NIS and Pension Reform: Specific proposals

by R. T. Luke V. Browne

I wrote two previous articles on pension reform that were published in successive editions of the newspapers over the past two weeks. In those articles, I addressed two salient issues – the possibility that a public servant can have a pension higher than his or her final salary and the non-alignment of the retirement age with the NIS pension age. I will now like to make some specific reform proposals.

We have heard that reform is necessary for NIS sustainability. In order for the NIS to be sustainable, it must have a sufficient level of income to cover its expenses.

The NIS was established in 1987. In the early days of a social security institution, its income from contributions will usually exceed the benefits it pays out. The surplus income is kept as reserves and invariably used for investments. The gap between income and expenditure tends to narrow over time until it gets to a point where the income of the social security institution is less than its expenditure. Apparently, NIS income is currently less than its expenditure.

In order to make an assessment of the true condition and health of the NIS, we have to take the state of its reserves into consideration.

I would say that the basic benchmark question we have to ask ourselves when probing the matter of pension reform is: what is the difference between the total NIS income and expenditure over the course of its existence? This information would give us an idea of how well run the organisation is as a social security institution, how long the NIS can continue to meet its obligations without change and the reasonableness of the proposition of pension reform.

I believe that the NIS should make this information on lifetime income and expenditure available to the public.

In some circumstances, reform is necessary and desirable for reasons of inter-generational equity and other pertinent considerations.

In its approach to making proposals for reform, the NIS must keep in mind that we only relatively recently (2014) emerged from a round of reforms as a result of which the NIS contribution rate was increased from eight percent to 10 percent and the pension age was increased from 60 to 65. These were serious and substantial changes. The public can legitimately be wary of these standard reform measures of increasing the contribution rate and increasing the pension age. I am encouraging the NIS to explore non-standard options in relation to pension reform and I will make some suggestions.

I had said in one of my previous articles that the NIS should advocate for a harmonisation of retirement age with its pension age. This measure would eliminate hardship and at the same time allow the NIS to collect contributions from individuals over a longer period of time. This will contribute to sustainability.

If the NIS were to cap the pension of public servants at a particular level, as I suggested in an earlier article, this would provide some relief to the public purse and give the central government more fiscal space for the provision of sustainability support to the NIS.

Currently, it only takes two years for an NIS pensioner to essentially be repaid in pension all the contributions he or she made to the NIS. However, the typical pensioner receives pension for a lot longer than two years and this matter is complicated by increasing life expectancy. Clearly, this situation is untenable. The NIS could fix this problem by adjusting its accrual rate for pensions. For example, if someone becomes eligible for a pension of 30% of his or her final salary after making contributions to the NIS for 10 years, the time period for eligibility for this level of pension could perhaps be increased to 15 years. I think this is only fair and that the measure would have public support.

I also think that the NIS should pay pensions based on average salary (insurable wages) over a person’s entire career and not just that individual’s best five years – it is fair for someone to be paid pension based on lifetime contributions to the social security fund.

Additionally, the NIS can explore the option of removing the cap on insurable earnings.

However, it should maintain a ceiling in terms of pension reference salary. Essentially, this would be an expression of social solidarity across income groups. This is desirable and serves the purpose of sustainability.

I believe that the NIS should explore these reform options before it takes recourse to any of the standard reform propositions associated with adjustments to contribution rates and pension age. We need to find the right calibration of the system for our circumstances.

I would reserve my comments on NIS coverage of self-employed persons and the introduction of unemployment and health insurance benefits through the NIS for another occasion.