Small Countries, Greater Opportunities: Social Insurance Systems in the Caribbean 

Serious financing problems are a major concern of social security policy makers around the world. Global trends such as population aging, diminishing job stability and a secular decline in interest rates have exacerbated pressures on many systems that are struggling to fulfil their social mandates of poverty alleviation and income smoothing. Caribbean social insurance systems -commonly referred to as social security systems around the world- are not exempt from these pressures.  In fact, as discussed below, they face specific challenges surpassing those encountered elsewhere.  In most countries, a depletion of reserve funds is expected in the next decade. To cope with this situation, Caribbean social insurance systems must adopt structural and parametric reforms and focus on implementing better financing practices in any structural-change scenario. In this blog we analyze the latter. 

Social insurance systems in the Caribbean have matured significantly since their inception during the independence waves of the 1960s and 1970s. In terms of service provision, they have gradually expanded to offer a wide range of long-term benefits, such as support for old age, survivorship, and disability pensions, as well as short term benefits that include coverage for employment-related injuries and support for sick leave. In countries like Barbados, The Bahamas and Trinidad Tobago, coverage rates are high, exceeding 70%.  Many have accumulated substantial funds, leading to average reserves of around 24% of the region’s GDP, according to the most recent data. But, as discussed in IDB’s recent technical dialogue, this financial strength is now threatened. For instance, without reforms, social insurance reserves in Jamaica, The Bahamas and Trinidad and Tobago, could be depleted by 2028, 2030 and 2036, respectively.  

Unique Challenges 

We identify at least three unique sets of challenges that Caribbean social insurance systems face beyond those encountered by systems elsewhere in the world. 

1. Emigration of the labor force. Aside from the decline in fertility rates and increased life expectancy that challenge social security systems around the world, pressures in the Caribbean also come from large emigration outflows.  For instance, the stock of migrants from Jamaica, Guyana and Trinidad and Tobago living outside the Caribbean in 2020 were, respectively, 36%, 49% and 21% of the local population still residing in the country, the majority being working age population. This lowers the pool of funds available for supporting retirees, leading to a greater burden on remaining workers and diminishing the long-term viability of social insurance benefits.   

2. Exposure to aggregate shocks due to specialization and climate change. Caribbean economies are highly specialized in commodities (e.g., oil in Trinidad and Tobago and Guyana, aluminum in Suriname) or services (e.g., tourism in The Bahamas and Barbados) which, combined with a high degree of financial openness, makes them highly vulnerable to external macroeconomic shocks. This vulnerability is enhanced even more by the disproportionate exposure to environmental catastrophes. Indeed, Caribbean islands rank within the 25 nations most susceptible to natural disasters per capita or land area, and the impacts of climate change are expected to increase these risks. This exposure to aggregate correlated shocks substantially increases the structural cost of social insurance. Simultaneously, the lack of diversification and high perceived risks restrict local investment opportunities for social insurance fund managers.  

3. Lack of scale economies in public administration. Finally, social insurance administration costs in the Caribbean, ranging from 0.1 to 0.4 percent of GDP, are high for international standards. This is largely due to lack of scale economies in revenue generation and public service provision. 

Despite these difficulties, social insurance systems have played a crucial role in protecting the well-being of populations, especially during substantial crises such as the COVID-19 pandemic and the 2008 global financial downturn. They have also played a fundamental role in protecting the population during natural disasters, such as Hurricane Dorian in The Bahamas.  Strengthening these systems is paramount and there are, fortunately, clear avenues for improvement.   

Implementation Opportunities on the Horizon 

Caribbean social insurance systems have leaned heavily on income derived from employer-employee contributions to fund their contributory pillars. As expected, these systems initially generated large surpluses and these reserves were invested in domestic, regional, or extra-regional instruments according to local regulations. However, with the maturation of these systems, persistent demographic changes, and sluggish economic growth, relying on contribution income became increasingly unsustainable. This prompted social insurance organizations to tap into reserves that, as previously mentioned, are rapidly declining and nearing depletion in many countries. This situation has heightened the importance of: (i) streamlining investment policies, and (ii) improving administrative efficiencies in contribution, payment administration and enforcement.  

Specifically, we identify four promising areas: 

1. Strategic investment policies.  Investment policies must align with demographic trends and future liquidity needs. Failure to do so could jeopardize the long-term sustainability of social insurance schemes. So far investment policies are designed to maximize returns, but they deliver a short-term portfolio conformation. Portfolios are composed of local government securities with liquidity constraints, direct involvement of the social insurance agency in real sector projects and conservative fixed term bank deposits.  A forward-looking approach to investment policies, considering demographic shifts and long-term sustainability, can unlock opportunities for better fund management and risk mitigation. Moreover, there is still an opportunity to diversify the investment portfolios by allowing a larger share of foreign securities. As discussed in our regional dialogue, in many instances, investment in the foreign market represents a very small percentage with few exceeding 10 percent in their portfolio. 
2.  Compliance and enforcement reforms. The effectiveness of enforcement mechanisms is crucial to strengthen the system’s financial health. Activities related to compliance, enforcement and inspection provide less than 1% of total operational revenues, in spite of the fact that the shadow economy in these countries ranges between 25% and 45%. Small economies in small islands require a stronger accountability mechanism to ensure effective enforcement.  Implementing reforms in compliance and enforcement mechanisms can enhance revenue collection and reduce the impact of the shadow/informal economy. These reforms may include an interoperational implementation with tax authorities and outsourced coercive collection of unpaid contributions.   
3. Digital transformation: Embracing digitalization can streamline processes, improve accessibility for employers, employees, and self-employed workers, and enhance overall service delivery efficiency. It can also help address geographical constraints to access (in The Bahamas, for instance). Digital transformation is the most important input in exploring the whole set of opportunities.  
4. Collaborative governance for structural reforms: Collaborative efforts among stakeholders, including governments, regulatory bodies, and private sector partners, can foster a more robust and transparent governance framework. Further fragmentations should be avoided in the administration of social insurance systems, where non-contributory benefits are delivered. Social insurance services must be provided under a one-stop shop setting.  

The journey ahead for social insurance systems in the Caribbean involves navigating complex challenges that may also require structural and difficult reforms. But there is also a path to invest in governance, transparency, digitalization, financial innovations, and compliance mechanisms that can unlock the full potential of these systems, increase trust, and pave the way for resilient and effective social insurance systems that meet the evolving needs of their aging population. Choosing inertia over action will only prolong and enhance the unavoidable costs of adjustment.