The average age of populations in most industrialised countries is increasing.
Consequently, the topic of pensions is of increasing interest to more and more of the voting public. But for many governments, Bermuda’s included, the pension issue has been generally left well alone.
Bermuda has one of the oldest populations in the world, and one of the highest ratios of senior citizens to working-aged people.
With people living longer, employers facing more business uncertainties and the changing demographics of the island, underfunded pensions are the latest difficulty facing us.
Bermuda’s pension time bomb exists because of three issues:
• Longevity: when pensions were first introduced almost 100 years ago, the average working life was about 45 years, from age 20 to 65. Life expectancy was only about 69, so funding a four-year retirement was not a challenge.
Today, many people do not begin working until their mid-twenties. That, combined with a life expectancy in Bermuda of 82 years, means funding a retirement that lasts 20 years or longer
• Sustainability: to provide a secure pension, the entity paying it needs sufficient funds, and to continue to be in existence. But there are numerous cases where large numbers of people have lost their pensions because companies have gone bankrupt, leaving a shortfall in the amounts to fund employee pensions.
Likewise, the Government’s pension plans for its own employees is in a shortfall
• Population: to date, there have been six working taxpayers sharing the burden of making payments to support each pensioner. In less than ten years, this will have shrunk to three workers for every pensioner.
The amount being paid to each pensioner has not changed, but the number of people footing the bill has been cut in half.
Taxpayers fund three different government pensions: one for the general population to receive in retirement; one to support the retirements of civil servants, police, fire and quango employees; and one for elected Cabinet ministers and Members of the Legislature.
All are in shortfall. The largest pension, with the largest shortfall, is the Bermuda Contributory Pension Fund.
It is the social insurance scheme into which all Bermudians contribute, and from which all seniors collect after turning 65. In 2016, the previous government estimated it was underfunded by $2.07 billion.
A 2014 review of the Contributory Pension Fund, discussed publicly by Auditor-General Heather Thomas three months ago, predicted that even in a best-case scenario, the money in this pension would run out in 2049.
It is only contributions from the present workforce that are used to make payments from the Contributory Pension Fund for old-age pensions, disability and death benefits for the general population.
There is no provision for any shortfall to be covered by the Government’s normal Budget. So the main challenge to the survival of the CPF is the low ratio of workers to pensioners.
Left in its existing structure, workers will have to pay ever-increasing amounts in contributions for people who are retired.
The fix is to generate more revenue to fund the plan.
This means reforming our immigration system, to add more people to the workforce, and to the population in general — allowing more people to foot the bill for pensions.
Without a step such as this, Bermudians will need to retire at a later age, pay more or receive less from pension funds.
There are also a number of smaller, interim actions that could be taken immediately, including increasing the retirement age to 68; lowering the amount of cost-of-living increase; relating pension payments to average salaries rather than final salary; and increasing contribution rates.
Even these interim solutions are unlikely to be popular. But doing nothing is no longer an option.
The pensions issue is a ticking time bomb. It is up to our political leaders to take action now.
• John Wight is the president of the Bermuda Chamber of Commerce