MARSHALLS RETIREMENT FUND BOUND FOR BANKRUPTCY

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Recent investment gains belie dwindling resources

By Giff Johnson Mariana HAGATNA Guam (Marianas Business Journal, Dec. 6, 2010) – Marshall Islands Social Security Administration (MISSA) investments hit their highest-ever levels in mid-November, topping the US$55.6 million mark. But don't let that fool you, officials warn that the country's retirement fund is on its way to bankruptcy.

Frank Armstrong, who heads Investor Solutions that manages the retirement agency's investments, was in Majuro in November for his annual report to the board. He downplayed the success of the last year, saying: "There's no magic (to this result). It is diversification of investments, reduction of risk and doing it as cheaply as possible."

But he also offered a sobering assessment of the financial troubles facing the retirement agency, which has money on hand to cover only about 25 percent of its long-term retirement liabilities. With beneficiary payments exceeding tax revenue this year for the first time since the 1990s, the retirement fund is being forced to resort to dipping into its investments to cover payments.

"The situation cannot be solved by higher stock market returns, Armstrong said. Action to change the beneficiary system has to be taken to fix the problem."

Jack Niedenthal, chairman of the retirement fund board, said the investments at MISSA "are sound as is our administrative policy with regard to our administrative expenses and we have about 90 percent compliance from the taxpayers."

He said the single overriding issue with regard to the future of the Administration is the benefit structure. "Our Social Security system cannot be sustained with the ever increasing beneficiary payouts and flat revenue and tax collection projections. We will run out of money if something is not done to change how we pay our benefits. This is an urgent matter and is not something that should be delayed."

[PIR editor’s note: An earlier report notes that a number of Marshall Islands agencies owe the Marshall Islands Social Security Administration large sums of money. Kwajalein Atoll local government owes nearly US$4 million, the government-owned Air Marshall Islands owes US$1 million, and a handful of other debtors owe from US$100,000 to nearly half a million dollars. All are either in court-ordered settlements or are in negotiation with MISSA.]

The retirement agency's U.S. based actuary predicts it has about 10 years to bankruptcy if changes are not made. The Cabinet has named a commission to assess the situation and recommend to the Cabinet ways to fix the system. A key holdup is likely to be next year's national election: it is doubtful political leaders will want to be associated with benefit cuts in an election year.

After a tough 18 months in 2008 and 2009, the fund's international investments have rebounded. Through the end of October, its investments were outperforming the benchmark S&P 500's rate of return by more than double, 9.72 percent compared to 3.89 percent, according to Investor Solutions report to MISSA.

This year's shortfall in revenue to meet beneficiary payment is estimated at more than US$1 million. But the difference between tax revenue and benefit payouts will rise dramatically to more than US$5 million in just three years and will hit US$8 million by 2015, forcing the retirement fund to withdraw an increasing amount of money out of its US$50 million investment fund each year until it is exhausted, board vice chairman David Paul said recently.

The agency's board is considering some recommendations for action such as extending normal retirement age from 62 to 65, freezing all benefits for active workers and decreasing by 25 percent all benefits across the board.

"It's better to take action now, said Niedenthal. The changes will be less painful.

Still, political action that reduces benefits in an election year is difficult in any country, and more so in a small nation like the Marshall Islands.

A key problem that affects the retirement system is that a majority of beneficiaries receiving payments have gotten more money from the fund than they paid in while they were working.

Niedenthal said the agency is a government program and ultimately the government "will have to take a hard look and decide how to solve the problem. There are solutions, though they are not politically easy."

 

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