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Everyone loses when you play with the pension

25 octobre 2019, 17:05

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The Basic Retirement Pension paid by the state has become one of the most potent weapons that each party is looking to wield this election. The MSM and the MMM have promised to hike it up to Rs9,000 and Labour-PMSD is yet to pronounce itself, although given the tight race, it’s unlikely to challenge this pledge. In an ageing society where there are more old people and fewer young people to finance their retirement, such extravagance is only putting an already unsustainable universal pension system at risk in the long term.

In recent years, the mantra of switching from a universal to a ‘targeted’ system, where only those who need it get paid the pension, has acquired a strong following. It sounds fair and has a nice class-war ring about it. This, however, is an idea that somebody has already had a crack at with disastrous results. In 2004, the MMM-MSM government announced that only those making less than Rs23,000 a month after retirement from other sources would get the pension. In practice, this turned out to be a fiasco: In Mauritius, with its large informal economy and where families living in overcrowded houses and sharing incomes, asking them to account of their individual earnings down to the cent was going to be a problem. At the end of this bureaucratic nightmare, the system did not save much: out of 110,000 pensioners, only 4,000 were kicked off the rolls. The ultimate testament of that proposal’s ineffectiveness is that today, the same MMM and the same MSM that tried to introduce targeting, are now making the grandiose promises about the pension.

Then there is the idea of raising the age at which the pension is paid. Now, raising it from 60 to 65 is a good idea. In fact, the government was supposed to do that in 2008, but baulked at the last minute. More recently, proposals have been floated to raise it to 70. In a country were the average male life expectancy is still just 72. That’s obviously ridiculous.

Another clutch of ideas (mostly from the private pensions industry) is to either move to a contributory system or do away with the state pension altogether. A contributory system means ensuring high wage growth: you need money to contribute to a pension. And it’s a non-starter in an economy where every time wage growth comes up, employers relive a mini-Armageddon in their minds.  A totally private pension system will not work either for two basic reasons. The first is that although private pensions are important for capital formation (like banks) and investment, investments made can, and do, fail. So you need a safety net, which is the state pension. And of course, not everybody will be able to afford paying for a pension scheme. The second issue is that a private pension system needs a strong regulator, which the Financial Services Commission is not. According to a report from the central bank in May this year, out of the 21 private pension funds in the country, 14 are actually underfunded in violation of the private pension rules set in 2013. Do we hear anything about that?

The pension system needs reforming: raise the minimum age to 65 and get an independent institution to decide how much to increase the pension each time, by either pegging it to inflation or to the average monthly earnings in the country. Looking to buy off the elderly today by digging the hole even deeper for tomorrow means that inevitably, those same parties that are spreading the largesse today will be tempted to fall back on one or more of the bad ideas outlined above. Everybody loses. Today’s ‘winners’ will turn out to be tomorrow’s biggest losers.