National Insurance Scheme (NIS) payouts for the first eight months of the year exceeded by over half a billion dollars the contributions garnered for the same period.
The trend is expected to continue and could see a shortfall of as much as $626M by the end of this year according to General Manager of the NIS, Doreen Nelson in an advertisement in yesterday’s Sunday Stabroek. Expenditure from January to August was $516M over income from contributions. The shortfall is occurring much earlier than forecast and raises increased concerns about the sustainability of the Scheme.
An International Monetary Fund (IMF) report released in July warned that the mismatch between pension benefits and contributions and weak reserve management threaten the sustainability of the NIS.
The report said that the finances of NIS are unsustainable under current parameters and “projections show that after 2011 the NIS will shift from small surpluses to growing deficits,” based on a number of trends and developments.
In NIS’s 2009 Annual Report, the auditors, TSB Lal and Co, noted that the actuaries had reported several matters of concern, among which was that annual expenditure was projected to exceed the year’s contribution income beginning in 2014.
Reserves are expected to be exhausted in 2022. “The actuaries made certain recommendations to ensure the future viability of the scheme but so far these have not been fully implemented,” the auditors had said.
The Actuarial Review had pointed out that reserves are projected to continue growing through 2014, reaching $33 billion. At this point, total expenditure will exceed total income for the first time. Unless the contributions rate is increased, assets will have to be sold each year to meet expenditure, it had noted. It projected reserves to be exhausted in 2022, it had said.
The NIS celebrated its 42nd Anniversary yesterday and in her message, Nelson said that a brief performance review showed that contributions collected over the period January to August 2011 were approximately $7.132 billion while total expenditure over the same period was $7.648 billion. The projections to the end of the year show that income from contributions would be approximately $11.610 billion while the projected expenditure would be approximately $12.236 billon, she said.
“The trend continues to show, that as predicted, in the last actuarial review of the Scheme, the organization’s expenditure on benefits and management of those benefits already exceeds the income received from contributions,” she said.
Nelson noted that several reasons have been advanced for this scenario including “an apparently dwindling structured workforce, an expanding informal workforce that is not complying with the NIS regulations, non-registration of employees by certain industries and the reluctance of many self-employed persons to register and remit contributions.”
“These, together with an ever ageing population and smaller returns on investments are causes for concern about the future of the Scheme,” said Nelson. She said that the amount paid as benefits during 2010 was $9.4B and it is projected that for 2011, the amount will increase to $10.8B. The pension branch- Old Age, Invalidity, Survivors – account for approximately 85% of these payments.
The IMF report had noted that the NIS pension system covers only 31½ per cent of the employed population and it was projected that as the population aged, the number of contributors per pensioner would fall from 8 in 2006 to 2 by the year 2056.
Another reason for the projection of growing deficits, the report had said, is that “a relatively high minimum pension, given the low wage environment (the minimum pension is equivalent to approximately 50 per cent of the minimum wage in the public sector, or 34 per cent of average insurable earnings.”
The report also pointed to “large and growing contribution arrears” noting that the figure in 2010 amounted to $300 million. “Delays in the court system have also denied resources to the NIS (there are currently 90 outstanding court cases worth $189 million and approximately 189 writs worth $6.4 million),” the report said. Growing NIS contribution evasion by workers, employers, and the self employed was identified as another reason.
The projected growing deficit is also based on the shortfall of 7.1 per cent in the contribution rate required to fund benefits up to 2056. “The actual contribution rate, 13 per cent, is too low relative to the required contribution rate (20 per cent) that would be required to meet the cost of the benefits package up to 2056; the size and growth of informal sector activities, a relatively low retirement age (60 years),generous growth of annual pension benefits driven by the minimum pension adjustment factor, which is not linked to contributions; High administrative costs (equivalent to about 15 per cent of contribution income, or 0.4 per cent of GDP).”
Further, the report pointed to the impact that the NIS investment in the failed Clico (Guyana) would have had on the scheme.
The IMF staff representatives said this was not covered by the actuarial report, but the scheme had invested approximately 18.6 per cent of its total assets, or 1.4 per cent of GDP in the Clico conglomerate, for which it has been given a guarantee by the government.
The NIS’s Annual Report for 2009 was tabled in the National Assembly in late April and it was reported that it had invested $5.7 billion in Clico. The NIS report acknowledged that the authorities have taken some actions to address the concerns. “Although its recommendations have not been implemented, the NIS has introduced some changes, including: (2) gender equality in the payment of benefits; (b) improved monitoring to ensure that beneficiaries meet the qualifying conditions; and 9c) computerization of NIS’ records and processes,” the report said.
“To fully restore financial balance to the NIS, other important actions, such as raising the retirement age, otherwise restraining the growth of benefits expenditure and increasing the contribution rates over time would have to be taken,” the report had said.
Meantime, Nelson, in her message yesterday said that over 26 000 employers have been registered over the years but currently just 5900 are active, that is, remitting contributions to the Scheme on behalf of their employees. For employed persons, the numbers registered to date is over 625 000 with those active being approximately 119 000. With respect to the self-employed, over 28 000 persons have been so registered to date but approximately 8000 are active and remitting contributions to the Scheme.
The NIS provides social assistance to over 44 000 pensioners, 66% of whom are old age pensioners and approximately 28% are survivors’ pensioners.
According to Nelson, efforts have been made and are continuing to be made for better systems of record keeping under computerization of operations, aggressive monitoring of the employer and self-employed populations for accurate and timely remittance of contributions and general compliance with the NIS laws and regulations and the provision of relevant benefits to contributors and pensioners. She urged that contribution payments be submitted via the electronic payment schedule.