adminmillion dollars.
Receiving the dividend payment, NSSA chairman Innocent Chagonda highlighted the importance of investments such as these to ensuring NSSA is able to meet future pension obligations to current contributors.
He pointed out that there was resistance to increasing NSSA contributions, as illustrated by events earlier in the year when NSSA had to reverse a decision to increase contributions and benefits.
He said the authority had to rely on the performance of its investments if it was to be able to increase benefits.
He added that those who looked at what NSSA receives in contributions and say NSSA has a lot of money were ill-informed as the NSSA pension and other benefits scheme were still young.
This, he said, was because the scheme has only been going for 17½ years, the number of people in employment and contributing to the scheme greatly outnumbers the number of pensioners.
However, the time would come, he said, when the number of contributors and the number of people who are drawing pensions would be equal.
In making these comments, the NSSA chairman highlighted not only the importance of the authority’s investments but the challenges NSSA faces with the number of pensioners bound to increase and resistance to increases in contributions.
The NSSA pension scheme is a partially funded-scaled premium scheme, which requires a gradual increase of the rate of contribution to meet a funding objective, such as avoidance of liquidity problems or maintenance of an actuarial balance between incomes and expenditure for a certain period.
It is designed to provide a pension that gives an insurable income replacement rate that depends on the length of the contribution period.
Ideally a person begins contributing to his or her pension when first employed as a young school or university graduate and continues contributing for his or her entire working life, retiring after 40 or more years in employment.
After 40 years of contributions the insurable income replacement rate would be 63,3 percent.
After 45 years it would be 75 percent. After 47 years it would be 79,7 percent. When the scheme has been going for lengthy periods such as this, the number of pensioners is likely to be high.
Most pensioners can be expected to have been working for decades. Those who began contributing to the scheme at the age of 18 will have worked for 47 years if they take late retirement at age 65.
They should be receiving pensions equivalent to 79,7 percent of their insurable income on retirement.
Just how much the monetary value of these pensions will be is difficult to predict, because it depends on each person’s insurable earnings at retirement.
At the moment there is an insurable earnings ceiling of US$200 per month. That means that nobody pays more than 3 percent of US$200 a month, which is US$6. It also means that US$200 is the maximum insurable earnings on which pensions can be calculated.
By the time the scheme has been going for between 40 and 47 years the maximum insurable earnings could be anything from US$200 per month upwards. There might even be no insurable earnings limit.
If there was no insurable earnings limit that would mean that employees would contribute a percentage of their basic earnings to the scheme.
When they retired their pension would be calculated on the basis of their contribution period and basic earnings.
Those who contributed for 40 years would receive a pension equivalent to 63,3 percent of their basic earnings.
On the other hand, if the insurable earnings limit was still US$200 then those earning above US$200 would receive a pension equivalent to only 63,3 percent of US$200.
If the maximum insurable earnings limit was US$1 000 then those earning US$1 000 and above would receive a pension of US$663 per month.
The unknowns about the future include what, if any, the insurable earnings limit will be when the scheme comes to maturity, what average wages will be then and how many pensioners there will be earning what levels of pensions.
A further factor that is difficult to predict is what future contributions will be. The scheme is designed to maintain the contribution rate at the same level for a period and then increase it to a further level for another period.
At the end of each period there should be a further increase in the rate. However, any rate increase has to be approved and gazetted by Government. Moreover, any increase in the insurable earnings limit also has to be approved by Government.
NSSA has to try to ensure there are sufficient funds to cover the highest possible levels of pension payouts.
In order to do that it relies on actuarial projections. Actuarial warnings were received that the fund could go bust unless corrective measures were taken to prevent that, Mr Chagonda said.
In this regard, he said NSSA instituted corrective measures that included increasing contributions, a move that was resisted.
An increase in employee contributions and raising the insurable earnings limit would result in improved pensions for those earning above US$200 but it would mean an increase in employer contributions as well, since the employee’s contribution has to be matched by that of the employer.
It is easy to see, therefore, why there is always resistance to efforts to increase contributions. While such resistance is understandable, it keeps pension levels low.
Increases in contribution rates and a raising of the insurable earnings limit, with a consequent increase in benefits, will have to come at some stage.
For those about to retire the sooner they come the better, since it will affect the pension they receive for the rest of their lives.
In the meantime, revenue from investing contributors’ funds, such as the million dollars that NSSA’s investment in FBC earned continues to help assure the future of those contributing today.
Such people are set to receive a good pension if they continue to contribute for most of their working lives and if their income when they retire is less than the insurable earnings limit at that time.
Talking Social Security is published weekly by the National Social Security Authority as a public service.
Readers can e-mail issues they would like dealt with in this column to [email protected] or text them to 0735 041 278.
Those with individual queries should contact their local NSSA office or telephone NSSA on (04) 706517-8 or 706523-5.
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