adminscheme matures with time, be equivalent to an increasing proportion of the pensioner’s insurable earnings at retirement.
Those who retire after contributing to the scheme for 20 years should receive a pension that is equivalent to 26,7 percent of their insurable earnings at retirement.
After 25 years of contributions the pension should be a third of the pensioner’s insurable earnings at retirement. Those who retire after 30 years of contributions should receive the equivalent of 40 percent of their insurable earnings at retirement
A person who has contributed to the scheme for 40 years should receive a pension that is the equivalent of 63,3 percent of his or her insurable earnings at retirement.
A person on a salary of US$1 000 on retirement, if the salary is below the insurable earnings ceiling, after contributing for 40 years would receive a pension of US$633.
After 47 years the income replacement rate would be 79,7 percent which, for the person retiring on a US$1 000 salary, would be US$797, again as long as the salary is below the insurable earnings ceiling.
A person earning US$500 on retirement after 40 years of contributions would receive a pension of US$316,50, provided the US$500 is below the ceiling on insurable earnings.
As explained above, this of course will only be true if the contributions to the scheme are a percentage of the employee’s actual earnings.
At present the earnings replacement rate for a pensioner who has contributed for the 17 years that the scheme has been in operation is 22,6 percent.
However, because there is an insurable earnings ceiling of US$200 those earning above US$200 are receiving 22,6 percent of US$200 rather than 22,6 percent of the salary they were actually receiving.
The contributions they were making prior to retirement were a percentage of US$200 rather than a percentage of their actual salary of, say, US$500. Their pension therefore has to be based on earnings of US$200.
If there were no insurable earnings ceiling a person retiring on US$500 after contributing for 17 years would receive a pension of US$113.
Because of the insurable earnings ceiling of US$200, the pensioner only receives US$45, which is 22,6 percent of US$200. This US$45 represents only 9 percent of the actual earnings of the person who was earning US$500, instead of the 22,6 percent that would be ideal for this type of scheme.
On the other hand, because NSSA has fixed the current minimum pension at US$40, employees retiring on a salary of only US$100 are receiving a pension equivalent to 40 percent of their salary. They are actually comparatively better off than higher wage earners in terms of the percentage of income replacement.
Obviously those who will benefit most from the gradual increase in the pension as a proportion of earnings are those who started contributing to the scheme while they were still young and reach retirement age after more than 40 years.
However, the extent to which they will benefit at retirement will depend on whether, at the time of retirement, they have been contributing to the pension scheme a percentage of their basic salary or a percentage of a lesser amount that has been fixed as an insurable earnings ceiling.
In the unlikely event that in 40 years time there was still an insurable earnings ceiling of US$200, the income replacement value of the pension of someone earning US$1 000 would be 63,3 percent of US$200, which is US$126,60, instead of the US$633 that it would be if there was no insurable earnings ceiling and contributions were a percentage of actual salary.
The removal of an insurable earnings ceiling would increase future pension payments for those earning more than $200 to the level where they are equivalent to 22,6 percent of their actual salary on retirement.
The joint employee and employer contribution rate of 6 percent of a maximum income of US$200 is much lower than that of any other pension fund, including the Government’s own State pension fund for public servants, which comes to 22,5 percent of actual salary.
While lifting the insurable earnings ceiling would benefit those earning above US$200 it would not in itself change the pension due to those earning US$200 or less.
However, the increase in contributions and pension levels of those earning more than US$200 might open the way to an increase in the minimum pension.
NSSA receives independent actuarial advice on contribution and benefit levels to ensure the pension fund remains sustainable and will be able to pay current contributors a pension when they reach retirement age that is commensurate with the ideal replacement rate the scheme is designed to pay out as the scheme matures.
It was on actuarial advice that the minimum pension was increased this year to US$40. It was also on actuarial advice that the contribution rate was increased to 8 percent of basic pay, split equally between employer and employee, in 2009.
Those who retired that year and in early 2010, before the rate was reduced and an insurable earnings limit restored, are benefiting from the higher pensions that resulted from having their pension assessed on the basis of actual earnings.
- Talking Social Security is published each week by the National Social Security Authority as a public service.
Readers with questions they would like dealt with in this column are welcome to e-mail them to:
[email protected] or send an SMS to 0772 307 913.
Those with individual queries they would like addressed directly should contact their local NSSA office or telephone NSSA on (04) 706517-8 or 706523-5.
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