Economist Arjen Alberts about pensions and cessantia: “No politician is ready to tackle this issue”

POSTED: 08/6/15 7:06 PM


St. Maarten / By Hilbert Haar – Financial supervisor Cft hammers on the need to reform the pension system – by increasing the retirement age and by basing pensions no longer on a percentage of the last earned salary but on a career-average income. Increasing the retirement age from 60 to 62 has been under discussion since 2012, but meaningful decisions are still missing. The situation is a Gordian knot, says economist Arjen Alberts, a former senior policy advisor to the Social Economic Council. “Everything is interlinked – retirement age, the age for entitlement to old age pension (AOV) and the rights to cessantia payments.”

To complicate matters further, Alberts says, the government also has to consider consequences for the private sector. “If the AOV-age goes from 60 to 62 for everyone – civil servants and private sector alike – it will also have to go up in the private sector. And if the retirement age for civil servants goes from 60 to 62, the age-limit for AOV has to go up as well. Otherwise, you could have civil servants who receive during the last two years before retirement AOV on top of their regular salary. That cannot be the purpose.”

Increasing the AOV age-limit has consequences for the private sector, Alberts says. “It forces everyone to continue working until the age of 62.”

Alberts points out that the AOV is a pay-as-you-go system –that is to say, the premiums employees and employers pay into the system this year will be used to pay out current AOV-entitlements. By contrast, pension premiums go into an account and sit there for 30 years or more.

“Weirdly enough, the AOV   is well funded,” Alberts says. This is because the premiums are based on the population of the former Netherlands Antilles. The population of St. Maarten is much younger than that population. So year after year there is more money coming in, than there is going out of that system.”

The surplus in AOV-funding cannot be used for other purposes. “What you could do is lower the premiums or increase the AOV payout. This is possible and the SER has advised to do this in the past.”

Alberts points out that in the aftermath of the May 1969 revolt in Curacao, the unions managed to get the AOV-age limit lowered from 65 to 62 and later to 60. On January 1, 1975 the AOV-age was lowered to 62, and on January 1, 1991 to 60 “That was a big victory for the unions but it is forty years ago. People are healthier in their old age now and they work longer. That makes AOV more expensive because your entitlement starts at a very early age, while the allowance is ridiculously low.”

As a policy advisor at the SER, Alberts once proposed to give full AOV-rights to people who have been working on the island for at least ten years. “You’re building up AOV-rights at around two percent per year. However, the work force on the island consists for more than fifty percent of newcomers. These future recipients will receive an inadequate AOV from which they will not manage to make ends meet. And it is already so little.”

Alberts says that the SER advised to give everyone who is longer than ten years on the island full AOV-rights. “In a pay-as-you-go system, their children and grandchildren are paying the premiums. They contribute more than people who have lived here all their lives. It is an apportionment system. Their children and grandchildren pay, and they have enough of them. That is why this is possible, because of the young population and because of the children of immigrants.”

Alberts realized afterwards that this idea did not go down well. “It created a lot of bad blood. I considered it a footnote in the advice, but elsewhere they took it badly. I know this because we were called on it with the request to leave it out of the advice. The cynical thing about this is that the government will have to pay financial assistance (onderstand) anyway to people who do not receive their full AOV. That is the law.”

Turning to the pensions for civil servants, Alberts notes that one of the ways to meet the requirements of financial supervisor Cft is to decrease the percentage of the salaries the government needs to pay for the pension premiums. “You can do that by adjusting pension entitlements or by increasing the retirement age.”

The way those pensions are calculated is another story: “Almost all countries use an AOV-threshold and pensions are calculated on the assumption that citizens receive them in addition to the AOV. The pension is calculated as a supplement to the AOV – except in St. Maarten. Here is a civil servant who does not have too high a salary, is going to earn more when he retires, because he receives 70 percent of his last salary, plus full AOV. This only applies to civil servants.”

There is another hot potato to consider: the basis for calculating the pensions. “Traditional pensions are based on the last-earned salary. After the financial crisis in 2008, 80 percent of the pension systems in the world switched to a weighted average salary as the basis for pension calculations. That topic is also dynamite.”

However, only looking at the fact that with a changed pension-basis, actual pensions will go down, overlooks the other side of the medal: “Premiums will go down.”

Alberts acknowledges that pensions for civil servants are the first victims in a financial crisis. “You see that also in Greece but on the other hand, those pensions are the most generous ones in the market. The unions will object to such changes, but it is not sustainable, also not for the private sector. This way the civil service becomes an enormous elite club.”

Enter the next player in this Gordian knot: the private sector. “There is no obligatory retirement age for anybody in St. Maarten,” Alberts says. “In other countries you have to retire at a certain age.”

Does this mean that civil servants could reach retirement age, continue to work and then receive their pension and their salary? “Yes,” Alberts says. “That is still possible.” He adds that the civil servants paid premiums for those pensions and that they are therefore entitled to them.

“There is a good number of civil servants working past retirement. The fact that many of them continue to work indicates already that the retirement age is too low.”

In the private sector, the lack of a mandatory retirement age brings with it another complication. If employers want to send employees into retirement, they have to fire them. And if they fire them, the employees are entitled to cessantia-payment. For an employee with 40 years of service this amounts to more than 42 weeks of salary.

Alberts says that cessantia is “an arcane and outdated system” and that it does not fit within the generally European-oriented social insurance system. “From the point of business economics this is fatal. People never change voluntarily from one job to the next, because when they do that, they lose their cessantia rights. The first thing the government has to do is abolish the cessantia system and introduce a true unemployment insurance. Sticking as long as possible with the same employer is fatal, that way you are punishing voluntary labor mobility. Cessantia is a South American relic.”

Alberts says that the cessantia system is “some sort of Russian roulette for the employer. How do you deal with that, how do you make reservations for it? That is impossible. There is no responsible way to prepare your company for that from a business administration point of view. If you’re paying a pension premium for your employees you’re rid of that problem.”

While he considers cessantia a disaster, Alberts realizes that many employees have built up rights within this system. “Nobody has a solution for this and everybody is dancing around it, but it is an enormous problem. Some employers may even pay you if you resign voluntarily to avoid future cessantia payments.”

Alberts stands behind the SER-advice that suggested to decrease the AOV-premium, abolish cessantia and to use the money saved for an Aruba-style general pension system for all. “That way everybody is covered and you also have something to make employers happy because they will be rid of the cessantia system. But you’ll understand that there is not one politician ready to tackle this issue.”

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