Pension reforms: A bitter necessity

In the wake of an ageing population in Mauritius, the issue of pension reforms was raised in the 2016/2017 Budget. A High-Level-Committee will soon come up with recommendations for a new system. In future, will the pensionable age tally with the retirement age, that is at 65?

The IMF options

According to the IMF, there are several options available to offset the projected increase in public pension expenditure, while ensuring equitable outcomes.  Mauritius could draw lessons from public pension reforms in other countries, which typically have focused on a combination of measures: reducing generosity, tightening eligibility, and increasing incentives to remain in the labour market. 

• Reforms aimed at reducing the generosity of pensions systems often aim to reduce the replacement rate. This is achieved by either lowering accrual rates, or adjusting the base used to calculate final pensions. 
• Eligibility can be tightened by increasing the retirement rate or through targeting. The increase in retirement age for civil service pensions is a step in this direction, as was the failed introduction of targeting for the Basic Retirement Pension in 2004. In a context where life expectancy is projected to increase, linking the retirement age to changes in life expectancy not only reduces the fiscal burden, but also ensures more people remain eligible to work in a context of a declining working age population. 
• Incentives to remain in the labour market can be increased by either tightening eligibility to early pensions or increasing the attractiveness of late retirement through actuarially fair pension payments. Legal changes against age discrimination can also support older workers seeking jobs. 
• Other countries, in addition to reforming their existing pay-as-you-go system, introduced a funded component to replace or complement the existing pay-as-you-go schemes. While here are potential fiscal advantages from such changes, these typically take several decades to accrue. 
• Increase fertility and the working population could also be considered.
• Encourage immigration, particularly of high skilled workers, to mitigate the impact of the projected decline in the working age population.

For the IMF, containing eligibility through increasing retirement ages has several advantages for Mauritius. From a fiscal perspective, further increases in the retirement age would raise revenue by increasing the years of contribution as people work longer, and reduce expenditure by limiting the number of years pensions are paid out. Beyond the fiscal considerations, prolonging work lives could also boost economic growth by promoting higher employment levels and consumption.  Nevertheless, the social safety net should be strengthened to protect those who are unable to work longer, for example for health reasons.

Our ageing population will surely have a huge impact on public expenditure in the years to come. Persons aged 60 or over account for nearly 14% of the current population, and this ratio will reach 30% in 2051.  Today, there are six employees to support one pensioner. By 2030, there will be only three and by 2051, the alarming figure of 1.75!

So far, some measures have been taken to counter this burden, such as increasing the retirement age gradually, from 60 to 65. In the early 2000s, there was a controversial debate over a targeting system but no decision was taken. In 2015, the International Monetary Fund (IMF) published a report entitled:  “Pension Reforms in Mauritius: Fair and Fast— Balancing Social Protection and Fiscal Sustainability”. Among its authors was Vimal Thakoor, a Mauritian professional, previously employed by the Bank of Mauritius and who now works for the World Bank. According to the report, the ageing population of Mauritius threatens the sustainability of its pension system. Since fertility rates are projected to stabilize under the natural replacement rate, the total population is expected to peak at about 1.3 million in the next decade, and decline to 0.9 million by 2100—a 30 percent reduction. At the same time, the share of the elderly in the population is projected to increase steeply, reaching 35 percent by 2100.  This will worsen the dependency ratios significantly between now and 2070.

In the last Budget, it was announced that a High Level Committee will be set up to look into the pension reforms. The Committee will make its recommendations by the end of February.

In figures

• Social Security Budget Rs 21.2 billion
• Percentage population over 60 in 2016: 14.4%
• Percentage population over 60 in 2026 : 20.5%
• Percentage population over 60 in 2051 : 29.5%
• Number of state pension beneficiaries (2016): 198,992

Who is eligible?

A basic retirement pension is payable to every Mauritian citizen aged 60 or over. The person should have resided in Mauritius for an aggregate period of 12 years since attaining the age of 18. The residence qualification does not apply to a Mauritian citizen aged 70 or over. Non-citizens are also eligible provided they have resided in Mauritius for at least 15 years in aggregate since attaining the age of 40, three of those fifteen years being immediately before the claim is made.