adminThis year marks a milestone for the National Social Security Authority’s National Pension Scheme. It was in October 1994 that the National Pension Scheme began operating. That means that in October this year the scheme will have been going for 20 years. This is a particularly important milestone because a social security pension scheme such as that established and run by NSSA can be considered as reaching maturity after about 40 years.
The Zimbabwe social security pension scheme is therefore almost half-way towards becoming a well-established mature scheme that provides reasonable benefits for those who have contributed to it throughout their working lives.
In the early years of a pension scheme, pensions are inevitably low, because nobody has contributed for long enough to be able to qualify for a large pension.
In the case of the National Pension Scheme a minimum of 120 months of contributions are required in order to qualify for a pension on retirement at the retirement age applicable to the pension scheme.
That means that it was only at the end of October 2004 that the first contributors would ordinarily have become eligible for a pension on retirement, save for those who retired before this date but benefited from the contribution credits the scheme offered.
In developed countries where social security schemes were established many decades ago most pensioners have been contributing to the social security pension scheme all their working lives.
That means that a person who began working at the age of 18 and retired at 65 would have contributed to the scheme for 47 years.
Those who only began working after university could still easily have contributed to the scheme for more than 40 years before they retire.
With Zimbabwe’s social security scheme, the size of a person’s retirement pension depends on two factors, namely the person’s contribution period and the person’s insurable earnings on retirement.
The insurable income is that portion of a person’s earnings that his or her contribution to the national pension scheme is based on.
Every person in formal sector employment, other than domestic work, is required by law to contribute a certain percentage of his or her insurable earnings to the National Pension Scheme.
Every formal sector employer is obliged to pay the same amount as the employee to the National Pension Scheme. The percentage is currently 3,5 percent from the employee and 3,5 percent from the employer. The scheme’s design is such that the percentage should gradually increase as the scheme matures.
For most people their basic earnings constitute their insurable earnings. However, there is currently a maximum insurable earnings limit of $700 per month. That means that nobody can insure more than $700 a month of their income for National Pension Scheme purposes.
All those earning $700 and below $700 a month contribute 3,5 percent of their basic earnings to the National Pension Fund. Their pension, when they become eligible for it, will be calculated on the basis of their actual earnings and contribution period, presuming they are still not earning above the maximum insurable earnings limit when they retire.
However, those earning above the maximum insurable earnings limit, which is currently $700 per month, pay contributions based on that maximum limit. They pay the same contribution as a person earning $700 a month. Their insurable earnings are $700, regardless of how much they are actually earning.
The NSSA scheme is designed to provide a person who has been contributing to it for 40 years with a pension that replaces 63,3 percent of his or her insurable income at retirement.
After 45 years of contributions the insurable income replacement rate would be 75 percent. After 47 years it would be 79,7 percent.
The formula used to calculate a person’s pension is the person’s insurable income on retirement multiplied by the number of years the person has contributed to the scheme multiplied by 1,333 percent.
Ten years from now, for those who joined the scheme at inception in October 1994, there will be a slight variation to the formula in respect of those who have contributed for more than 30 years. There is an additional one percent of the years in excess of 30 years that a person has contributed for.
In this way the percentage of insurable income that the pension replaces will escalate as contributors move towards the 40 years and more contribution periods.
The replacement rate for those who have contributed to the scheme for 20 years is 26,7 percent. That is what those who have contributed to the scheme since its inception can expect if they retire at the end of October this year.
After 25 years the percentage becomes 33,3 percent and after 30 years 40 percent. After 35 years it is 51,7 percent. The percentage increases each year to a 63,3 percent replacement rate after 40 years.
Once the scheme has been going for 40 years it can be considered as having matured, although the insurable income replacement rate continues to increase for those who have contributed for longer than this.
In October this year, the scheme will have been going for 20 years. Although there is nobody who can have contributed for more than that when the 20th anniversary arrives, there are many young people in employment now who can expect their retirement to come after they have contributed to the scheme for 40 years or more.
October marks the half-way mark as the national pension scheme moves on to that point, in another 20 years from then, when it can be considered a mature scheme.
When it comes to that point, most new pensioners should be receiving a pension that replaces a reasonable part of their insurable earnings.
The national pension scheme was always going to be a scheme that benefited most those who began contributing to the scheme while still young and continued contributing to the scheme throughout their working lives. That is how all such schemes are designed. The present scheme is now almost half-way towards achieving that.
Talking Social Security is published weekly by the National Social Security Authority as a public service. There is also a weekly radio programme on social security, PaMhepone NSSA/Emoyeni le NSSA. This Thursday the programme will be a live programme on Radio Zimbabwe at 6.30pm on Radio Zimbabwe. Readers can e-mail to [email protected] or text them to 0772-307913. Those with individual queries should contact their local NSSA office or telephone NSSA on (04) 706523/5, 706545/9, or 799030/1.
Online Reporter