Social Security Reform In The Eastern Caribbean (Part 2)

by Prof. C. Justin Robinson, Professor of Finance and Principal, UWI Five Islands Campus I define a financially healthy and sustainable Social Security Fund (SSF) as one where the fund can meet its obligations to beneficiaries for the foreseeable future without reforms to its design features which were discussed in part of this series.

While many factors such as the growth rate in the economy, growth in incomes, investment income and administrative costs impact on a SSF, I focus on the gap between contribution income and benefit expenditure as the key indicator of a fund’s financial health and sustainability.

Once a fund gets to a stage where benefits expenditure is consistently larger than contribution income, even though investment income can cover the gap for a period of time, the fund will eventually be unable to meet its obligations unless there are reforms in one or more of the design features of the fund.

In Table 1 the relationship between contribution income and benefits expenditure is presented for 11 Caribbean countries for the years 2003, 2012 and 2021.

In 2003 contribution income exceeded benefits expenditure for the 11 funds presented here (the ratio was greater than 1.0) and 10 years later in 2012, contribution income exceeded benefits expenditure for nine of the 11 funds even though the gaps were smaller for all funds. However, by 2021 the landscape was totally different with benefits expenditure now exceeding contribution income for eight 0of the eleven funds.

In one generation the financial health and sustainability of a large majority of social security had changed for the worse, threatening their sustainability over the medium and long term. What may have been the drivers of such dramatic change.

Over the 2003 to 2021 period, Caribbean economies have faced many economic challenges and there have been some losses on investments made by Social Security Funds which all impacted on the funds. However, I am of the view that the most significant factor is the exponential growth in benefits expenditure relative to the growth in contribution income as shown in Table 2.

Across the 11 Caribbean countries presented here, between 2003 and 2021 the average growth rate in contribution income was 185%, while the average growth rate in benefits expenditure was 436%.

It is difficult to imagine rates of income growth and returns on investments that could have made up for the rapid growth in benefits expenditure. In the final part of this series I will present data on the underlying factors driving the growth in benefits expenditure and some thoughts on how to reform the funds to enhance sustainability.