By: Olkeriil Ngirudelsang
Palau Civil Service Pension Plan (CSPP)’s proposal to increase pension contributions of government workers and to tax pension benefits has the support of President Surangel Whipps Jr.
After meeting with Whipps on July 27, CSPP board wrote a letter to Senator Rukebai Inabo, Chairperson of Senate Ways & Means & Financial Matters that “President Whipps agree with the board to increase contributions from 6% to 7% effective October 1, 2021”. The communication also said that “President Whipps suggested that the board should consider taxing monthly benefits as follows: Retirees receiving up to 8,000 dollars shall be taxed at 6% and anything beyond $8,000 shall be taxed at 12%”.
Currently, employees of government and government semi-autonomous agencies contribute 6% of their salaries to CSPP while employer pay 6% to match the contribution. Pension beneficiaries do not pay tax on the benefits they receive.
With the proposed VAT tax reform still pending in OEK, CSPP Board had requested OEK to include the Pension proposals in the bill. “The Board is asking that this tax scheme be included in the new tax reform so the retirees may be eligible to receive some sort of refund at the end of the year” stated the letter. Under the proposed tax reform bill, income tax paid on salary below $10,000 a year will be refunded back to employees.
As previously reported, Pension plan receives about 7- 8 million dollars annually in contributions while it pays out 10.2 million in benefits to retirees. This gap between what is contributed versus what is paid out to retirees came about in 1999 when the government introduced a 30-year service eligibility where a person who has not reached 60 years of age can begin receiving pension benefits.
Pension plan is partially funded by remittance tax as well as percentage of the environmental impact fee collected from tourists but the amount received from these two sources are not enough fill the funding gap.
In July CSPP Board requested OEK to provide subsidy otherwise Pension will be forced to raised contributions from 6% to 10% to cover the funding shortfall. Under the FY 2022 proposed budget, there was no subsidy earmarked for Pension Plan. Whipps had said that if the contributions are increased to 10%, government as an employer will be paying an increase of about $4 million dollars.
President Whipps made a statement after the CSPP July letter saying that government does not have the money to pay for the subsidy. He said that “there are two ways to solve this problem, one way is to demand the government to increase its contribution, the other way is to cut benefits.”