January 24, 2022

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Oran Hall | Pension or insurance? The real purpose of the NIS

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The National Insurance Scheme (NIS) is a compulsory contributory-funded sociaL-security scheme meant to cover all employed people in Jamaica.

It is administered under the National Insurance Act and offers some financial protection to the worker and his or her family against loss of income arising from injury on the job, sickness, retirement, and/or death of the bread winner.

Everybody between 18 and 70 who is gainfully occupied in insurable employment is required to be registered with the NIS. Those qualified to be insured include the employed, self-employed, and voluntary contributors.

Voluntary contributors, being neither employed nor self-employed, choose to contribute, with the approval of the NIS, although they are not required to do so because they retired from full-time employment before the normal retirement age, became unemployed, or relocated indefinitely to a country that does not have a reciprocal social-security agreement with Jamaica.

The NIS is more of an insurance scheme than a pension scheme and was never meant on its own to provide a liveable retirement income for anyone. It is reasonable to say that it is a scheme that provides a form of safety net primarily for low-income earners who do not belong to private-insurance schemes or private-pension schemes.

It is not free as beneficiaries must pay contributions during their working years. For those in the employ of others, both the employer and employee pay a specified rate on a specified salary, and the self-employed pays an amount equivalent to the sum of the contributions of the employee and the employer.

Since April 1, 2020, the contribution rate has been 6.0%. Of this, 3.0% is deducted from the employee’s gross salary, subject to the NIS insurable wage ceiling, or IWC, and the employer makes a matching contribution. With the IWC currently at $3 million, the maximum contribution for an employee is $7,500 per month for those earning $3 million or more per annum. The IWC is scheduled to increase to $5 million effective April 2022. The self-employed pays the full 6.0%, subject to the IWC.

The Ministry of Labour and Social Security is responsible for collecting NIS contributions and for administering the benefits under the scheme.

Contributions to the NIS are invested by the National Insurance Fund (NIF) in a diversified investment portfolio of bonds, money market securities, ordinary and preference shares, and real estate.

Dividends, interest, and rent are critical to the ability of the NIS to pay benefits, but real estate and equity investments are helpful in growing the value of the portfolio although their increased value does not translate to cash to be distributed unless they are sold.

The NIS pays an old-age pension to contributors who attain the retirement age defined by the National Insurance Act and meet the contribution requirements during their life time.

The pension benefit is two-tiered, consisting of a basic or flat-rate component and an additional wage-related component.

Flat-rate pensions are based on the contribution record. The average number of weeks of contributions from the eligibility age of 18 years to the normal retirement age are as follows:

• Full rate – 39 weeks or more;

• Three-quarter rate – 26 to 38 weeks;

• Half-rate 10 to 25 weeks.

An additional pension is paid based on contributions at the rate of six cents per $13 of contribution paid. There is also an invalidity pension as well as a widow’s/widower’s pension.

The Invalidity benefit is payable to a contributor who has satisfied the contribution conditions and has been diagnosed with a permanent medical condition that renders the contributor incapable of work for a continuous period of at least 26 weeks. This benefit is converted to a retirement pension when the beneficiary attains the retirement age.

The widow’s/widower’s benefit is payable to the spouse of a deceased NIS contributor or pensioner. The payment of this benefit and the spouse’s allowance can be either for the short term or long term over the beneficiary’s lifetime, depending on the qualifying conditions.

The weekly rate for benefits are as follows:

• Full rate – $3,400;

• Three-quarter rate – $2,550;

• Half-rate – $1,700.

There are several other benefits.

The funeral grant is a benefit that is payable upon the death of an NIS pensioner or his/her spouse; an NIS contributor who has satisfied the required contribution conditions or their spouse; or an employee whose death was as a result of injuries sustained in insurable employment.

A grant is a one-time payment that is awarded when the contribution conditions for a pension are not satisfied. Grants are payable in the categories of retirement, widow’s/widower’s, special child, orphan, and invalidity.

The NIS also pays an orphan benefit, a special child benefit, an employment injury benefit, an employment injury disablement benefit, an employment injury death benefit, and a maternity benefit.

A big benefit is health insurance under the NI Gold Health Insurance Plan for pensioners, which requires no payment of premiums. Some of the benefits it provides are in-hospital room and board, surgeon and assistant surgeon’s fees, doctor’s visits and home visit fees, diagnostic services, prescription drugs, and optical and dental.

Generally, the benefits of, for example, old-age pension, are relatively small, but they do add up. Of particular value is NI Gold, which can be a saviour to pensioners who lose the health insurance benefit they used to get from their employers prior to their retirement.

The ability of the NIS to pay higher levels of benefits can be enhanced by an improvement in the contributions, by more people becoming contributors, and by higher levels of income from the investment portfolio.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. [email protected]

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