‘We’re paying out much, much more than what’s being received’

The NMI Retirement Fund is able to meet only half of the recommended 60.9 percent contribution rate, a problem that has built up over the years, according to administrator Richard Villagomez.

“You’re not getting enough money to support the system and we’re paying out much, much more than what’s being received,” Villagomez said at the Rotary Club of Saipan general membership meeting at the Hyatt Regency yesterday.

Given the “significant gap” between what the system requires against what is actually being contributed, Villagomez warned that the Fund will soon run out of money if it does not receive additional contributions.

Comparing the Fund’s status to other Micronesian islands, Villagomez said that Palau has a 26.8 percent recommended contribution rate versus its 6 percent actual contribution rate, while the neighboring island of Guam has a recommended contribution rate of 24.8 percent versus its actual contribution rate of 21.5 percent.

The administrator cited two “big factors” in the difference between the CNMI’s and Guam’s recommended contribution rates: covered payroll and increase in liabilities.

According to Villagomez, covered payroll refers to members of the defined benefit requirement plan that was closed out when the law that created the defined contribution plan was enacted. “So the number of people or members of the defined benefit plan will continue to shrink as people retire, refund, or move on,” he said.

As people retire, Villagomez said the Fund incurs more liabilities, causing them to pay out more. “It’s actually a combination of those two factors that really push off our percentage to 60.9 percent,” he added.
When asked whether the high recommended contribution rate is also brought by the Fund’s generosity in giving benefits, Villagomez replied, “Yes, that could be a contributing factor.”

Restructuring benefits

Based on a report by former Fund consultant Wilshire Consulting, Villagomez said the restructuring of retiree benefits is the “only choice” to lengthen the life of the Fund, which they expect to run out of money “in about two and a half years based on the current trend.”

Villagomez said the Fund currently issues checks to some 2,800 beneficiaries.

While there are other solutions available to restore the Fund’s solvency like plan assets and future returns as well as future contributions, Villagomez noted that the probability of these two options happening is either “zero” or “close to zero.”

“The immediate solution for now, at least to buy time, is to restructure the benefits,” said Villagomez, who added but did not elaborate that there are legal and constitutional issues to this solution.

$63 million payout

Citing unaudited figures, Villagomez disclosed that the estimated benefits the Fund paid out last year was $63 million. Of this amount, about $53 million was spent in the CNMI, which is 5.5 percent of the Commonwealth’s reported gross domestic product of $962 million in 2009.

“In two and a half years, when we stop paying pensions or not able to pay pensions, we’re looking at estimating about 10 percent of consumer spending to be taken out or cease to exist in the economy,” added Villagomez.