## _cr13259

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---

### Sustaining Potential Growth — A. Growth Performance
- Aruba’s real GDP growth:
  - averaged 4.8 percent in the 1990s.
  - averaged close to 2 percent during 2000-07.
  - contracted on average by 2.4 percent during 2008-12.
  - contracted by over 11 percent in 2009.
  - the level of real GDP in 2012 remained 12 percent below its pre-crisis level and its recovery is expected to be slow.
- Volatility of GDP growth (standard deviation of real GDP growth):
  - 1990s: 2.8
  - 2000-07: 4.2
  - 2008-12: 5.6
- Sectoral exposure and external links:
  - Tourism accounts for over 80 percent of economic activities.
  - More than 60 percent of Aruba’s tourists originate in the US.
  - Vulnerabilities include business cycles in source countries for tourism/FDI and fluctuations in international oil prices affecting refining profitability.
- Potential output:
  - Potential output has been on a declining trend, with current potential growth near or below zero depending on estimation method (time-trend polynomial and HP filter).

### Sustaining Potential Growth — B. What Explains the Modest Growth Performance
- Tourism competitiveness:
  - Aruba’s market share in Caribbean tourism increased during the crisis and the sector rebounded faster than Caribbean peers.
  - Revenue per available room has been consistently higher than the Caribbean average.
  - A sizable share of resorts is owned by timeshare owners, providing stability.
  - Authorities pursued market diversification toward South American markets (Venezuela, Brazil, Chile, Colombia).
- Input costs and competitiveness indicators:
  - Electricity tariff: US$0.26 per kwh.
  - Broad comparisons show competitive position on wages (ratio of average wage to per capita income) and shipping costs of imports relative to many peers.
- Structural impediments to diversification (labor market examples from Aruba’s Labor Law):
  - Employment contract entered before hiring; employer may not ask employee to perform jobs other than specified in contract.
  - Temporary workers allowed only through an agency for up to 12 months in same position; after 12 months a pause of 3 months before rehiring the same temporary worker in same position.
  - Lay-offs require a dismissal permit from the Director of the Department of Labor and severance pay based on last salary and years of service.
  - Total working time in a week (including overtime) cannot exceed 55 hours.
  - Anecdotal evidence of high borrowing costs for new entrepreneurs and unclear/complex licensing requirements.
- Growth-accounting framework and drivers:
  - Production function: Y = A K^α L^(1−α) with α assumed to be 0.35.
  - Capital accumulation assumed with depreciation δ = 6 percent per year.
  - Results: the slowdown in growth is largely attributed to falling total factor productivity (TFP); labor’s contribution has declined over time. Negative shocks in recent years contributed to larger negative TFP contributions.

### Sustaining Potential Growth — C. Outlook for Potential Growth
- Demographics and labor force projections:
  - Share of population above 65 years: 7.4 percent in 2000; 10.4 percent in 2010; expected to more than double in 2030.
  - Labor force participation rate: 64.7 percent in Aruba versus 72.2 percent EU average.
- CBS 2010–2030 projections (summary):
  - Low scenario: Aruba would need a total of 45,025 immigrant workers in 2030, accounting for 37.4 percent of the projected population, to sustain a growth rate of around 1 percent.
  - Medium scenario: Aruba would need a total of 74,121 immigrant workers in 2030, or about 52 percent of the total projected population, to sustain a growth rate of 1.6 percent (the current potential growth rate).
  - Policy implications: such high levels of immigrant workers are likely to pressure housing, infrastructure, health, and education services; attention needed to increase productivity via improving the business environment, raising labor force participation, skill improvements, and technological upgrading.
- Tourism “exhaustion effect” (empirical results, sample 1990-2012; dependent variable = 5-year moving average growth rate):
  - Tourist arrival (ratio of total population): coefficient 0.79** (standard errors 0.29, 0.30, 0.28 across specifications).
  - Tourist arrival (ratio of total population)^2: coefficient −0.05** (standard errors 0.02).
  - Inflation: coefficient 0.005** (standard error 0.002) in one specification.
  - Interpretation: tourist arrivals positively affect growth but the negative quadratic term implies a saturation/exhaustion effect—tourism may have reached limits to further growth dividends given land constraints and immigrant labor needs.

### Sustaining Potential Growth — D. Potential for Developing Renewable Energy
- Government goal and current status:
  - Goal: make Aruba 100 percent dependent on solar and wind energy.
  - One windmill park currently provides about 15 percent of total energy needs.
  - Another windmill park planned in 2014 expected to increase the share of wind energy to 25 percent.
  - Plans include establishing research laboratories, attracting overseas companies to use Aruba as a test platform, and positioning Aruba as a gateway between South America, the U.S., and Europe.
- Economic rationale and benefits:
  - Aruba has abundant solar and wind resources.
  - Developing renewable energy could reduce input costs, boost competitiveness, reduce pollution, and support technological/knowledge-based productivity gains.
- Financing and cost structure:
  - Developing renewables requires huge upfront investment.
  - For onshore wind energy, a very high portion of Leveraged Cost of Electricity (LCOE) is investment cost; O&M costs are minimal.
  - For gas-powered energy, fuel and carbon costs comprise the majority of LCOE.
  - Securing financing without jeopardizing external sustainability will require success in attracting FDI inflows.
- Constraints from island status and labor shortages:
  - Aruba cannot hook up to the electrical grid of other countries, so it may not be possible for it to be 100 percent dependent on renewable energy.
  - Backup power plants will always be necessary.
  - There are technological and other constraints to storing wind energy, which worsen as the number of windmills increases.
  - Exporting non-tourism services to South America, including in the field of renewable energy, may face difficulties in light of shortage of skilled labor.

### Tourism Competitiveness and Diversification — Policy Takeaways and Statistics
- Policy guidance:
  - Maintain current price competitiveness in tourism.
  - Continued diversification in tourism source markets is useful.
  - Marketing efforts in the past almost doubled tourist arrivals from Latin America between 2005 and 2013.
  - Tourists from U.S. still account for more than 60 percent of the total, indicating room for diversification.
- Selected statistics on visitor arrivals:
  - 2005 visitor arrivals (in percent of total): US 73.1; Latin America 10.3; Other 16.6.
  - 2003Q1 visitor arrivals (in percent of total): US 61.5; Latin America 18.9; Other 19.6.

### Fiscal Vulnerabilities, Consolidation Rationale, and Policy Recommendations
- Fiscal context:
  - Overall deficit averaged around 3 percent of GDP during 2005-07 and almost doubled during 2009-12.
  - Tax revenues (excluding the one-off oil refinery tax settlement payments) remained broadly stable at around 20 percent of GDP.
  - Capital spending remained broadly unchanged at relatively low level of 1 1/2 percent of GDP.
  - Estimated public debt ratio at end-2012 stood at 67 percent of GDP (pre-crisis levels hovered around 45 percent of GDP).
  - Aruba’s external debt is around 105 percent of GDP (noted elsewhere in the chapter).
- Risks and projections without additional reforms:
  - Without additional reforms, the average deficit observed during 2009-12 is likely to persist in the medium term bringing the public debt level above 80 percent of GDP in 2018.
  - Fiscal impact of ageing population and PPP commitments pose significant longer-term risks.
- Rationale for consolidation:
  - Reaching a balanced budget in 2015 and ensuring surpluses of 1 percent of GDP on average thereafter will bring public debt down to below 60 percent of GDP in 2018.
  - Credible consolidation can: create fiscal space for contingent liabilities, lower government financing risks, boost resilience to shocks, and improve growth prospects.
- Fiscal multipliers and composition:
  - Plausible range for spending multipliers: 0.5-1.
  - Plausible range for revenue multipliers: 0.1-0.5.
  - Multipliers are likely lower for small island economies like Aruba; given Aruba’s openness, fiscal multipliers are unlikely to be large.
  - Composition should include both expenditure and revenue measures.
- Fiscal institutions and rules:
  - Fiscal responsibility frameworks can contribute to successful consolidations.
  - Evidence cited: around a quarter of successful major debt reduction episodes were preceded or accompanied by fiscal rules; expenditure-based rules were more successful.
  - Aruba has initiated work on a fiscal council and is considering both a debt rule and a nominal expenditure ceiling.
  - Strengthen fiscal institutions by building capacity for reporting and establishing monitoring and corrective mechanisms.

### Recommended Expenditure- and Revenue-Side Measures
- Expenditure-side measures:
  - Public sector personnel cost:
    - Compensation of government employees is above 11 percent of GDP; adding wage subsidies brings wage-related spending close to 15 percent of GDP.
    - Target a gradual reduction in wage related costs to their 2009 level to create savings of around 2 percent of GDP by 2018.
    - Achieve through combination of permanent reduction in number of government employees and review of wage compensation policies. Government employment grew by 3 percent in 2012.
  - Other current spending:
    - Restrain spending on goods and services in line with public sector employment reductions and improve spending efficiency.
    - Contain and reduce transfers and subsidies, especially transfers to the health care system.
    - Restraining these categories can produce savings of around 2 1/2 percent of GDP.
  - Capital spending:
    - Government capital spending levels are relatively low; cutting further may harm infrastructure and growth, so savings here are difficult to achieve.
  - Other savings:
    - Gradual fiscal improvement can generate savings from lower interest expenditure to the tune of 1 percent of GDP by the end of the consolidation period compared to unchanged-policy scenario.
- Revenue-side measures:
  - Consider raising more revenues from indirect taxes; introduction of a VAT is one potential measure.
    - Simulation cited: a VAT with a standard rate of 15 percent (and a lower rate for the tourism sector) could yield around 6 percent of GDP in revenues, but implementation would require proper preparation.
  - More feasible near-term measures:
    - Raise the BBO rate back to its original level of 3 percent to provide additional 2 percent of GDP in revenues.
    - Increase excise taxes and import duties to levels that would produce an additional 1 percent of GDP in revenues.

### Demographics, Pensions, Health Care, and Ageing-Related Reforms
- Demographic projections (medium growth scenario of CBS) — population and dependency ratios (share in total population, percent):
  - 2010: Total population 101,484; Age 0-15 20.8; Age 16-59 63.8; Age 60 & over 15.4; Dependency Ratio 0.24.
  - 2015: Total population 115,256; Age 0-15 18.6; Age 16-59 63.4; Age 60 & over 18.0; Dependency Ratio 0.28.
  - 2020: Total population 126,765; Age 0-15 18.0; Age 16-59 61.6; Age 60 & over 20.4; Dependency Ratio 0.33.
  - 2025: Total population 139,569; Age 0-15 18.4; Age 16-59 59.0; Age 60 & over 22.6; Dependency Ratio 0.38.
  - 2026: Total population 142,332; Age 0-15 18.5; Age 16-59 58.7; Age 60 & over 22.8; Dependency Ratio 0.39.
  - 2030: Total population 153,386; Age 0-15 18.9; Age 16-59 57.6; Age 60 & over 23.5; Dependency Ratio 0.41.
- Pension and health financing:
  - AOV (old-age pension) balance turned negative in 2009; reserves projected to run out in 2014 (Central Bureau of Statistics of Aruba, 2011).
  - Projections (assuming unchanged pension parameters and costs growing at the inflation rate) suggest the AOV’s deficit will reach close to 3 percent of GDP by 2030.
  - AZV (general health insurance) operations balanced by annual transfers from central government amounting to around 2½ percent of GDP in 2012; absent changes, government transfers to AZV will need to increase.
  - Aruba’s public spending on health care is already one of the highest in the regional comparison presented.
- Suggested reforms to address ageing pressures:
  - Raise the statutory retirement age:
    - A gradual raise will strengthen pension finances through more years of contributions and fewer years of benefits, and can increase labor supply and consumption.
  - Increase old-age insurance contribution rates:
    - Employee contribution currently at 3 1/2 percent; consider increasing contributions, while taking overall labor taxation into account.
  - Reduce the replacement rate:
    - Slow pension cost increases via lower pension benefits, changing indexation approach, or linking benefits to demographic factors (e.g., life expectancy).
    - Recent introduction of mandatory general pension expected to raise the overall replacement rate in the longer term and help reduce pressure on AOV to increase benefits.
  - Increase revenues and contain health care costs:
    - Raise contribution rates (currently at 9 percent for employers and 2.5 percent for employees) and reduce costs by shifting part of the burden to beneficiaries through co-payments and other measures.

### Pension Reform Simulations and Health-Care Financing Implication
- Pension spending scenarios (Percent of GDP):
  - 2010 2020
    - No change: 4.4 6.0
    - Increase retirement age to 63 by 2020: 4.4 4.7
    - Increase retirement age to 65 by 2020: 4.4 3.9
- Pension system findings and reform focus:
  - Current retirement age for AOV beneficiaries is 60 years, described as "relatively low" compared to many regional peers where it has been raised to the range of 62-65 years.
  - Simulations indicate that raising the retirement age can be a "highly effective measure to contain pension spending."
  - Given "the current level of payroll taxes and replacement rate in Aruba," the pension reform recommendation is to focus primarily on increasing the retirement age rather than on reducing replacement rates or raising contribution rates.
- Immediate health-care financing reform implication:
  - Shift part of medical costs to beneficiaries is highlighted as necessary; specific mechanisms include "introduction of copayments and deductibles" since "currently, the government pays for 100 percent of the cost."

### Fiscal and Policy Conclusions (summary of paragraphs 15–18)
- Strong fiscal management is required to avoid excessive debt and to create sufficient space for addressing shocks and risks from contingent liabilities.
- Under a fixed exchange rate, fiscal policy is the main stabilization tool and can help boost the economy’s potential growth.
- Because fiscal multipliers are "unlikely to be large in Aruba," the authorities are advised that "fiscal consolidation without delay" is warranted.
- Consolidation should primarily focus on expenditure reduction, while generating higher revenues should also be part of the policy mix.
- Immediate measures are needed to improve the financial situation of the old-age pension and general health care schemes, which "could include a combination of changes to the retirement age, contribution rates and generosity of pension and medical benefits."
- Adoption of a well-designed and effective fiscal responsibility framework will support successful fiscal consolidation:
  - "Well-designed fiscal rules and monitoring mechanisms to ensure transparency and timely implementation of the budget can help deal with discretionary policy making arising from political expediency."
  - Authorities' intention to introduce a framework consisting of fiscal rules and a fiscal council is described as "a welcome move."

*Source: IMF staff report content excerpt.*

### References _______________________________________________________________________________  12

### SUSTAINING POTENTIAL GROWTH

### A. Growth Performance
- Aruba’s real GDP growth:
  - averaged 4.8 percent in the 1990s.
  - averaged close to 2 percent during 2000-07.
  - contracted on average by 2.4 percent during 2008-12.
  - contracted by over 11 percent in 2009.
  - the level of real GDP in 2012 remained 12 percent below its pre-crisis level and its recovery is expected to be slow.
- Volatility of GDP growth (standard deviation of real GDP growth):
  - 1990s: 2.8
  - 2000-07: 4.2
  - 2008-12: 5.6
- Sectoral exposure and external links:
  - Tourism accounts for over 80 percent of economic activities.
  - More than 60 percent of Aruba’s tourists originate in the US.
  - Vulnerabilities include business cycles in source countries for tourism/FDI and fluctuations in international oil prices affecting refining profitability.
- Potential output:
  - Potential output has been on a declining trend, with current potential growth near or below zero depending on estimation method (time-trend polynomial and HP filter).

### B. What Explains the Modest Growth Performance
- Competitiveness of tourism:
  - Aruba’s market share in Caribbean tourism increased during the crisis and the sector rebounded faster than Caribbean peers.
  - Revenue per available room has been consistently higher than the Caribbean average.
  - A sizable share of resorts is owned by timeshare owners, providing stability.
  - Authorities pursued market diversification toward South American markets (Venezuela, Brazil, Chile, Colombia).
- Input costs and competitiveness indicators:
  - Electricity tariff: US$0.26 per kwh.
  - Broad comparisons show competitive position on wages (ratio of average wage to per capita income) and shipping costs of imports relative to many peers.
- Structural impediments to diversification:
  - Labor market rigidities (examples from Aruba’s Labor Law):
    - Employment contract entered before hiring; employer may not ask employee to perform jobs other than specified in contract.
    - Temporary workers allowed only through an agency for up to 12 months in same position; after 12 months a pause of 3 months before rehiring the same temporary worker in same position.
    - Lay-offs require a dismissal permit from the Director of the Department of Labor and severance pay based on last salary and years of service.
    - Total working time in a week (including overtime) cannot exceed 55 hours.
  - Anecdotal evidence of high borrowing costs for new entrepreneurs and unclear/complex licensing requirements.
- Growth-accounting framework and drivers:
  - Production function: Y = A K^α L^(1−α) with α assumed to be 0.35.
  - Capital accumulation assumed with depreciation δ = 6 percent per year.
  - Results: the slowdown in growth is largely attributed to falling total factor productivity (TFP); labor’s contribution has declined over time. Negative shocks in recent years contributed to larger negative TFP contributions.

### C. Outlook for Potential Growth
- Demographic trends and labor force projections:
  - Share of population above 65 years: 7.4 percent in 2000; 10.4 percent in 2010; expected to more than double in 2030.
  - Labor force participation rate: 64.7 percent in Aruba versus 72.2 percent EU average.
- CBS 2010–2030 projections (summary):
  - Low scenario: Aruba would need a total of 45,025 immigrant workers in 2030, accounting for 37.4 percent of the projected population, to sustain a growth rate of around 1 percent.
  - Medium scenario: Aruba would need a total of 74,121 immigrant workers in 2030, or about 52 percent of the total projected population, to sustain a growth rate of 1.6 percent (the current potential growth rate).
  - Policy implications: such high levels of immigrant workers are likely to pressure housing, infrastructure, health, and education services; attention needed to increase productivity via improving the business environment, raising labor force participation, skill improvements, and technological upgrading.
- Tourism “exhaustion effect”:
  - Empirical results (sample 1990-2012, dependent variable = 5-year moving average growth rate):
    - Tourist arrival (ratio of total population): coefficient 0.79** (standard errors 0.29, 0.30, 0.28 across specifications).
    - Tourist arrival (ratio of total population)^2: coefficient −0.05** (standard errors 0.02).
    - Inflation: coefficient 0.005** (standard error 0.002) in one specification.
  - Interpretation: while tourist arrivals positively affect growth, the negative quadratic term implies a saturation/exhaustion effect in Aruba—tourism may have reached limits to further growth dividends given land constraints and immigrant labor needs.

### D. Potential for Developing Renewable Energy
- Government goal and current status:
  - Goal: make Aruba 100 percent dependent on solar and wind energy.
  - One windmill park currently provides about 15 percent of total energy needs.
  - Another windmill park planned in 2014 expected to increase the share of wind energy to 25 percent.
  - Plans include establishing research laboratories, attracting overseas companies to use Aruba as a test platform, and positioning Aruba as a gateway between South America, the U.S., and Europe.
- Economic rationale and benefits:
  - Aruba has abundant solar and wind resources.
  - Developing renewable energy could reduce input costs, boost competitiveness, reduce pollution, and support technological/knowledge-based productivity gains.
- Financing and cost structure:
  - Developing renewables requires huge upfront investment.
  - For onshore wind energy, a very high portion of Leveraged Cost of Electricity (LCOE) is investment cost; O&M costs are minimal.
  - For gas-powered energy, fuel and carbon costs comprise the majority of LCOE.
  - Securing financing without jeopardizing external sustainability will require success in attracting FDI inflows.

*Source: IMF staff report content excerpt.*

### 13.      Being an island economy and having a shortage of skilled labor may also pose

### 13.      Being an island economy and having a shortage of skilled labor may also pose

### Constraints from island status and labor shortages
- Aruba cannot hook up to the electrical grid of other countries, so it may not be possible for it to be 100 percent dependent on renewable energy.
- Backup power plants will always be necessary.
- There are technological and other constraints to storing wind energy, which worsen as the number of windmills increases.
- Exporting non-tourism services to South America, including in the field of renewable energy, may face difficulties in light of shortage of skilled labor.

### Tourism competitiveness and diversification (policy takeaway)
- Maintain current price competitiveness in tourism.
- Continued diversification in tourism source markets is useful.
- Marketing efforts in the past almost doubled tourist arrivals from Latin America between 2005 and 2013.
- Tourists from U.S. still account for more than 60 percent of the total, indicating room for diversification.

### Selected statistics on visitor arrivals (as presented)
- 2005 visitor arrivals (in percent of total): US 73.1; Latin America 10.3; Other 16.6.
- 2003Q1 visitor arrivals (in percent of total): US 61.5; Latin America 18.9; Other 19.6.

### Fiscal vulnerabilities and immediate context (Rebuilding Fiscal Space – Background)
- Overall deficit averaged around 3 percent of GDP during 2005-07 and almost doubled during 2009-12.
- Tax revenues (excluding the one-off oil refinery tax settlement payments) remained broadly stable at around 20 percent of GDP.
- Capital spending remained broadly unchanged at relatively low level of 1 1/2 percent of GDP.
- Estimated public debt ratio at end-2012 stood at 67 percent of GDP (pre-crisis levels hovered around 45 percent of GDP).
- Aruba’s external debt is around 105 percent of GDP (noted elsewhere in the chapter).

### Risks and projections without additional reforms
- Without additional reforms, the average deficit observed during 2009-12 is likely to persist in the medium term bringing the public debt level above 80 percent of GDP in 2018.
- Fiscal impact of ageing population and PPP commitments pose significant longer-term risks.

### Rationale for consolidation
- Reaching a balanced budget in 2015 and ensuring surpluses of 1 percent of GDP on average thereafter will bring public debt down to below 60 percent of GDP in 2018.
- Credible consolidation can: create fiscal space for contingent liabilities, lower government financing risks, boost resilience to shocks, and improve growth prospects.

### Fiscal multiplier considerations and composition of adjustment
- Plausible range for spending multipliers: 0.5-1.
- Plausible range for revenue multipliers: 0.1-0.5.
- Multipliers are likely lower for small island economies like Aruba; given Aruba’s openness, fiscal multipliers are unlikely to be large.
- Composition should include both expenditure and revenue measures.

### Fiscal institutions and rules
- Fiscal responsibility frameworks can contribute to successful consolidations.
- Evidence cited: around a quarter of successful major debt reduction episodes were preceded or accompanied by fiscal rules; expenditure-based rules were more successful.
- Aruba has initiated work on a fiscal council and is considering both a debt rule and a nominal expenditure ceiling.
- Strengthen fiscal institutions by building capacity for reporting and establishing monitoring and corrective mechanisms.

### Recommended expenditure-side measures
- Public sector personnel cost:
  - Compensation of government employees is above 11 percent of GDP; adding wage subsidies brings wage-related spending close to 15 percent of GDP.
  - Target a gradual reduction in wage related costs to their 2009 level to create savings of around 2 percent of GDP by 2018.
  - Achieve through combination of permanent reduction in number of government employees and review of wage compensation policies. Government employment grew by 3 percent in 2012.
- Other current spending:
  - Restrain spending on goods and services in line with public sector employment reductions and improve spending efficiency.
  - Contain and reduce transfers and subsidies, especially transfers to the health care system.
  - Restraining these categories can produce savings of around 2 1/2 percent of GDP.
- Capital spending:
  - Government capital spending levels are relatively low; cutting further may harm infrastructure and growth, so savings here are difficult to achieve.
- Other savings:
  - Gradual fiscal improvement can generate savings from lower interest expenditure to the tune of 1 percent of GDP by the end of the consolidation period compared to unchanged-policy scenario.

### Recommended revenue-side measures
- Consider raising more revenues from indirect taxes; introduction of a VAT is one potential measure.
- Simulation result cited: a VAT with a standard rate of 15 percent (and a lower rate for the tourism sector) could yield around 6 percent of GDP in revenues, but implementation would require proper preparation.
- More feasible near-term measures:
  - Raise the BBO rate back to its original level of 3 percent to provide additional 2 percent of GDP in revenues.
  - Increase excise taxes and import duties to levels that would produce an additional 1 percent of GDP in revenues.

### Demographics, pensions, and health care (Ageing-related fiscal challenges)
- Demographic projections (medium growth scenario of CBS) suggest share of old people will increase substantially over next two decades, reaching almost 24 percent in 2030.
- Old-age dependency ratio (people aged 60 and over to those aged 16-59) will rise markedly by 2030.
- Population projections and dependency ratios (share in total population, percent):
  - 2010: Total population 101,484; Age 0-15 20.8; Age 16-59 63.8; Age 60 & over 15.4; Dependency Ratio 0.24.
  - 2015: Total population 115,256; Age 0-15 18.6; Age 16-59 63.4; Age 60 & over 18.0; Dependency Ratio 0.28.
  - 2020: Total population 126,765; Age 0-15 18.0; Age 16-59 61.6; Age 60 & over 20.4; Dependency Ratio 0.33.
  - 2025: Total population 139,569; Age 0-15 18.4; Age 16-59 59.0; Age 60 & over 22.6; Dependency Ratio 0.38.
  - 2026: Total population 142,332; Age 0-15 18.5; Age 16-59 58.7; Age 60 & over 22.8; Dependency Ratio 0.39.
  - 2030: Total population 153,386; Age 0-15 18.9; Age 16-59 57.6; Age 60 & over 23.5; Dependency Ratio 0.41.
- AOV (old-age pension) balance turned negative in 2009; reserves projected to run out in 2014 (Central Bureau of Statistics of Aruba, 2011).
- Projections (assuming unchanged pension parameters and costs growing at the inflation rate) suggest the AOV’s deficit will reach close to 3 percent of GDP by 2030.
- AZV (general health insurance) operations balanced by annual transfers from central government amounting to around 2½ percent of GDP in 2012; absent changes, government transfers to AZV will need to increase.
- Aruba’s public spending on health care is already one of the highest in the regional comparison presented.

### Suggested reforms to address ageing pressures
- Raise the statutory retirement age:
  - A gradual raise will strengthen pension finances through more years of contributions and fewer years of benefits, and can increase labor supply and consumption.
- Increase old-age insurance contribution rates:
  - Employee contribution currently at 3 1/2 percent; consider increasing contributions, while taking overall labor taxation into account.
- Reduce the replacement rate:
  - Slow pension cost increases via lower pension benefits, changing indexation approach, or linking benefits to demographic factors (e.g., life expectancy).
  - Recent introduction of mandatory general pension expected to raise the overall replacement rate in the longer term and help reduce pressure on AOV to increase benefits.
- Increase revenues and contain health care costs:
  - Raise contribution rates (currently at 9 percent for employers and 2.5 percent for employees) and reduce costs by shifting part of the burden to beneficiaries through co-payments and other measures (discussion continued beyond excerpt).

*Source: KINGDOM OF THE NETHERLANDS—ARUBA (IMF staff report excerpts as provided in the source content).*

### introduction of copayments and deductibles (currently, the government pays for 100 percent of

### _cr13259 - introduction of copayments and deductibles (currently, the government pays for 100 percent of

### Pension system findings and reform focus
- Current retirement age for AOV beneficiaries is 60 years, described as "relatively low" compared to many regional peers where it has been raised to the range of 62-65 years.
- Simulations indicate that raising the retirement age can be a "highly effective measure to contain pension spending."
- The simulations are for illustrative purposes and show that "the shorter the transition period to higher mandatory retirement age is, the larger will be the positive impact of such reforms on AOV finances."
- Given "the current level of payroll taxes and replacement rate in Aruba," the pension reform recommendation is to focus primarily on increasing the retirement age rather than on reducing replacement rates or raising contribution rates.

### Fiscal and policy conclusions (paragraphs 15–18)
- Strong fiscal management is required to avoid excessive debt and to create sufficient space for addressing shocks and risks from contingent liabilities.
- Under a fixed exchange rate, fiscal policy is the main stabilization tool and can help boost the economy’s potential growth.
- Because fiscal multipliers are "unlikely to be large in Aruba," the authorities are advised that "fiscal consolidation without delay" is warranted.
- Consolidation should primarily focus on expenditure reduction, while generating higher revenues should also be part of the policy mix.
  - Expenditure-side priorities include: restrained public sector wage bill, improved spending efficiency, rationalization of transfers and subsidies, and containment of aging-related spending.
  - Revenue-side measures: "Aruba should consider tax measures with a view to boost revenues from indirect taxes."
- Immediate measures are needed to improve the financial situation of the old-age pension and general health care schemes, which "could include a combination of changes to the retirement age, contribution rates and generosity of pension and medical benefits."
- Given the current level of total contributions and a "relatively moderate replacement rate," reforms should primarily rely on:
  - changing the retirement age, and
  - shifting part of the medical costs to beneficiaries (for example, "introduction of copayments and deductibles" since "currently, the government pays for 100 percent of the cost").
- Adoption of a well-designed and effective fiscal responsibility framework will support successful fiscal consolidation:
  - "Well-designed fiscal rules and monitoring mechanisms to ensure transparency and timely implementation of the budget can help deal with discretionary policy making arising from political expediency."
  - Authorities' intention to introduce a framework consisting of fiscal rules and a fiscal council is described as "a welcome move."

### Illustrative pension spending scenarios (Percent of GDP)
- 2010 2020
  - No change: 4.4 6.0
  - Increase retirement age to 63 by 2020: 4.4 4.7
  - Increase retirement age to 65 by 2020: 4.4 3.9

### Immediate health-care financing reform implication
- The report highlights shifting part of medical costs to beneficiaries as a necessary reform option, noting the current situation where the government "pays for 100 percent of the cost."
- Specific mechanisms referenced include "introduction of copayments and deductibles."

*International Monetary Fund staff summary drawn from the provided content unit.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13259.pdf_