Minister of Finance Camillo Gonsalves has announced reforms to the National Insurance Service (NIS), the nation’s social security agency, which would see contribution rate rising from 10-15% over the next two years, beginning in June.
He said in his Budget Address today (Monday) that the changes are expected to ensure that the fund can continue to meet its obligation until 2060, as compared to 2035, if no reforms are undertaken.
The finance minister told lawmakers that the adjustment in the contribution rate is among eight recommendations that capacity had approved “to improve financial sustainability, benefit, adequacy, and coverage.
“These approved reforms, when fully implemented, will secure the financial future of the fund and ensure that the NIS remains the best investment for Vincentian workers to secure their financial future,” he said.
He, however, said work on the necessary parallel reforms, namely to the necessary improvements to the public pension system is also well advanced.
“While section 73 and 88 of our Constitution limit the extent to which public service pensions can be altered for existing workers, we must nonetheless continue to work to ensure the modernization of our public service pension arrangements to ensure their viability for the next generation of civil servants,” Gonsalves said.
He said the government will announce “next steps to this important process in the first half of 2024″.
Gonsalves said that in order to improve the financial sustainability of the NIS, the contribution rate will be increased to 12% on June 1.
It will then move to 13% on Jan. 1, 2025, with one percentage point increase on each successive Jan. 1 until 2027.
“In the case of employed persons, this increased contribution rate will be split evenly between the employer and the employee,” he said.
The second reform measure is to change the current age pension to a retirement pension.
“This includes not awarding early age pensions to those who have not retired or still earn more than 50% of their wage ceiling,” he said.
The finance minister told Parliament that early age pensions will therefore only be paid upon retirement or to the elderly with lower incomes rather than to everyone who claims before the pensionable age.
The third measure is to increase the reduction factors that apply to early age pensions from half a percent per month to two-thirds of a percent per month.
In this way, the penalty moved from 6% per year to 8% per year “to discourage early age pensions,” Gonsalves said.
He said that applying a reduction factor is typical in the private and public pension sectors.
“Typically, the reduction factor ranges from 6% to 9%. As indicated in the St. Vincent and the Grenadines context, the early age pension has been a significant driver of pension costs in the past few years and has significantly tempered the cost savings that were anticipated from the 2014 adjustment to the retirement age — because people still retiring early.”
The fourth measure is to increase the reference wage period used to compute pension from the five best years to the seven best years of contribution.
As regards the measures intended to improve the adequacy of benefits, the government will increase insurable rate wages from $1,000 per week to $1,200 per week, moving it to EC$51,996, effective April 1.
“This increase will ensure that the NIS remains relevant to higher income workers in St. Vincent and the Grenadines.”
A second measure is to increase the minimum pension from $70 a week to $80 a week, effective March 1.
“And this increase will help to protect the most vulnerable category of pensioners who have witnessed a disproportionate reduction in the real value of pension due to recent inflationary pressures.”
The government will also introduce a permanent unemployment benefit, which Gonsalves said was one of the main requests from stakeholder consultations. This will begin in January 2025.
“This benefit is necessary to broaden the safety net for workers to cover the risk of loss of income due to temporary unemployment,” Gonsalves said.
He said the International Labor Organization promotes this initiative, adding that in the region, Barbados and the Bahamas introduced permanent unemployment benefits before COVID and Grenada did so in 2023.
“And to improve coverage, we will enhance the marketing campaign to extend social security coverage for self-employed participation and allow self-employed persons to qualify for employment injury benefits and implement a new approach for self-employed and informal sector workers to pay contributions to the NIS.”
He said that extending contribution to the self-employed and informal sector workers is critical to ensure the dignity of life of these workers in their golden years.
“The COVID-19 experience demonstrated the high degree of financial vulnerability of the self-employed and informally employed workers when they lost the employment income,” Gonsalves said.
“As such, the NIS must provide a more secure and dependable safety net for all workers irrespective of employment status. Currently, there are only 1,436 active self-employed persons on the NIS rolls.
On its face, 1,400 self-employed persons is a severe under-representation of the number of self-employed persons in St. Vincent and the Grenadines.
He said that according to the draft 12th actuarial valuation report, the reform measures announced would, in the short term, improve the financing and reduce the fund’s long-term costs.
“The proposed reforms would significantly improve the long-term viability and sustainability of the fund,” the finance minister said.
“Without any reforms whatsoever, the fund would not be able to continue meeting its obligations in the manner that it currently does beyond the year 2035. However, with the prudence and people centred reforms announced today that they are projected to be pushed back to the year 2060.
“To be sure as time progresses and demographics change, more parametric reforms will be required to ensure the fund remains affordable, sustainable and useful beyond 2060.”
He said this is the nature of the social security pension system in St. Vincent and the Grenadines.
“But the reforms announced today, taken together, add up to a powerful reinforcement of the NIS’ longevity, sustainability, and suitability for working people.”
Gonsalves contrasted the current 10% NIS contribution rate in SVG to other Organisation of Eastern Caribbean States member countries, noting that while it was the same in St. Lucia and Anguilla those rates were set since 1979 and 1982, respectively.
At the same time, SVG’s NIS contribution rate did not reach 10% until 2014 — three decades later.
He said that as such, St. Lucia and Anguilla were able to build up greater reserves before their respective funds matured.
“The other OECS countries such as Grenada, Antigua Dominica and Montserrat have recently passed legislation to increase their contribution rates to 16, 16, 15 and a half and 15% respectively,” he told Parliament.
“St. Vincent and the Grenadines needs to adjust its contribution rate to meet the growing social security costs occasioned mainly by demographic risks. Since its inception, the St. Kitts has had a contribution rate of 11% and they are currently engaging in their public consultation process with a view to increasing that rate.”
Meanwhile, he said that transitioning to a retirement pension is already practiced in Barbados, the Bahamas, Grenada, St. Lucia and Trinidad and Tobago.
Gonsalves pointed out that there are no early retirement provisions in some countries such as Anguilla, The British Virgin Islands and Montserrat.