Inadequate pension contributions: The coming crisis

According to a poll conducted in 2006, one in five Americans believed the most practical way to fund their retirement was through winning the lottery. A similar survey from early this year found that winning the lottery was the plan, too, for one in three Canadians.

The authors of the Canadian poll, BMO Financial Group, politely reminded people that the actual chances of hitting a major jackpot were “approximately 1 in 14 million.”

In the Cayman Islands, as elsewhere, the avoidance of the inevitable, meaning planning financially for one’s future, must be overcome. The consequences of not doing so are simply too dire to ignore.

By law, Cayman’s private sector workers have 10 percent of their salaries (employers contribute at least 5 percent) invested in one of the territory’s 16 private pension plans. Withdrawals typically are possible after the normal retirement age of 60. The system reassures people about the security of their lives when they reach old age.

This feeling of reassurance is misplaced — because the underlying sense of security is false.

As the Cayman Compass reports today, the majority of Cayman’s private pension plans would need employees to contribute (over and beyond the statutory 10 percent) far more of their salaries — depending on when they entered the program — if those employees wish to receive the equivalent of two-thirds of their salaries during their retirement years.

The fundamental problem of insufficient contribution levels has long been known, as has the government pension regulator’s demonstrated inability, or unwillingness, to hold accountable the many hundreds of Cayman employers who can’t or won’t contribute their share to their employees’ pension plans.

As we said in September: “Both Cayman’s private and public pension schemes are woefully inadequate. In their current state, they are unenforceable, unworkable and quite possibly unsalvageable.”

Put another way, Cayman’s current pensions scheme just doesn’t work. And even if it did work, it would be insufficient, according to hard actuarial truths.

Those truths must be explained simply and understandably to every worker in Cayman who plans on relying on their pensions to fund their retirement years.

We suggest that the government consider creating a wholly new office (Note: an office, not a department, authority or ministry) whose sole purpose would be to provide impartial analysis and individual guidance on retirement planning to every Cayman resident, absolutely free of charge.

This independent office, staffed by a small number of investment planners, would be available to all on a walk-in or appointment basis, and the financial advisers’ basic goal for each client interaction would be, at a minimum, for the client to leave knowing as precisely as possible: 1) Currently, what their prospects are for standard of living in retirement; 2) How much more they will need to earn, and save, in order to achieve the standard of living they desire. These calculations are not difficult.

This Editorial Board could hardly be accused of agitating for a larger public sector bureaucracy; however, this retirement resource appears to us to be an efficient, effective and entirely appropriate use of government funds for the direct benefit of the citizenry.

When one Caymanian reaches retirement age, only to discover his or her pension is inadequate to maintain a dignified lifestyle, it is a personal tragedy. When this becomes the standard scenario for aging Caymanians, it portends a national calamity.

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