Pension mess: robbing Peter to pay Paul
The late, great Larry Burchall wrote about many things in his Bermuda Sun opinion pieces. His voice was a powerful one over 15 or so years and, sadly, many of his grave economic predictions have come to pass. Here is one that concerns every single Bermudian.
We just heard from the finance minister that there is a massive shortfall in the Contributory Pension Fund. Pension contributions from the general workforce go into this fund and allow payments for old-age pensions and disability and death benefits for the general population. Mr Dickinson said: “The CPF is the first pillar of retirement income and the benefits from this fund, together with other pensions, are important to the ongoing financial stability and security, as well as health, of the seniors in our society.”
Because of this serious shortfall in funds, there is now consideration by the Government for the raising of the retirement age to 70 and also for requiring increased payments into the scheme.
This issue is not new and the alarm has been sounded by many over the past 20 years, including Mr Burchall, former economics lecturer Robert Stewart, political commentator Denis Pitcher, numerous actuaries, the 2013 Sage report and all of our auditors-general. Back in 2018, Mr Pitcher explained: “The 2014 review of the Contributory Pension Fund predicted that in a best-case scenario, the money would run out in 2049. As a stark example, this suggests that those born in 1984 who would turn 65 in 2049 would effectively spend their entire working lives contributing to a pension system from which they would not draw a penny.”
Also in 2018, Mr Stewart said the “politicians would like us to believe that money paid into the pension fund is held in account, but that is not the case”. He continued: “Your contributions go into the fund but are immediately paid out to people who have retired. Now, as we have an ageing population, more money is going out than is going in, so we are short of money in the first place. Nothing can be done, short of putting a huge charge on working people in order to make the fund viable.”
As alarming as this is, there are other pension funds that are also drastically short of cash. These include the Public Sector Superannuation Fund, the Ministers and Members Legislature Pension Fund and the Government Employees Health Insurance Fund. Way back in 2013, Mr Burchall wrote an eye-opening op-ed regarding the PSSF and the Public Service Superannuation Act of 1981, which legislates the retirement pension package for all government employees.
At that time, he estimated the PSSF fund to be short by about $1 billion. He gave a crystal-clear example of how the shortfall of that fund affects all of us. For his example, in 2013, let’s say a senior civil servant was retiring early at 60 years of age after 30 years of government service at an annual pay scale of #50 — which equals $204,775.00. Under the 1981 Act, in this case, they are eligible for 51 per cent of their last salary amount, payable every month, with cost-of-living adjustment every two years until their death.
Run the numbers. A 60-year-old can live another 20 years. So, if the PSSF fund cannot meet the obligation for a particular pensioner, where, then, does that money come from? It comes from you and me because there is a government guarantee for public-sector pensions. The money will come from the general operating account; ie, the Consolidated Fund, which is where pretty much all our taxes go — eg, payroll tax, customs duties, land tax, car licence fees, hotel occupancy tax. Remember, the Government uses this revenue to pay for its many programmes such as health, education, public safety, financial assistance, infrastructure and public transportation. Robbing Peter to pay Paul, comes to mind.
More recently, at the Chamber of Commerce budget breakfast in March 2021, Arthur Wightman, of PwC Bermuda, estimated that there are now $1.5 billion to $1.7 billion of unfunded liabilities associated with the PSSF and other public pension funds. He said: “During the next 50 years, the number of people over a pensionable age of 65 is expected to increase by 68 per cent. The public-sector pension funds have a government guarantee, so when they run out the Government has to step in. The contributory pension fund does not. Like a lot of funds, the way that works is that today’s workers pay for today’s retirees. But if that runs out, that’s it.”
Were the PSSF fund parameters ever going to meet their obligations? Some say the fund was badly set up from the start, but as Mr Burchall mentioned in 2013, what is very clear is that Bermuda’s debt soared from 2004 and because of the need to service that debt, less and less money was left over from the ordinary flow of revenue. Also contributing to the problem were declining annual government revenues, increases in pay/higher pay bands for civil servants, a fall-off in the level of required contributions and the fact that overall contributions from government workers were set and remained too low, for too long.
Public debt comes in many forms. Of all of Bermuda’s financial woes, it is the unfunded government liabilities crisis that has had the least focus and stands to cause serious consequences for Bermudians in the foreseeable future.
The chickens have come home to roost.