Pension shortfall: battle cry v call to arms?
The current dilemma of the potential for a contributory pension shortfall is not so current. The dilemma has been articulated in reports before to the 2016 release of the Actuarial Review of the Contributory Fund of Bermuda and continues to be a reality for many developed countries around the world.
Since the potential of underfunded social insurance schemes operating as pay-as-you-go systems is well documented and known, it is not the articulation of the problem that should alarm us, but, more significantly, the pace at which we are implementing well-thought-out strategies to intentionally address the issue.
The Merriam-Webster dictionary describes a battle cry as a phrase shouted in battle by soldiers, whereas a call to arms is defined as a summons to engage in “a particular course of action”.
When it comes to the future of our contributory pension scheme, we have moved well beyond the battle cry.
What actions should Bermuda take in the face of a looming, underfunded pension scheme? Perhaps the answer to that question can be uncovered by revisiting the purpose of social insurance schemes in the first place.
According to social security historians, the concept of social security emerged as early as the late 1800s, when the social conditions of Europe fuelled the notion of social reform and protection by means of the state.
Otto von Bismarck is infamously known as enacting compulsory social insurance in Germany, starting with sickness insurance and eventually growing into old-age insurance with subsidised payments from the employer and the state.
The nation of Denmark, however, was the first country to enact a compulsory national old-age pension.
Historically, social insurance was, as its name implies, intended to be a social programme. In fact, in its origins, social insurance was considered in some circles as “social welfare”, designed primarily to protect individuals from the risk of poverty during adverse circumstances.
Over the past few decades, however, social insurance is considered more of an entitlement programme.
There is a debate of whether the entitlement view has contributed to the lack of co-ordinated, political action to address the sustainability of these schemes over time, given the backlash that might come from disenchanted voters who oppose any proposed changes.
It does not help that social insurance has been marketed as a predictable source of income in old age, and perhaps rightly so, as wages are garnered as a means of compulsory contributions to support the scheme.
However, herein lies the dilemma we face at present: how do we remain entitled to a programme that the state may no longer be in a position to provide?
National social insurance schemes grew as a response to counter the adverse social and financial risks of old age, premature disability and widowhood.
In the United States in 1935, the need for the introduction of social security under US President Franklin D. Roosevelt was closely associated with the risks of old age after working years, particularly in the postwar, Great Depression era.
Social insurance was enacted in Bermuda some 35 years later in the form of the Contributory Pension Act 1970. The scheme comprises two classes of benefits:
• Contributory benefits, which include old-age pension and gratuity, widow(er)’s allowance and gratuity, and disability pension
• Non-contributory benefits, which include old-age pension, and disability pension
On July 10 this year, David Burt, the Premier of Bermuda, was quoted regarding his intentions of undertaking a “comprehensive examination of the social insurance programme, including the impact of changing employer and employee contributions from a fixed rate to a percentage of earnings, and the appropriate level for the cap on social insurance contributions”.
According to the Premier, “the objective of the review will be to increase the take-home pay of low earners”.
Mr Burt’s reference to low-income earners, in some way aligns with the historical view of social insurance as a social protection programme.
However, financial protection is not only needed for low-income earners.
Young adults, the middle-aged and the middle class specifically — the majority of the population, also known as the “Sandwich Generation” — are at risk of poverty in old age, given the cost of living in Bermuda among other variables.
In addition, if included in the Premier’s plan is to further increase the social insurance burden on the young and middle class — or tax them excessively by some other means — without an assurance of an equitable consideration of their own ageing future, we have an even bigger problem on our hands.
What may be the fate of the majority should social insurance no longer be available to the degree expected?
The existing situation demands a frank conversation around the planned alternative for future generations.
Several ideas are emerging to address the issue, such as raising the retirement age and modifying benefits.
However, these conversations should be expanded and co-ordinated to include tackling the cost of living in old age, particularly the exorbitant cost of food, and health and long-term care, which often consumes a considerable amount of pensioners’ incomes.
The situation requires intentional co-ordination and multiple strategies, in addition to political urgency, with all hands engaged to tackle these very real threats to ageing well in Bermuda.
We welcome such a formative approach and stand ready to make our contribution in this much needed call to arms.
Claudette Fleming, PhD, has been the executive director of Age Concern Bermuda since 2000. Age Concern is a non-governmental organisation whose mission is to advance the rights and responsibilities of older adults and to promote their quality of life. For more information about Age Concern, visit www.ageconcern.bm or contact the organisation at firstname.lastname@example.org