NIS does not provide an adequate level of coverage to the working and elderly population. This is primarily the result of poor administrative performance and not a result of inadequate contribution or benefit rules.
Extract from the draft eighth report of the Actuary
Introduction
Recently, the National Insurance Scheme (NIS) has been in the news for two main reasons. The first was in relation to the recorded loss of $371 million the Scheme had made in 2011 as well as a projected larger loss for 2012. This was the first time in its 43 years of history that the Scheme suffered a loss. Officials of the Scheme cited a dwindling workforce and the failure of businesses and self-employed persons to pay over contributions to the Scheme as the main reasons for this state of affairs.
The second news item was in relation to the most recent report (in draft) of the actuary on the long-term viability of the Scheme. The actuary painted a very gloomy picture of the state of the finances of the Scheme to meet its long-term liabilities. This has caused much concern among sections of the Guyanese population, particularly those currently receiving NIS benefits as well as potential beneficiaries.
Today, we take a closer look at the NIS to assist the public in a general understanding of the Scheme. We will also touch on the main conclusions and recommendations of the actuary who on Friday last met with key stakeholders to discuss the draft report.
Brief historical background
The conceptualization of the Scheme commenced in 1954 when a survey carried out revealed that 60 per cent of persons aged 65 and over were receiving a non-contributory old age pension from the State through the application of the “means” test. Given this state of affairs, a proposal was made for the establishment of a compulsory savings scheme or provident fund to which employers and workers contribute equally weekly amounts for the benefit of the latter.
It took another 17 years of studies and review of the various reports issued before the National Insurance Scheme finally came into operation on 29 September 1969, with the assistance of the International Labour Organisation, a specialized agency of the United Nations.
The Scheme has as its mission the following:
To establish and maintain a system of social security through which enough income is secured to take the place of earnings when they are interrupted by sickness or accident;
To provide for retirement through age, sudden death of a breadwinner and to meet exceptional expenses as those concerned with birth and death; and
To ensure that moneys collected, which have to be used for future payments, are invested in such a manner that the economy of the country would reap maximum benefit.
Current situation
Employers and employees are required to contribute to the Scheme 7.8 per cent and 5.2 per cent respectively (giving a total of 13 per cent) of insurable wages. Insurable wages is the weekly or monthly income on which contributions are paid, subject to a current ceiling of $143,455 per month beyond which no further contribution is made. It is approximately four times the monthly minimum wage prevailing in the public sector. Self-employed persons and voluntary contributors contribute 11.5 per cent and 9.3 per cent respectively. The latter is based on insurable earnings during the last two years of employment.
Persons between the ages of 16 and 60 who are gainfully occupied in insurable employment, must be insured and remain insured for life.
Benefits payable
The main benefits are:
Old age benefit: Payments to an insured person who has reached 60 years of age;
Sickness benefit: In addition to free medical care and attention, periodic payments to an insured person rendered incapable of work other than because of employment injury;
Maternity benefit: Payments to an insured person or to the uninsured spouse of an insured person in the case of pregnancy or confinement;
Invalidity benefit: Payments to an insured person who is rendered permanently incapable of work other than as a result of employment injury;
Survivor’s benefit: Payments in respect of an insured person who dies and who immediately before death was receiving old age benefit or invalidity benefit, or in respect of an insured person who dies otherwise than because of employment injury; and
Funeral benefit: Payment on the death of an insured person, or of a person in such relationship to an insured person
Old age benefit
Old age benefit represents approximately 88 per cent of benefit expenditure. For a contributor to receive such a benefit, he/she must have attained the age of 60 years and made a minimum of 750 contributions, of which 40 per cent is used in the calculation of the benefit. For every additional block of 50 contributions, one per cent is added, subject to an overall maximum of 60 per cent. In terms of dollar value, the average of the three best of the last five years of insurable earnings before reaching age 60 is used. The minimum benefit currently stands at $17,932 per month.
The following example, extracted from the Scheme’s website, explains the calculation:
Contributions details:
Date joined the Scheme 29 September 1969
Date last worked 1 December 2005
Contributions made 1,800
For first 750 contributions 40%
For remainder 1,050/50 = 21%
Percentage awarded 40 + 21 = 61% Restricted to 60%
Earnings details:
Year Earnings Insurable earnings
2005 $120,000 $92,817
2004 $110,000 $88,397
2003 $100,000 $84,189
2002 $90,000 $80,180
2001 $85,000 $80,180
Best of three years: 2003, 2004 and 2005
Average insurable earnings: $88,467
Amount of pension 60% of $88,467 = $53,080
Governance arrangements
The Scheme has a board comprising the Chairman, the General Manager (ex officio) and Deputy Chairman; and seven other persons appearing to the Minister to be qualified and having experience of and shown capacity in such matters he considers beneficial to the functioning of the Board. The Board functions under the direction supervision and control of the Cooperative Finance Administration (COFA) of which the Minister is the Chairman. In particular, all investments of NIS funds have to be approved by COFA. The Board may also designate inspectors to give effect to the provisions of the NIS Act.
An actuary is a business professional who analyses the financial consequences of risk. Actuaries use mathematics, statistics and financial theory to study uncertain future events, especially those concerning insurance and pension programmes. The NIS Act provides for the Scheme to be actuarially assessed every five years in relation to its financial condition and the adequacy or otherwise of contributions to support benefits. The Minister may, however, direct that the review be made for shorter periods. Every actuarial report is to be laid before the National Assembly.
If there is a temporary insufficiency in assets of the Fund to meet liabilities, the shortfall is met from moneys provided by Parliament as an advance that must be repaid as soon as possible. This in effect means that any advances given have to be repaid within 12 months. There is no provision for the Scheme to be provided with a loan from the Consolidated Fund.
Eighth actuarial review
The eighth actuarial review has been completed and a draft report was issued. The main conclusion is that the Scheme is nearing a crisis stage for the following main reasons:
● A first time deficit of $371 million was recorded in 2011 in its more than 40 years of existence;
● The deficit is projected to be even larger in 2012;
● Assets are just over two times annual expenditure;
● The entire Fund will be exhausted in less than ten years if contribution rates do not increase and benefit reforms not made immediately;
● Due to administrative inefficiencies, a large portion of the workforce does not contribute regularly, and more than half of the over-60 resident population do not receive an old age benefit; and
● Policy makers have not responded to changing socio-economic conditions and deteriorating finances and thus the long-term financial sustainability of the system is now in jeopardy.
In summary, the report stated that NIS does not provide an adequate level of coverage to the working and elderly population. This is primarily the result of poor administrative performance and not a result of inadequate contribution or benefit rules.
The key recommendations of the actuary are:
● Increase the contribution rate from 13 per cent to 15 per cent not later than January 2013 i.e. in a little over a month’s time;
● Increase the wage ceiling from $143,455 per month to $200,000;
● Freeze pension increases for two years until finances improve;
● Increase pension age from 60 to 65 on a phased basis;
● Increase the maximum 60 per cent benefit after 40 years of contribution instead of 35 years;
● Increase the number of years for insurable wages to be averaged from 3 to 5; and
● Change basis for pension increases from minimum public sector wages to price inflation with a limit.
The report on the 7th actuarial review issued in early 2008 also contained several recommendations for reforms. In addition, a reform committee that was established made recommendations in its 2007 report. However, according to the actuary, “no meaningful changes emanating from either of these two reports have been made”. The next actuarial review is due as of 31 December 2016.
To be continued
