual pillars of a DB system. In a Defined Benefit plan, especially a pay-as-you-go plan, each person pays for everyone; each gets according to their needs (based on their payments), no one bears the full risk of investments and your age benefit never ceases for as long as life lasts. Our DB system also offers many benefits during our working lives. Over the past year and a half, we have shared with readers the workings of the DB system, and we have opened up our system to suggestions for reform.
Two options for such reform have emerged from regional/international initiatives. They are the concept of a Notional Defined Contribution (NDC) system, which is a hybrid of the DB and the DC systems; and the concept of a single CARICOM Social Security System.
The Notional Defined Contribution system operates in a few European countries, and was pioneered in Sweden 15 years ago. This is a model in which the benefits are closely indexed to the account balance that is accrued from contributions and from interest. Google the topic and you will find this brief: Individuals have an account which details how much money they have paid into the system. This account, however, is entirely virtual in that individuals do not have access to the fund in these accounts.The government chooses a “virtual” rate of return usually based on economic factors such as price inflation (e.g.: in Italy and Latvia) or a mix of wage and price inflation (e.g.: in Poland and Sweden). Those in favor of this plan claim that since benefits are mostly tied to contributions, this may encourage labor force participation during a person’s working years; on the other hand the NDC model is less redistributive than a guaranteed benefit pension program. There is no financial market risk since the accounts are contemporaneously paid out from the current labor force to current retirees, but there is demographic risk. If a country has few workers and many retirees, the “virtual” rate of return must be lowered to account for this. The NDC plan has lower administrative cost than one in which individuals have access to their accounts because of economies of scale and lower transaction costs, but there is no incentive for individuals to increase their savings. In short, the system collects contributions on a DB basis, but maintains accounts and pays out like a DC plan.
In the early 2000’s, Actuary Derek Osborne wrote about “one CARICOM Social Security Scheme” – if only for the payment of pensions, to replace the 16 systems that now operate. The argument is that a single system would enjoy economy of scale – one information management system, one administrative structure, one actuarial review, pooling of resources for investment, and so on. This concept has re-emerged recently and is currently being researched at the OECS level.
As you consider the merits and demerits of a regional system, bear in mind that elements of singularity already exist with the CARICOM Reciprocal arrangement, and the proposed, but un-ratified, OECS Agreement. Although several persons are enjoying benefits under the CARICOM agreement, there are still some administrative issues that are being refined.
Experts seem to agree however that for us, at least for now and the foreseeable future, the Defined Benefit system, with adjustments, is best suited for St Kitts & Nevis. The advantages and disadvantages of the different ways of providing social insurance in Small Island Developing States, would make a great moot for Leeward Island Debaters to consider.
