Doubling the basic retirement pension in Mauritius. Reality check.

Often used as an instrument to sustain income in retirement for the less fortunate, a basic retirement pension imposes huge financial burden on the government. Mauritius is still one of the few remaining countries that provide a state pension. Despite the good intentions of the government in caring for its elderly population, the state pension in Mauritius has, over the years, failed to take into account the increased cost of living and evolve to provide a decent standard of living to retirees.
The newly elected government has realised the inadequacy of the state pension and is committed to find a way to increase the latter. However, can we blindly assume that the government can conjure up higher pensions without affecting the broader population? Someone has rightly pointed out that the government usually gives with one hand and takes with another. There is nothing wrong with this approach as long as it is progressive and promotes social fairness in an economy.
A recent interview of a prominent financial figure, in Mauritius, highlighted the options available to the government to finance an increased state pension, namely an increase in taxation, the channelling of investment from other sectors to finance the state pension or an increase in debt levels.
Although these are perfectly viable options and are readily available, they might do more harm than good in the long run. Increasing taxation is too easy a solution and often shows that the government has not put enough thought into finding an alternative solution. Tackling an increased state pension with an increase in taxation, especially through indirect taxation, is regressive and affects the same group of people that the government is trying to protect. Higher indirect taxes, like VAT, lead to higher cost of living for everyone, including pensioners.
Channelling investment from other sectors to finance the state pension essentially refers to a reorganisation of priorities. Although this might seem like a fair proposal, care has to be taken as to which sectors will see a decrease in investment.
Governments around the world are trying to bring down their borrowing levels to a sustainable figure. Would it be wise for Mauritius to adopt a different strategy and increase its debt burdens, hence its borrowing costs and riskiness levels, to finance an increase in state pension? Surely not.
So how else do we go about financing an increase in the state pension? Is it even a good idea to contemplate increasing the state pension when pension systems around the world are sounding the alarm bell as to the growing unsustainability of financing state pension? How do we tackle the increase in life expectancy of people and avoid stretching out public finances?
Funded scheme
Although this is not possible overnight and can only be undertaken using a gradual approach, the basic infrastructure underlying the state pension should be changed from a pay-as-you-go scheme to a funded scheme. Currently, the government pays out pensions, when they fall due, out of its revenue, more generally out of tax receipts. It does not put money aside to meet the pension payments. The evolving nature of the pension liabilities and the future economic and demographic environment make such a system unsustainable in the long run, especially if state pension is to increase. The introduction of specific taxes for new employees, so that they effectively pay for their own pension, will allow a pot of money to be accumulated over the years so that it can be used to pay out state pension for the future generation. Investing money in a fund and making sure the assets match the liabilities (pensions to be paid) decreases the burden on the government and allows the fund to be a self-contained entity.
Currently, the basic retirement pension is not subject to any means test. More simply, everyone is entitled to a pension payment from the government as from the age of 60. Is this a fair and equitable system? Should a millionaire get the same state pension as someone on the breadline? Certainly not in the long run. Introducing a form of means testing will ensure that more money is available to sponsor the state pension for the less fortunate and that only the most deserving people get state assistance. Means testing has been tried in Mauritius before but was abolished in 1958 due to nepotism, fraud, bureaucracy, stigma and informational distortion. However, this was more than half a century back and the factors governing the liabilities were very different. Does means testing deserve another attempt? Yes, well, just because it did not work in the past does not mean it will not work in the future. With the introduction of biometric identity cards in Mauritius, means testing should suffer less from factors like fraud, bureaucracy, informational distortion, to name a few, because all the information on the person applying for the state pension is just a click away. It is high time that we put the huge amount of effort and money spent in the national identity card overhaul to good use, wouldn’t you agree?
Life expectancy
An increase in life expectancy has altered the population pyramid. Yet, such demographic changes have not been accompanied by an increase in the labour force among the elderly, which would be necessary to keep the burden off the state pension scheme. Accelerating the rise in retirement age such that the state pension age increases by say 2 months ever quarter and linking retirement age with life expectancy not only drive elderly people to work longer but also decrease the burden on the current generation and decrease the length of time for which the government needs to make pension payments. A bigger labour force also spells economic growth. Besides, tax receipts are received for a longer time since people are working for longer.
As it stands, the myopic behaviour of most people means that they are not saving enough, or not at all, for retirement. However, it can be argued that some people cannot afford to save for retirement because of their low income. Introducing compulsory auto-enrolment into a pension scheme will encourage people to think about their future and decrease the burden on the state; consequently alleviating the financial burden on the government and allowing it to increase the state pension for those who are in real need of income support in retirement. Encouraging individuals to save more for their own retirement, both by educating the population on the importance of having sufficient funds at this time, and by offering tax incentives to encourage such saving, breeds a culture of a less state-dependent population, allowing the government to tackle other pressing issues and helping the needy.
Of course, there exist drastic measures that can be used to finance an increased state pension. For instance, back to the initial proposition of channelling investment between different sectors. The abolition of free transport for the elderly and a reallocation of the budget to higher state pension payments might lead to a more equitable distribution of income. In fact, it is extremely challenging to justify free transport for the elderly as a means of redistributing income for a number of reasons. Even less drastic, if free transport is to be maintained, is an overhaul of the transport system for the elderly. The biometric identity card can be used as a swiping device to pay bus fares. As such, this will check the huge subsidy being given for free transport.
The pension system in Mauritius is quite stable for a small country and it is very encouraging that the government has provided for its elderly population even during dire economic situations, and at a time when powerful governments around the world are cutting down on state pension benefits and calling for an overhaul of their pension system to reduce future benefit payments. Personally, I believe that if it were not for the state pension, many people in our island would not have survived in retirement. The incentive of trying to provide a better standard of living to the elderly population by the newly elected government is the right one. However, due consideration and care should be taken as to the measures implemented to bring about such a change. It would be a pity that the country’s finances were led into the red due to economic promises made on unfounded ground. Without proper and well-structured solutions, which take into account changing demographic and economic environment as well as the soaring costs of state pension provision, I fear that the state pension system may be sitting on a ticking time bomb.

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About the author
Rahil Ram joined Legal & General Investment Management, London, in September 2014 as a graduate, after having interned with the firm in 2012. He graduated from Cass Business School, London, in July 2014 with the highest degree average in his year and holds a first class degree in BSc Actuarial Science with honours. He is currently enrolled on the MSc Actuarial Management course at Cass Business School and is studying for the Actuarial qualification.


Commentaires

I am sorry to say that some people are constantly engaged in refuting the present Government. From draft letters and generalizations by group members of 'we love mauritius' on Facebook to now other articles published in Le Mauricien, it is clear to me that people who are against the present Government, are constantly engaged in refuting the Good, now that LEPEP is doing its job well enough. I am sure that if their salaries were increased by R2000, no ne would have come to question about where the money will come from! If I am wrong in what i am saying, then where were these people when Navin Ramgoolam was fraudulously spending off the People's money on his mistress, on his 'ti copain ti copine' and on his own needs? Why was no one writing letters or articles against him then as often as you people are writing against LEPEP? In 3 weeks, this is the third letter/article of this genre. Clearly some people are trying their best to make people wear the color of glass that they want them to wear. Why don't you people see it this way: 'I am working and a very small percentage of my salary might have to go into contributing for old age pension for my parents and I am happy because my parents will be able to live a better life because of me'. Frankly, I often saw old people selling vegetables or pickles on the roads and that used to pain me. Being a youth, I am more than happy that their old age pension is increased because it gives me the relief that may be in the days to come, I will not have to see as many old people trying to sell pickles to you when you park somewhere. When people talk against the increase in pension, it truly pains my heart because it is yet another example of how values are dead and how selfish people can be nowadays. So what if we, the fit category, have to pay a little more tax (though i don't think it will happen)? Why can't we do it for our parents and grand parents?

You raised fair points, but, the article is not about refuting any measures undertaken by the government nor about criticising the increase in basic retirement pension for the elderly. Instead, it aims at providing an overview of the means available to the government of how best to go about increasing the state pension without jeopardising any long-term growth prospects of Mauritius. And it is geared to provide some insight as to the tools available to the government in light of the changing economic and demographic environment.
It is encouraging to see that youngsters like yourself acknowledge that we need to look after our elderly and stand up for those who have toiled hard to bring our country to where it is today. My hat's off to you. The article is destined to provide the same support for elderly people by raising an awareness of how best to do this in terms of state pension provision.
"Personally, I believe that if it were not for the state pension, many people in our island would not have survived in retirement. The incentive of trying to provide a better standard of living to the elderly population by the newly elected government is the right one."

Well written article Mr. Ram... Action is seen as right when the outcome is right for the future of Mauritius.