By Elvin Bailey

A few persons have asked for my opinion of the potential impact upon Social Security of the situation in the financial markets of the world.  In doing so, they have elevated me to financial guru, a position that I am most unworthy of.  Notwithstanding, I will respond to their requests for information about how we have invested within the past five years and review the 2007 performance - this is the latest audited information available.

Social Security invests in Government, equities, banks, the stock market and in real estate; and we also lend money to certain institutions. Since 2003, our investments in Government have ranged between 7 to 11% of our assets. Between 22% and 25% have been in loans, 2% - 3% is in equities, approximately 3% has been in stocks, 1% - 4% has been in real estate, and 58% - 63% has been in banks, mostly as CD’s. There is hardly any quarrel with this mix; it is the distribution of this mix that seems to concern many persons.

For this distribution and mix of assets, your Social Security has received an interest rate that hovers around 6.5%.  When inflation is applied, however, our real growth has been from minus 2% to positive 4.3% in the period. As such, we have had returns of EC$31.5million, EC$40million, EC$42.7 million, EC$47.5million and EC$53.3million respectively. Our assets, too, have grown (through contributions and interest on investments) from EC$590 million in 2003 to EC$911million in 2007. We expect current analyses will show that our total assets would have reached the billion dollar mark in 2008.

Just in case you were wondering, our stocks are in local companies (TDC, Horsfords, Cable & Wireless, National Bank, East Caribbean Home Mortgage Bank, East Caribbean Securities Exchange) and one regional (St Lucia Electricity Company). Only a very small amount, just about US$1million, is in the International Stock Market, managed by a reputable Canadian firm.

In 2007, our investment income was $53.3million. Most of this return was based on the 6.5% paid by the financial institutions and through repayment of loans by our clients.  This year, I expect that there will be adjustments in the interest rates from the financial sector which means that the returns on loans will also be adjusted. Interest earned is very important to Social Security because it helps to prolong the life of the Fund. We are already paying out, in benefits, half of all the money we collect as contributions (excluding the administrative costs), but when we factor in the investment income, we fall to about 30 -35 cents of payout on the dollar. My expectation therefore, is that the adjustments in the interest rates would mean that we will get less and therefore our balance sheet would not look as good.  It would be nice if interest paid to us went up, but I have to be realistic.

I think we have done well and deserve your vote of extreme confidence!

Some time ago, in the article entitled Pellucidity, I pointed out the nature of our economy and which sectors are critical based on their contribution levels to the Social Security Fund. In 2007, we collected a little under $65million of which 31% came from the public sector and para-statal bodies, 14% came from Hotels/Restaurants, 10% came from Construction, 9% came from the Wholesale/Retail trades and 8% came from Manufacturing. These five sectors combined for a full 70% of our contribution base.  These sectors also represent 53% of the employers and provide for 75% of the jobs; with the Public sector leading the way followed by the Hotel/Restaurant sector.

When we generated that 2007 contribution income, the Tourism sector was enjoying arrivals of approx 492,600 and 244 cruise ships called (data supplied by Planning Unit). This year, we note that there are fewer flights into the country, air fares remain discouragingly high despite the adjustments in fuel prices; and more than 10% of our hotel rooms (some of the priciest) are presently out of commission. The outlook for 2009 in terms of tourism has been revised and therefore the relative rank of these sectors may also be different, but hopefully revenue streams from some of them will hold steady. If they do, then we will be okay.

It is arguable that a lowered interest rate should stimulate people to borrow (and build). I have already pointed out some of the difficulties we face in the Construction sector, chief among them being the under-reporting and the payment pattern for December and January. But people will also be concerned about their ability to repay, even if the Institutions are willing to lend, when their job security is being threatened. It is a cycle that can become vicious. Notwithstanding, we expect that our partnership with the housing projects of the Nevis Housing & Land Development Corporation, the National Housing Corporation, Civil Service Housing Schemes, and various other housing projects of other institutions will continue to bear fruit. I hope that people now see the wisdom of the decision to invest locally, and the benefits of stimulating local development.

And yes, only a small amount is in overseas markets and an even smaller part in the international sector. But during our Reform discussions, there were many persons who felt that better manipulation of our investment portfolio was required, and felt that more of the assets could be placed in the international markets – some allowed up to 25% in overseas investments. Now that the market is down, aren’t we glad that the exposure to such toxicity is as small as it is!

In many ways 2008 was similar to 2007, but in many ways it was starkly different. But we will not dwell on 2008. Yet.

For Social Security for 2009 and onwards, there is Beacon Heights. This is the purchase of a little under 85 acres and the plans to construct 190 houses at Dewars’ Estate. This is a bold decision, but one that has met with very positive response from the general public. Consider this project a fulfillment of a bit of advice given by our Actuary years ago: real estate will be one of your best investments over time. Consider this also our Social Security’s contribution to the nation’s economic stimulus plan. (For more information on this project, contact the Beacon Heights Office at Port Zante at 466 7665)

Now back to the question: How will we be affected by the world financial situation? I will leave that to debate.  And as you debate, keep in mind that we have embarked on our own economic stimulus plan (including our new building on Liverpool Row). Keep in mind, too, that you can help by paying your dues when they are to be paid; by keeping yourselves healthy; and by praying that our continued wisdom will chart a good course for our Social Security Fund.

May God continue to bless us all, and grant us prosperity for 2009. So let it be!