Rethinking Bermuda’s pension policies
There is a consensus that the vulnerable in society should be cared for. This is true for children, people with disabilities and the elderly.
That principle is the reason why Bermuda has a basic pension, funded through the Contributory Pension Fund, which ensures that the vast majority of retirees have an assured income, albeit a limited one.
In a society as wealthy as Bermuda, it would be morally indefensible to have destitute and desperate senior citizens. It is also pragmatic — financially secure senior citizens are critical to a functioning society. And it makes sense on economic grounds as well. Pensioners who can pay their own way keep the economy moving and people working.
So there’s no real debate on the necessity of having a funded and thought-through system of pensions.
But there are questions of how it should be funded, what level of support people should have and to what degree people should be individually responsible for their own financial security.
Some countries such as Singapore have systems where almost all of the responsibility lies with the individual and the employer through a system of forced savings.
At the other extreme, there are countries where pensions are provided entirely by the state, raised through progressive taxes on society as a whole.
Bermuda’s retirement system has two major parts. One is the system of private pensions made mandatory in the late 1990s by which all employers were required to have a pension scheme in which employers and employees contribute a total of 10 per cent of an employee’s salary through matched donations. This was expected to be the retiree’s main pension. Government workers have another pension fund, which works slightly differently.
The second pillar is the Contributory Pension Fund, which was created in the 1970s. Employers and employees each contribute a fixed amount, and the pensioner receives between $1,100 and $1,600 a month, depending on the frequency of their contributions. This pension was always intended as a supplement to the main pension and an individual’s savings, other forms of income or family support.
This system is increasingly rickety and unstable. More than a decade of economic stagnation, decisions by the Government to allow existing pension funds to be raided and payments suspended and the irresistible surge of an ageing population are creating a perfect storm.
The CPF was set up as what is known as a “pay as you go” fund, which means it began to pay out pensions long before those pensions were fully funded. This was all right in the early years when contributions were much higher than benefits, and the fund also benefited from occasional top-ups from government budget surpluses to make up for anticipated shortfalls.
Government budget surpluses will be an alien concept to younger readers, and in any event the system was always flawed given the island’s changing demographics.
As with health insurance, the system benefited from having a large number of younger workers who are now increasingly scarce. At the same time the number of people retiring is increasing dramatically. The number of people aged 65 or older is expected to peak in 2045.
By then, if nothing changes in the interim, there will be no Contributory Pension Fund. It is due to be exhausted by 2044, according to the most recent actuarial report. So someone who is 43 now will have contributed to the fund for the whole of their working lives and will have nothing to show for it.
Something has to change. Several generations of politicians have known this, and with a few notable exceptions, have done nothing.
One solution proposed in the actuarial report made public in February was to raise the retirement age to 70. This makes a lot of sense. Many people now in their fifties will not be able to afford to retire anyway, especially if they made the government-sanctioned withdrawals from their pensions. Healthcare advances mean that they are also physically and mentally able to continue for much longer than their elders were when 65 was arbitrarily set as the retirement age.
That will, according to the report, extend the life of the fund to 2070. If contributions were consistently increased by 4 per cent more than benefits, the fund would last even longer.
David Burt, the Premier and finance minister, did not address the retirement age when he discussed the CPF last Friday. He did announce the benefits would be increased by 2.5 per cent, in keeping with the Progressive Labour Party’s election promises.
Given the parlous state of the CPF, it would have been reasonable and normal to expect Mr Burt to raise contributions at the same time, and preferably by more than the increase in benefits, thus shoring up the fund.
He did not do that, instead saying that the way the CPF will be funded will be changed in the next Budget.
Noting that the Government had said four years ago that it would change payments to the CPF from a flat donation to one based on a percentage of income, he said: “As such, the historic and unfair system that sees a CEO making $400,000 annually pay the same amount, in contributions, as a worker making $40,000 annually cannot and will not continue.
“Social insurance contributions based on a percentage of income is not a unique concept to Bermuda, as it has been implemented in many other countries around the world, including the United Kingdom over 45 years ago. This change will increase the take-home pay of low-income workers, while ensuring that our pension fund is sustainable for future generations.”
Perhaps it is acceptable that a person who for whatever reason has achieved a high income should pay more in dollar terms so that a person who for whatever reason is earning considerably less should enjoy exactly the same pension when they both retire. There will be those who disagree, but that’s democracy. Whether the $400,00 CEO will think it’s fair, and whether they will decide if they wish to keep working in Bermuda, is another matter.
Regardless, it does not, in and of itself, solve the problem of ensuring the solvency of the CPF, or that the CPF on its own is inadequate for retirement.
Raising the retirement age helps to some degree in this regard and should be revisited.
But the real problem is that the whole system is fundamentally flawed.
When the CPF actuarial review was first made public in February, the pension reform committee along with some high-powered consultants were tasked with looking at the CPF, and the government workers’ pension fund, which is in similar dire straits. It would make sense for them to look more carefully at the whole pension situation.
They should answer some fundamental questions, such as:
What basic level of income should retirees have?
What funding is required to accomplish that?
To what degree should individuals be responsible for their own retirement, and to what degree should it be left to society as a whole?
To what extent should they be legally forced to take personal responsibility?
It would also make sense for them to look at other systems, including Singapore’s.
There is no Contributory Pension Fund in Singapore. Instead, all employees must join a central pension fund to which they must give a percentage of their earnings. Employers must also contribute a slightly higher amount.
This system, introduced in the 1950s, has been astonishingly successful. Not only are senior citizens able to rely on a living pension, but they can use savings to cover their healthcare and in some cases to buy a home.
There is also a system of supplementary support for the small minority who were unable to earn enough to build a living pension.
At first glance, the amount of contributions might seem unpalatable at 17 per cent of the employee’s income and 20 per cent coming from the employer, although it should be noted there is a cap on income.
And it is critical to note that the Singaporean economy has been one of the most successful in the world for decades. Whether that is because of its full-blooded approach to capitalism or its location at the heart of the Asian economic miracle can be debated.
But there should be no doubt that having a growing economy, and a government committed to establishing the conditions that enable economic growth, is central to the success of any pension scheme and this should be the Bermuda Government’s overriding priority.
Mr Burt has opened debate on this issue, and it is to be welcomed. But the debate should be much more far-reaching and comprehensive than a simplistic call to squeeze the rich.