Many Caymanians can’t afford to retire

Pensions reform desperately needed, say experts

Most Cayman residents don't have enough money in their pension funds for retirement.

A large swathe of the Cayman population has not saved enough money to retire and will likely need to be subsidised by government in their later years.

According to administrators of the Chamber of Commerce pension fund, the average person retiring at 65 has saved enough money to last them just four years after they stop working.

Randall Fisher, senior manager of the pension plan, said the system was in need of major reform. He said pensions administrators had been warning for some time that the mandatory contribution of 10% of a person’s annual salary would not be enough for anyone to retire on in Cayman.

Even someone retiring today who had put the maximum amount into their pension each year since the inception of the scheme in the late 1990s, would only have amassed savings of around $180,000, assuming 2% interest year-on-year.

Unless they had substantial additional savings, that would only be enough to last fewer than 15 years under the current Pensions Law formula which caps the amount that can be withdrawn by retirees at $12,480  annually.

In reality, Fisher said, most people retiring today have significantly less than that amount in their pension funds. The situation has been made significantly worse, he said, by the decision last year to allow people who had not reached retirement age to access a portion of their savings. An estimated  $400 million was withdrawn from Cayman pension funds under emergency legislation to deal with the economic impact of COVID-19.

For some, says Fisher, this has wiped out their retirement savings and left them starting to build their savings from scratch, late in their careers.

“The recent emergency withdrawal programme has allowed members to withdraw a significant amount of their pension funds that may never be replaced,” he said.

“For those that are not in their 20s it is going to be a real struggle to have sufficient retirement funds without the need to make substantial additional voluntary contributions.”

Economist Simon Cawdery, host of the ‘Money Sense’ radio show, agrees. He said it was clear that many people, who had not been impacted economically by COVID, had taken the opportunity to dip into their pension funds anyway.

“No one can fault the government for allowing people who had lost jobs to access their pensions but under what circumstances is it sensible to allow someone with no job disruption to withdraw $50,000 from their pension funds and buy a BMW that will be worth less than zero when they retire?” he said.

Cawdery added that a majority of people retiring in Cayman over the next decade, if they had no other savings or assets, would likely need government support.

Simon Cawdery

He said it was impossible to live off the $12,480 maximum annual payout provided by private pension schemes. This low annual allowance is not a fault of the system, he said, but a reflection of the fact that most people don’t have enough savings to see them through retirement.

Cawdery said Cayman had made a wise decision to introduce the mandatory pension scheme in the 1990s but the required contributions – 5% of salary from the employee and 5% from the employer – were not high enough to support the cost of retirement in Cayman.

Additionally, most people reaching retirement age now have not been contributing to their pensions for long enough to have amassed significant savings.

“Does the pension system in Cayman provide a possible path for anyone to retire at an income level that will be sufficient to support them? That is the question that needs to be asked and the answer is ‘not a hope in hell’,” he said.

Cawdery acknowledged that requiring larger mandatory pension deductions from people and businesses would be a politically difficult decision. But he said deductions of 17-20% are those that some developed countries already have and that actuaries are saying are absolutely necessary to provide the kind of savings needed to retire in Cayman.

He said there were currently many examples of people working into their 80s because they couldn’t afford to retire.

He acknowledged, however, that people could have chosen to save for retirement through other means than the mandatory national pension scheme.

“Personal responsibility is a common argument that is used in Cayman and elsewhere. The problem that is being solved by a mandatory pension plan is that history shows us that if you leave it to people to make a conscious decision to save for retirement, they don’t do it. Almost everyone prefers to buy a car than to save for retirement.”

For those that can’t work into their 80s and are unable to save enough, government will end up picking up the tab, he said.

“Cayman will have to increase taxation to help people through old age,” he said.

“We have an aging population and there will be an increasing number of people without enough money to support themselves.”

He said the situation had been made “manifestly worse” by the emergency withdrawals during COVID.

Only a fraction of the people who had chosen to access their pension funds had been impacted economically by COVID-19, Cawdery said. Unless they made sensible investments with that money, he said there would be long-term repercussions for Cayman.

Member of Parliament Chris Saunders, the Opposition spokesman on finance, made a similar point in the then-Legislative Assembly in November, bringing a private member’s motion calling for a select committee to examine and address the impact of the emergency withdrawals.

Though he said he supported the policy, Saunders argued, “We need to accept that the changes that we have made have added to the challenges and we are duty bound to fix it.”

The motion was rejected by government but Premier Alden McLaughlin acknowledged flaws with the current system and said the new National Pensions Board would be charged with recommending policy changes.

He has indicated the system is in need of radical overhaul, but said during the debate that now is  not the time to increase costs to employers or workers.

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  1. Some of us without inheriting a home or a pot of money face the tough choice of working and saving overseas to save enough to retire or continue working here and facing poverty if we live into our 70s.
    With the cost of living so high here and needing to save up an amount of, say, 25 times one’s annual living expenses to retire, the math is quite bleak. Many will be working into their 70s to keep from risking outliving the funds they’ve set aside for their last years of life.

  2. to put a reference point on the $12,480 annual withdrawal: CINICO health insurance (the only policy available to many) costs over $800/month or almost $10,000/year. Meaning that if your only income stream is your pension, however long that may last, you face the impossible situation of having $2,480 pa to live on. Plus, the CINICO premiums increase routinely.