Speaking Notes

Prime Minister & Minister of National Insurance On The 2010 Amendments to National Insurance Regulations

Background

Successive actuarial reviews of the National Insurance Fund highlighted the financial challenges that lie ahead for National Insurance. Specifically, long-term projections suggest that if no change is made to the contribution rate, or to the way benefits are awarded and calculated, the National Insurance Fund could be exhausted in the early 2030’s. Such a scenario is due directly to the aging of our population and the fact that the contribution rate, now 9.8% after being at 8.8% for 37 years, is below the true cost of the National Insurance benefits package.

These actuarial reviews also made policy recommendations aimed at strengthening solvency but also designed to ensure that National Insurance provides relevant and equitable benefits that are affordable for future generations. Many of these recommendations, along with some new ones, were also made by the Social Security Reform Commission which was established in 2003.

Having served as Minister responsible for National Insurance on several occasions, I am extremely proud of both my record and that of my government as it relates to the National Insurance and the positive enhancements that we have made over the years:

· Major set of amendments in 1998 in which we increased the wage ceiling from $250 to $400 per week, increased pension amounts, provided for older persons with low wages to access their pensions and among other things, brought equal treatment to widows and widowers as it relates to survivors benefits.

· In 2009, we introduced an unemployment benefit when world economies were in crisis and unemployment levels rose here in the Bahamas. With this new benefit, NI now provides income protection for workers and their families for every contingency that can result in involuntary loss of income – sickness, confinement or maternity, injury, old-age, invalidity, death and now unemployment. During this economic crisis this unemployment benefit has provided up to 13 weeks of benefits to over 17,000 Bahamians. And this money does not only help the persons who qualify, but it has also pumped over $25 million back into the economy that has allowed more Bahamians to keep their jobs.

· Creation of the National Prescription Drug benefit which will be available in a matter of weeks to thousands of pensioners and children. These Bahamians who suffer from one or more more of 11 covered chronic illnesses will be able to access their prescription drugs from private and public pharmacies across The Bahamas. And then in the not too distant future, it is our intention to have all workers and their family members who suffer from chronic diseases to also benefit from this program.

Objectives of These Amendments

From time to time amendments to National Insurance regulations are required so that the social protection offered by NIB is consistent with prevailing socio-economic conditions which are forever changing. These amendments seek to achieve several things:

1. To enhance the relevance of National Insurance to higher paid workers, pensionable civil servants and workers in the hospitality sector.

2. To provide additional benefits for self-employed persons

3. To bring added income security to pensioners, widows and widowers.

4. To ensure consistency between all National Insurance benefits, ensuring that when considered together, benefits are neither overly generous nor have coverage gaps.

5. To enhance long-term sustainability by making slight adjustments to retirement pension promises, and

6. To clarify and fix several sections of regulations to ensure that they properly address how benefits should be awarded and calculated.

These amendments do not provide for any increases to the contribution rate for employed persons. While further increases to the contribution rate will be required in the future to improve long-term sustainability, these amendments focus more on the benefit side, with a goal of enhancing the coverage and security offered to the majority of workers and pensioners. Some of these amendments are long overdue and so in some cases we have to catch up.

Most of the changes are earmarked to take effect in January 2011, except for a few that will be specified.

Contributions Amendment Regulations

1. Wage ceiling : The wage ceiling has been increased only twice since 1974 – in 1984 and in 1999 – and now stands at $400 per week. Almost half of National insurance contributors earn more than $400 per week, and for these higher paid people, each year that the ceiling remains fixed and their wage increases, National Insurance becomes less relevant.

Increases to the ceiling have been recommended in successive actuarial reviews and again in the report of the Social Security Reform Commission. Because the ceiling has not been adjusted for over 10 years, another large adjustment is required to bring it back in line with the wages of higher paid persons. However, given the economic times and other changes that have been made recently, we are proposing to increase the wage ceiling to $600 per week in two steps - from $400 to $500 per week in January 2011 and then from $500 to $600 per week in July 2012.

It should be remembered that a change in the wage ceiling only affects workers who earn more than $400 per week and the second adjustment to $600 will only affect those who earn more than $500 per week.

With a long history of failing to increase the ceiling at regular intervals we are putting in place measures that will ensure that once the ceiling reaches $600 per week in July 2012, it will be adjusted every 2 years in the month of July. The size of each increase will be determined using The Bahamas Retail Price Index plus 2%. This extra 2% above price inflation allows for the fact that wages often increase by more than goods and services. Therefore, ceiling adjustments that exceed price inflation will ensure that the ceiling keeps pace with wage increases of higher paid employees.

2. Civil Servants : In 1984 when the wage ceiling was first increased from $110 to $250 per week, the new ceiling applied to all workers. However, a decision was taken in 1985 to roll back this ceiling increase for pensionable civil servants (PM you know history better than us). As a result of this decision, refunds were given to workers and the government for the contributions they made on wages between $110 and $250 per week.

Pensionable civil servants are still feeling the effects of this short-sighted decision. Although they have contributed less than other workers to National Insurance, they will receive pensions that are a lot less than other workers. After 35 years of contributions, the most that pensionable civil servants can receive from National Insurance is $286 per month compared with up to $950 per month for private sector contributors.

The proposed amendment therefore, seeks to bring pensionable civil servants in line with other contributors so that all workers in The Bahamas pay on the same wage ceiling. While it will take many years for pensionable civil servants to earn the same pension as someone who has paid at the higher age ceilings for their whole career, this change will benefit thousands of current and future public servants.

This change will take effect in July 2011. It will result in Government having to pay additional contributions of around $1.8 million in the fiscal year 2011/2012.

3. Hotel Workers: Another group of workers for which National insurance does not currently provide adequate protection are those who are partly remunerated by tips & gratuities. These workers in hotels and restaurants across The Bahamas only pay NI contributions on their base wage, which is often much less than their take-home pay when tips and gratuities are considered. As a result, when they get sick, unemployed or eventually retire, their benefit or pension is considerably lower than their regular earnings as their National Insurance benefit is based on base wage only.

The proposed amendment intends to include formally paid gratuities (not cash left on the table) in insurable wages and to have the worker pay the full contribution on the portion of insurable wages that is earned from gratuities.

So the base wage will be considered first, and if the base wage is lower than the wage ceiling, gratuities will then be considered, but only as much as is necessary to take the total up to the wage ceiling. For example, if base wage is $200 per week and gratuities that week are $200, all $400 of that workers earnings will be covered. If however, the base wage is $200 and gratuities that week are $400, only $300 of that worker’s gratuities will be covered as this $300 will take insurable wages up to the $500 per week ceiling.

National Insurance will rely on the hotels and restaurants to deduct the full contribution from gratuities and pay them into NIB along with the regular contribution that is shared by employer and employees.

Over next few months NIB will work with hotel and restaurant employers and the union to find ways to get as many workers as possible to benefit from this change.

This change will take effect in July 2011.

There are a few other amendments to Contributions regulations which facilitate changes to benefits, one of which is the new contribution rate to be paid by self-employed persons who will be eligible to additional benefits.

Benefits & Assistance Amendment Regulations

1. Retirement benefit eligibility: The Bahamas National Insurance Board has extremely generous qualifying conditions for the most costly benefit – Retirement benefit. Only 3 years or 150 weekly contributions are required. The initial framers of National Insurance intended this requirement to increase from 150 weeks (3 years) to 750 weeks (or 15 years) as the scheme matured. However, the necessary amendments were never made and so National Insurance has paid lifetime pensions to hundreds of people who have only made a few years of contributions. With contributions sometimes totalling only 9 or 10 months worth of pension payments, this generous eligibility condition has come at a great cost to the Fund for many years.

There are certain norms and best practices in social security and one of them is to require at least 10 years of contributions for a Retirement pension. So instead of going from 3 years to 15 years as was originally envisaged, we will increase the minimum contribution requirement to 10 years or 500 weeks.

So far this year 733 new awards of Retirement Benefit

•   206 with less than 500 weeks (28%)

•   137 of these 206 are Bahamian (67%), rest non-Bahamian

•   93 of these 206 are 65 or over (45%) so 55% of them are claiming early

•   Of those with less than 500 weeks, here is the breakdown:

                  - 150 to 199 weeks: 42

                   - 200 to 299 weeks: 64

                    - 300 to 399 weeks: 58

                    - 400 to 499 weeks: 42

Persons who are 60 years or more; not working and who have less than 10 years of contributions may apply before January 1, 2011 and receive pension.

Contribution Rate

For those persons who reach age 65 and do not have at least 500 contributions, a new Retirement grant will be established. This grant will be a one-time payment based on their average insurable wages and the number of contributions they made to National Insurance. Like other National Insurance benefits, this will be paid to claimants residing both in The Bahamas and anywhere in the world.

2. Pension calculation: One of the most significant challenges facing National Insurance is long-term sustainability. The most costly benefit offered by National Insurance is Retirement benefit – now two-thirds of pension costs and almost 50% of all benefit payments. Therefore, any benefit changes that will provide meaningful savings over the long run have to be made to Retirement benefit. The changes being proposed to Retirement benefit at this time will result in some reductions in overall cost, but will more importantly increase benefit equity and fairness to current and future workers.

The changes to retirement benefit are:

a. Extend the period over which insurable wages are averaged from 3 years to 5 years. This will provide a slightly better relationship between actual contributions and the benefit awarded.

b. Adjust the way pensions accrue over time so the maximum 60% replacement rate is attained after 40 years of contributions instead of the current 35 years of contributions. No change is being made to the benefit accruals for the first 10 years of contributions.

c. Eliminate the adjustment to average wages for higher paid persons that was introduced in 1999 that reduced the average insurable wage used for pension purposes from $400 to no more than $362.50 per week.

d. Change early retirement reduction factors to rates that better reflect the additional cost of paying pensions before normal pension age of 65. Early pensions are now reduced by 4% for each year the award precedes the 65^th birthday and the proposed change is to increase the adjustment to 7/12% for each month before the 65^th birthday. This means that a pension awarded at age 60 will be 65% of the amount that would be payable at age 65 instead of the 80% of the age 65 pension now payable. This change only affects future pensions awarded before age 65.

3. Survivors benefit: Two enhancements to provisions for survivors benefits are being made:

a. allow widows and widowers to receive their Retirement benefit in full plus a portion of their spouses Retirement pension instead of only the higher of their retirement pension and the survivors pension which is 50% of the spouses pension. This change will ensure that household income from National Insurance pensions does not fall by more than 50% of when the spouse with the higher pension dies.

b. For widows and widowers who do not qualify for a pension because they are either too young or are employed with wages that exceed 50% of the wage ceiling, we will introduce a one-time grant equivalent to one year’s survivor pension. This amount will assist them in dealing with the financial hardship that could arise following the sudden loss of the income of their spouse.

4. Pension adjustments: Earlier I mentioned that we would be providing for the wage ceiling to be increased automatically every two years to ensure that National Insurance remains relevant for higher paid persons. Similarly, these amendments provide for automatic adjustments to all pensions every other (or second) July starting in 2012. Before this however, all pensions, including minimum pension rates, will be adjusted effective July 2010. So once these amendments are passed and gazetted, and as soon as National Insurance can make the necessary adjustments to the pensions of more than 29,000 people, all pensioners will be receiving a pension increase. The amount of the increase will be as follows:

If pension awarded in 2009: 2.1%

Minimum pensions:

From $270 per month to $287

From $250 per month to $266

Assistance pensions from $230 per month to $245 per month

In the past we needed to come to Parliament to make an amendment to National Insurance regulations in order to adjust pensions. This will not have to happen anymore as starting July 2012, all pensions will be increased automatically by actual inflation as measured by the Retail Price Index. This will ensure that all pensioners will be able to maintain the standard of living that National Insurance pensions provide, and to which they have become accustomed, as the prices of food and other items increase.

5. Benefits for self-employed persons: Only 20% of the estimated 26,000 self-employed persons contribute to NIB. While there are many reasons why those in this group do not contribute, the exclusion of industrial benefits is certainly one of them. Currently, only a few classes of self-employed persons are eligible for Industrial benefits – share fishermen, straw and fruit vendors and taxi drivers who own their vehicle.

While we are extending industrial benefits to all classes of self-employed persons we are also adding a new requirement that they must be up-to-date, or current with their contributions at the time of the accident. In these amendments, we have added the term “current” as it relates to payment of contributions and have defined “current” as being no more than 60 days or 2 months behind on contributions. So if a self-employed persons has an accident while carrying out his or her trade but is more than 60 days behind on their contributions, they will not qualify for medical care, injury benefit, or if the accident is really serious, disablement pension. It is therefore important for self-employed persons to remain up-to-date with their contributions.

6. Means Test For Assistance: Since 1974, the National Insurance Board has made assistance payments to older persons, invalids and survivors who failed to qualify for a contributory NI benefit, but because of low incomes, are deemed to be in need. Until this current fiscal year, these payments have been partly subsidized by the Bahamas Government.

What National Insurance has found, though, is that some people who are receiving assistance pensions are not necessarily poor. They may be cash poor but they have assets that may be sold for cash. So to make sure that only persons who are truly in need receive non-contributory pensions financed by the contributions of workers and employers, the means test is being expanded to include financial assets such as cash, stocks and bonds, as well as real estate, other than one’s own home.

7. Other amendments:

a. For short-term benefits, Sickness, Maternity, Injury and Unemployment, change the number of benefit days in a week from 6 to 5, to be consistent with the work-week of most workers.

b. Now that NIB offers unemployment benefit, require that the claimants for Sickness benefit must be currently employed and the benefit serves to replace income lost due to sickness. So when someone loses income due to redundancy they get unemployment benefit, and when they lose income due to sickness they get Sickness benefit.

c. Reduce the number of waiting days for unemployment benefit from 15 to 3, which is the same as for other short-term benefits. With the change I just outlined, this will result in unemployment benefit being paid from only 4 days after being made redundant.

d. Introduce a new penalty for unemployment benefit for persons who fraudulently receive unemployment benefits, such as when they return to work and still collect unemployment cheques.

e. Introduce a minimum contribution requirement for anyone wishing to register as a Voluntary insured person. With the increase in the required number of contributions for retirement from 150 weeks to 500 weeks, there may be unemployed persons who will choose to start paying contributions up to 500 weeks just to get a pension. This change will eliminate that possibility.

f. Clarify certain procedures for the payment of unemployment and retirement benefits.

Financial & Accounting Amendments

Only 2 amendments to this set of Regulations:

1. Given that the first phase of the National Prescription Drug Plan will be financed by excess funds in the Medical Benefits Branch, the amendment provides for the transfer of reserves from the Medical Benefits Branch of the National Insurance Fund to the Chronic Disease Prescription Drug Fund. This Fund is a totally separate Fund and so, unlike the recent transfer of $20 million to cover unemployment benefits between branches within the National Insurance Fund, a new provision is required to transfer money out of the National Insurance Fund and into the Chronic Disease Prescription Drug Fund.

2. National Insurance regulations always provided for pensions to be adjusted once cumulative inflation exceeded 10%. However, pension adjustments did not always follow this provision. As is the case in all industrialised countries, and now in several Caribbean social security schemes, we believe that the change to automatic adjustments every two years is a superior provision as it provides pensioners with the security of knowing that their monthly pension will keep up with increases in the cost of living.

Financial Implications of These changes

1. Ceiling increase to $500 per week in 2011 and higher contribution rate for self-employed persons: approximately $17 million in first year.

2. Change to Civil servants contributions: $9.0 million in fiscal 2011/2012 for both Government and public servants

3. Contributions on tips and gratuities – still to be estimated as still uncertain on how gratuities will be incorporated for workers who do not receive gratuity payments weekly.

While there is an immediate impact on contribution income, short-term benefits will increase in 2011 and pensions will be higher in the long-run. As a result, these changes will have very little positive impact on overall long-term solvency.

1. 2010 pension adjustments: $650,000 per month or around $7.5 million in first 12 months.

2. Changes to Retirement benefit provisions will result in lower new average pensions but this will have minimal financial impact in the first few years after the change.

3. Survivors benefit: with new provision for Survivors grants and increased pensions, a rough estimate is $1.2 million in the first year of the change.

4. Because of the ceiling increase in January 2011, short-term benefit payments (Sickness, Maternity, Unemployment and Injury) will increase by around $4.5 million in 2011.

5. Bahamas Government for April 2010 – 12,009 pensionable, 7,233 non-pensionable, total 19,242

a. 14,997 (78%) will be affected by the ceiling increase (they now pay at $1,733 per month)

b. Only the ones who are pensionable will be affected by the change in contribution basis in July 2011 (12,009 or 62%)

6. All Bahamas: workers at ceiling estimated that around 55,000 who will see contributions increase in Jan. 2011 (around 40%)

7. Employers who will be affected by ceiling increase - around 4,000 out of total of 13,000 – 30%.

8. Below is the financial effect on government re the recent and proposed contribution changes:

a. 1% increase in June 2010 - $300,000 per month ($3.6 million per annum)

b. Ceiling increase January 2011 - $210,000 per month ($2.5 million per year)

c. Change in contributions for pensionable civil servants July 2011 - $750,000 per month ($9 million per year)

d. Annual contribution will increase from around $24 million in 2009/10 to $40 million in 2011/12. With approximate 60/40 employer /employee split - $24 million Bahamas Government and $16 million employees

Time line for amendments:

1. Immediate:

· 2010 pension increase

· Ability to transfer from Medical Branch to Chronic Disease Prescription Drug Fund

2. July 2011

· Pensionable civil servants to pay full contributions on all insurable wages

· Workers partly remunerated by tips & gratuities to pay contributions on gratuities

3. All other amendments – January 2011

Decisions made today will influence and impact NIB for years to come. We must have a long-term perspective and provide promises that we know today that we can afford to pay 50 years from now.

My government is committed to strengthening the National Insurance Fund for future generations. This program of social security that was established more than 35 years ago has played a vital role in the social and economic development, and the expansion of important infrastructure, in The Bahamas. We want this role for NIB to continue, and more importantly, we want to ensure that the National Insurance Board will to be able to comfortably meet the promises that have been made to today’s workers.