Tuesday, February 21, 2023

The Bahamas government has failed to put forward a compelling argument for an increase in the National Insurance Board (NIB) rates

Why is the National Insurance Board (NIB) in its current state?

By Lindon Nairn

A Bahamian view on issues of concern with the National Insurance Board (NIB) of The Commonwealth of The Bahamas
The government has failed to put forward a compelling argument for an increase in the National Insurance Board (NIB) rate.

Yes, arguments such as “pension payouts exceed contributions” appear strong on their face, but they fail to tell the whole story much less point to a sustainable solution.

It is quite possible that an increase in NIB’s rate is necessary, but such a decision should follow disclosure of what drove NIB to this position and how NIB might be dramatically restructured to achieve maximum sustainable results.

Why is NIB in its current state?  First, new and improved benefits were regularly added — from inception — without any sustainable plans to pay for them.

While insureds enjoyed those better benefits, it was irresponsible to put them into effect without first ensuring that appropriate steps were taken to fund them.

Administrations took such reckless steps to garner political support without regard for the long-term implications of their actions.

Second, alarmingly, NIB’s net earnings, excluding contributions made and benefits paid (”net earnings”) is barely higher than one percent of its total assets.

(This net earnings return on assets is derived from 2019 annual financial statements.  It is likely that it has fallen since.)

Until recently, any private citizen could simply put money into fixed deposit accounts at any financial institution and generate multiple times NIB’s net earnings.

That fact underscores the high administrative costs associated with running NIB, its low gross earnings and, most importantly, it demonstrates that ultimately NIB provides no net real value to its contributors.

Third, based on actuarial reports, the pension shortfall is due in part to lower than expected population growth.

To me, a pension plan that is reliant on ongoing population growth, even though a common practice globally, has inherent elements of a pyramid scheme.

Of course, it is accepted that lower than projected growth could impact unit costs.

Finally, since its founding, NIB has had many successes, however, in the current technological and economic climate, NIB has become anachronistic.

It has not kept pace with the times and no doubt that is due largely, if not entirely, to political interference.  One can point to much evidence of inapposite political engagement, but few speak more loudly to that than the reshuffling of NIB’s board of directors every time a new party wins a general election.

How might NIB be fixed?

Let me state upfront that these recommendations are both radical and incomplete.

They are intended to offer only a fragrance of what might be done.

NIB has at least four broad divisions: pension, unemployment, sickness and drugs.

For the purposes of contributions, administration and law, with the exception of sickness and drugs, those areas should be completely distinct.

Those benefits are very different creatures and managing them together covers deficiencies and hides opportunities.

NIB’s administration of pension should cease.

Instead, established private entities that meet specific criteria should be allowed to manage contributors’ pensions.

The enabling legislation should include controls such as linkage to business license and the eventual movement to personal savings accounts (PSAs).

Regarding the latter, contributors under a certain age should immediately move to PSAs.

Whether or when such a step can be taken will depend on what impact it might have on the current actuarially computed shortfall, which could crystallize and thereafter weigh negatively on the national accounts.

It is acknowledged that transitioning away from the current model requires heavy lifting.

Furthermore, with the new structure, a number of incentives designed to increase employees’ and even employers’ contributions could be introduced.

Given that the above action will increase net earnings by 300 percent to 700 percent, the actuarially computed liability should fall dramatically.

Today, I am afraid there is no need for NIB to itself administer a sickness and drug plan.

There are four local companies capable of providing those services at costs well below and efficiency considerably above what NIB will ever likely achieve.

As such, NIB should engage a private entity to administer most, if not all, aspects of its sickness and drug benefits plan.

With that said, the administration and other charges by private entities would require prudent and intense evaluation.

While a portion of what is now NIB’s employer and employee contributions should go to employees’ pension accounts as outlined above, the remainder should go into the unemployment and sickness and drug pools.

The management of those categories will likely reveal underfunding and the need for incremental contributions.

It will aid transparency and help policymakers and beneficiaries to be more realistic with respect to benefits.

The above moves will make a substantial amount of the resources deployed by NIB superfluous.

As for NIB’s staff, they should be offered an unprecedented early retirement package — up to three years.

That will not have long-term deleterious effect on the scheme.  NIB’s redundant administrative buildings and other assets should be sold.

It is important to re-emphasize that the above addresses only a handful of the considerations that have to be made.

This is a complex matter requiring the engagement of professional groups from various disciplines.

The status quo, including blindly raising rates, is harmful to our economy and by itself does not assure sustainability. Drastic changes are mandatory.

 Lindon Nairn