Resilient Safety Nets: Future-Proofing Retirement Incomes in the Caribbean

Albeit at different rates, Caribbean countries have seen their populations gradually age over time. This is the result of several factors including falling fertility rates, emigration of its working population and increasing life expectancies.  

Even though population aging is the result of important social achievements, such as the increase in life expectancy, it brings important challenges to social protection systems. In the latest edition of IDB’s Caribbean Economic Quarterly Report, we focus on how this phenomenon is placing pressure on the finances of existing National Insurance Schemes across the Caribbean. We also   discuss how governments can respond to these pressures and their implications in the medium- to long-run. 

Caribbean nations, like their peers in Latin America, are expected to see the ratio of its elderly population to its working population increase up until at least the year 2050.¹   These demographic trends are supported by a confluence of several factors, including: 

1. Falling fertility rates. Fertility rates in the Caribbean have been on a downward trajectory for several years driven by both rising incomes and by increased family planning. The Bahamas, Barbados and Jamaica all have fertility rates below the recommended replacement rate (2.1 live births per woman). On the other hand, Suriname and Guyana both have fertility rates above the replacement rate, but this is expected to also drop belove the replacement rate over time. 

2. Rising life expectancies. Rising life expectancies in the last few decades are driven by several trends including rising incomes and increasing access to healthcare. Despite a noticeable drop between 2020 and 2022, due to the COVID19 pandemic, the expected life expectancy of Caribbean nationals is expected to continue to increase. As the elderly population lives longer, they will be collecting benefits from pension schemes for a longer period thus placing additional strain on already stretched pension funds. 

3. High net migration. Several Caribbean countries have higher rates of net migration compared to the Latin American and Caribbean. Up until 2019, Jamaica, Trinidad and Tobago and Guyana had negative rates of net migration (i.e. emigration), many of whom tended to be young and educated.²  A notable exception to this trend is The Bahamas which has seen consistently positive levels of net migration (i.e. immigration) since at least the turn of the 21^st century. 

As a result, the relation between pension benefits and the contributory base has shifted: pension entitlements in National Insurance Schemes are growing and being financially supported by a gradually diminishing pool of workers.  Benefits paid by national pension schemes exceed contributions in most Caribbean countries. These deficits, which have persisted for years in some islands, are often paid by either subsidies from national budgets (e.g., Suriname), or from existing assets held by funds (e.g. Guyana). 

Unfortunately, several National Insurance Schemes have been running deficits for years, and some are expected to deplete either their assets or pension reserves within this decade (Table 1).     Jamaica is noticeably absent as its National Insurance Scheme, since the implementation of several reforms in the mid-2010s, has been generating surpluses due to contributions received exceeding benefits paid and relatively high investment income. This, however, is largely explained by its low coverage and replacement rates. 

However, there is no one-size-fits-all prescription to mitigate or reverse the depletion of national insurance schemes. Governments can select a combination of different approaches including 

1. Addressing administrative efficiency: Due to their small population size, Caribbean National Insurance Schemes are, in general, unable to capitalize on cost-savings due to economies of scale. Nevertheless, there is potential for optimizing administrative and operating expenditures. For example, despite the comparable size, administrative expenditure, as a share of contribution income, was approximately five times higher in The Bahamas than in Barbados.   

2. Adjusting parameters to better reflect the demographic and fiscal context. Adjustments to better match contribution income and benefits are a common recommendation in actuarial reports, such as increasing the retirement age or the minimum number of contributions necessary to qualify. In the case of Barbados, the statutory retirement age was raised from 65 to 67 in in 2018 and will raise to 68 by 2034.³  

3. Aligning investment portfolios with pension objectives:    Given the current demographic trends, as systems mature, contribution investments become insufficient.  Investment income can play a more important role.  Better results could be obtained via investment policies that acknowledge the long run objectives of retirement income and reducing concentration risks. In line with this view, the most recent actuarial reports in both The Bahamas and Barbados have suggested increasing the share of foreign-owned assets as one potential avenue for diversification and better risk-return profiles. 

4. Improving the design and institutional capacity: Building the capacity of National Insurance Schemes, particularly of its employees, is also key in mitigating the fallout due to these impending demographic shifts and the financial strain of national pension funds. These schemes can also benefit from digital transformation, and additional tools to monitor and enforce employers’ obligations to contribute. Considering this complex challenge, the IDB is undertaking a regional research project titled “Social Insurance in the Caribbean: The Time has Come”. ⁴  The project will offer added information on the types of reforms the countries might consider in the future. 

Pensions from the National Insurance Scheme not only play a crucial role in providing financial security during retirement. Moreso, pensions from National Insurance Schemes underpin the social contract between workers and their nations and, thus, are also contingent liabilities for national budgets. Consequently, Caribbean governments should address these concerns and implement reforms to buttress their National Insurance Schemes. 

Further in-depth analysis, including coverage and adequacy calculations, can be explored in the latest edition of the Caribbean Economic Quarterly Report.