By Elvin Bailey
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A question was posed to me recently: “What are the worst possible things that can happen to Social Security?” It was followed by a challenge to write about it. At first, I thought it would be counterproductive to do so as there are many persons who would read more into the pestle than the mortar that was put into it. But then I felt that you the owners of social security ought to know what will happen if we neglect so great an institution.
For many persons, a worst case scenario occurs when government borrows from Social Security. The debate was once again intensified by the EC$10.3million tranche that was recently loaned to the Nevis Island Administration for its Civil Service Mortgage Scheme. Persons are expressing the same fears that have been expressed from the moment that they become aware of government borrowing: they will kill the Fund. These persons put forward two aspects to this type of borrowing that could potentially be disastrous: over-borrowing by the government – the so called ‘cash cow’ concept, and non-repayment by the government.
According to the audited statement for 2007, as at the beginning of the year and for the entire life of Social Security, $211,023,622 had been loaned to governments and statutory bodies. In 2007, an amount of EC$13,301,778 was advanced, EC$3,093,873 was collected in re-paid principal, and EC$12,345,032 was generated in interest with EC$11,559,094 actually collected. By the end of the year, EC$222,017,465 was on the books as loaned to government and statutory bodies.
Each loan application is thoroughly assessed by the staff of the relevant department and forwarded, with analysis, to the Board of Directors. They in turn conduct their own assessment before any disbursements are given. In other words, there is a process of due diligence and proper evaluation before any money is disbursed.
It must also be highlighted that there is no frivolity. Each loan application is considered for its value towards infrastructural and human development. That is why only certain areas such as Health, Ports, Housing, Roads and Education are funded. In this way, the Board ensures that every stratum of society has equal access to the benefits of Social Security, even those persons who do not pay and who do not have to pay contributions!
I must also point out that the Social Security Act (No 13 of 1977), imposes guidelines to prevent over-borrowing by limiting individual investment to ‘no more than 5% of the total investments of the fund as valued at the 31st day of December immediately preceding the date of the proposed investment’ or…‘as may from time to time be fixed by the Minister’. The payment side is controlled by the section that states that investments must be made on terms that are ‘not less favourable than are available to other investors generally,…’ In other words, the amount to be loaned must be manageable and the interest rate must be no less than market rates.
The interest generated through lending to the governments must also be highlighted. The data suggests that the interest on these loans amounted to 23% of all of our investment income, and was 19% of the contribution income. These are significant numbers: it is this type of return that allows us to do poverty alleviation measures amongst our Assistance Pensioners; that allows us to take on ascribed roles such as the upgrade of Health facilities; and in Education such as our scholarship programmes. Furthermore, neither the Federal nor the Local government is in violation; not in over-borrowing and not in under-paying.
For Social Security, the real worst case scenario is that of hoarding the money and doing nothing with it. Indeed, over-borrowing and under-paying pale into insignificance when compared to inertia. Money does best when it is spread around, helping other things to grow. Hold it in a vault or under the bed and it becomes paper, subject to corruption by agents of decay. It is only when it is used that it becomes money and has meaning.
Another worst case scenario that some persons describe is the fact that there is too much of the money domiciled here: more of it should be overseas; up to 10% would be tolerable. They justify this position by arguing that overseas investments yield higher returns. They decry the lack of foresight that has legally limited our overseas investments to no more than 1% of our assets. The institution understands the argument, but also understands that charity must begin at home. We take comfort therefore that we have contributed to the development of the country and to the liquidity in the financial institutions. It is this development that has increased our international attractiveness and the liquidity has facilitated borrowing by the citizenry for the realization of their dreams. Besides, by keeping as much of the funds circulating locally as we have done has helped to protect the money from the turmoil that the international market has recently experienced. Hindsight is indeed a great teacher!
The final scenario I wish to deal with in this discussion is the contribution rate. Contributions are paid at the rate of 11% since 1986 when Employment Injury coverage was introduced (before, it was at 10%). However, in the recent Actuarial reviews, it was pointed out that to maintain and sustain the current level of benefits and cover total expenditure over the next 60 years, even with the most optimistic of assumptions, a premium of 16.4% would be required. In other words, our partially funded, pay-as-you-go system needs a boost. Fortunately, many persons have said to us that they would be tolerable of an increase in the premium. But, for them, a worst case scenario would be to increase the rate to the self-sustaining 16.4% that was identified. So we will have to seek a compromise.
Now, let us connect the dots. Your premium would most likely have been at 16% or higher were it not for the interest that we have been generating. Yet a significant portion of the interest is a direct result of government borrowing. Fewer persons would have been ‘working and well off’ had it not been for the use of your money to grease the wheels of the economy. And the vibrancy of the economy, the low contribution rate and the magnitude of the benefits package (with a 60% pension rate vs. the 42% that is the international standard) has been made possible by the actions of your Social Security Board. Who said you can’t eat your cake and still have it?
Now that your knowledge has increased, let us all prosper! Let the matter rest. Please.
