When governments break pension promises

Beware, Cayman Islands: Public retirement benefits are government killers.

The most instructive example is Detroit, which earlier this month became the largest city in the United States to enter bankruptcy protection, with some US$20 billion in debt and liabilities, including billions in unfunded pension liabilities. A federal judge ruled, in effect, that Detroit’s pensions promises to its retirees could be broken, sending tremors throughout public sector unions across the U.S.

When it comes to public pension problems in general, Detroit is in a crowded room. A January 2013 study by The Pew Charitable Trusts found that 61 of the largest cities in the U.S. faced a combined pension shortfall of US$99 billion, in addition to US$118 billion for retiree health care and other benefits.

At the state level, estimates of unfunded pension liabilities range from hundreds of billions to several trillion dollars, depending on which think tank is doing the analysis. In Europe, debt and changing demographics have forced multiple countries to re-evaluate their pension schemes, most notably Greece, Spain and Portugal.

Here in Cayman, the problem is smaller but similar — with some $178 million in total unfunded public pension liabilities (as of January 2011) that will have to be funded over 20 years. A similar island nation, Bermuda, has underfunded its pension fund by nearly $1 billion. A recent study, the SAGE Commission report, acknowledges the obvious: “The stark reality is that promises made regarding pensions will have to be broken.”

Exacerbating the negative consequences of governments’ promises is the outsize influence that public worker unions wield over elected politicians, punishing those who threaten to cut overgenerous benefit packages and handsomely rewarding those who fight to preserve the status quo.

The Cayman Islands Civil Service Association does not overtly exercise its lobbying powers to the extent as, say, Bermuda’s unions, but that’s because it doesn’t have to: Cayman legislators know electoral arithmetic and fully understand the political hazards of going against the interests of the single largest voting bloc in the country. In Cayman, civil servant benefits are largely off limits.

Accordingly, Finance Minister Marco Archer gave a wide berth to this political “third rail” when he announced government’s plan to increase payments to its main public sector retirement plan for the next two years, from $19.7 million this year to $23.75 million in each of the next two years.

The $4 million annual increase will come not from additional contributions from civil servants’ salaries, but directly from government revenue, in other words, tax dollars.

Mr. Archer’s solution — the continued coddling of a select group of public servants at the expense of everyone else — is far from the ideal. However, it’s better than the alternative of ignoring government’s pension obligations (like some 1,100 private companies here have allegedly done).

On balance, Mr. Archer’s recent announcement is a positive one because it indicates the Cayman government is aware of the looming threat posed by public pensions and is at least willing to earmark funds now to prevent catastrophe later.

That makes now a good time to focus seriously on the bigger, more threatening pachyderm in the room — the government’s unfunded liability for public health-care services, which in 2004 was estimated at $654 million, but today is simply unknown.

We predict Cayman’s government will not be able to continue juggling policies of fiscal solvency, civil servant protectionism and welfare state entitlement. Sooner than later, one, the other, or all must fall.

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2 COMMENTS

  1. The Govt historically has not been making good on its own pension plan, a big problem agreed.

    The 654m of looming civil service health care expense has to be at or very near the top of the list that will threaten Cayman’s long term viability to remain competitive in the marketplace, and further greatly increase taxes on its industries and citizens!

    If that number was established in 2004, much before the civil service was greatly expanded, we know it is much much higher.

    Two simple comments come to mind:

    1. Why has there been no effort to have updated ‘independent’ actuarial work done to verify what that amount is?

    2. With that amount equating to over 20,000 per Cayman citizen why is it that the Govt employees continue to greatly out benefit every other citizen and resident where non Govt employees have to pay half of their health and pension costs, while Govt employees pay nothing??? With emphasis, private sector employees pay 5 percent with their employers matching 5 percent, yet Govt employees get 12 percent and the employee pays nothing. That makes no sense whatsoever let alone that we can not afford such luxury.

    Putting it another way, this behemoth looming expense is more than the entire national debt yet near ziltch has been done to acknowledge or address the problem.

    This makes the Turtle Farm look like a rounding error.

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  2. I think the simplest and most realistic answer to Paul’s questions is that there are no politicians willing to make the hard unpopular decisions required to remedy this issue which is to simply stop giving these benefit away for free and have Government employees pay for their benefit just like everyone else. Reason: because it will cost them a reelection and that is clearly more important to them than anything else. Caymans leader have proven over and over that their primary concern is getting reelected not making choice that are in Caymans best interest as a nation. This is just another example of that truth.

    Eventually someone else will step in and make these decisions for them it’s just a matter of time. And most people will not like the outcome.

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