National Insurance finances could be gone in two decades

In a worst-case scenario, the National Insurance Fund (NIF) could be depleted in another 19 years due to Government’s debt restructuring in 2018 which resulted in a $1.3 billion loss.

Additionally, based on the same scenario, total expenditure of the NIF could outpace contributions over the next three decades, except for the period 2022 and 2023.

This is according to the latest actuarial review of the National Insurance Scheme (NIS), which examines the NIF, the Unemployment Fund and the Severance Fund, and looks at the period from January 1, 2015 to December 31, 2017, and also includes recommendations and analysis based on “experiences” in 2018, including the effect of the debt restructuring.

The report, which was done prior to the COVID-19 pandemic but was laid in Parliament last year, said “Except for under the optimistic scenario until 2058, total expenditure is expected to exceed contribution income in all but the two years after 2021. The fund will be depleted between 2041 and 2077.”

Under the optimistic scenario, the NIF reserves will be depleted by 2077, it will be depleted by 2051 under the best estimates scenario and in 2041 under the pessimistic scenario.

These results, it said, were based on the 2018- issued Barbados Government debt being redeemed as scheduled at “full face value”.

“Should the Government of Barbados restructure any of its debt held by the NIF again, the outlook for fund finances would be worse than presented above,” said the report.

As a result of the restructuring, the NIS experienced a loss of $1.35 billion or 27 per cent of the face value of all investments.

“Had there been no restructuring of Government debt in 2018, projected fund depletion would have been in 2059 instead of 2051 as now projected under the ‘best estimate scenario’. However, with the expectation that debt restructuring has improved the economic outlook for Barbados, projected long-term NIF costs are lower under this review than under the previous review,” it explained.

As at December 2017, total NIF reserves were $5.3 billion, 7.2 times expenditure in 2017.

Total income for the NIF for 2015 was $920.9 million, it was $860.8 million in 2016 and $959.9 million in 2017. Meanwhile, expenditure moved from $601.4 million in 2015 to $684.1 in 2016 and $741.9 million in 2017.

The report pointed out that while the National Insurance, Unemployment and Severance Funds lost $1.35 billion in investments/ assets due to debt restructuring, the obligation on future taxpayers is reduced by that same amount.

It added that “for the NIS to recoup this investment loss it will have to collect additional contributions from businesses/ employers and workers.

“Since the group of individuals and institutions that pays taxes to the Government is almost identical to the group of individuals and institutions that makes NIS contributions, the economic effect of the debt restructuring is not as significant to residents and businesses in Barbados as it may appear to the NIF

“The immediate visible negative effect of the exchange is a deterioration in NIS sustainability. Possible positive results from the restructuring exercise are all amounts due from the Government of Barbados being paid in cash,” it added.

However, it added that this loss would have a “significant impact” on the projected outlook of the National Insurance Fund and future contribution levels required by employers and workers to ensure long-term sustainability.

The report indicated that in line with the economic growth, the number of insured persons making contributions increased slightly during the review period after six years of decline.

“The number of pensions in payment has increased as expected. The key result from the number of pensioners growing at a faster rate than the number of contributors is an increase in the demographic ratio (number of pensioners per 100 insured persons) from 32 to 36 between 2014 and 2017,” it added.

The 80-page document indicated that “During the extended period of economic challenges” the Unemployment Fund experience was “consistent with expectations – lower contributions, increasing benefits and a drawing down of reserves that had accumulated during stronger economic times.

“During the period 2015 to 2017 contributions were boosted by the transfer of the full severance fund contributions (0.5 per cent of insurable earnings) from private sector employers. The fund experienced surpluses in each year and cash plus investments totalled $64 million at the end of 2017,” it said.

“The reallocation of severance fund contributions to the unemployment fund was reduced to 0.25 per cent effective January 2019 and will cease at the end of 2020. Short-term projections of the unemployment fund indicate that the fund is likely to have sufficient reserves to meet current expenditure through 2022 without any additional rate increase once most contributions are paid in cash. This is however dependent on the value of backlogged claims that are being addressed in 2019,” said the report.

Payouts for all pension-type benefits increased as expected and the number of NIS contributors increased slightly, it added.

Total income for the unemployment fund was $52.1 million in 2017, $51.7 million a year prior and $52.4 million in 2015.

Meanwhile, total expenditure was $35.2 million for 2017, $33.1 million in 2016, down from $34.9 million the previous year.

The severance fund had $11.4 million in total income for 2017, which was $1.1 million more than in 2016 and $1 million less than in 2015.

Meanwhile, total expenditure under this fund went from $3.2 million in 2015 to $1.6 million in 2016 and $1.9 million in 2017.

The report said although there were “inconsistencies” in NIS data provided, especially in the financial statements of the three funds, the overall data provided was considered “acceptable” for the primary purpose of the review.

“While these data issues may affect specific projected rates and years when key events are projected to occur, they do not, however, materially affect the general outlook for the three funds and the conclusions drawn from the results presented,” it noted. marlonmadden@barbadostoday.bb