admincontributions income and its expenditure on benefits, implying that surely NSSA could afford to pay higher pensions out of the income it received.
What such comments overlook is the fact that current employees are partly contributing to their own pensions on retirement. They are contributing towards a pension which, in the case of an 18-year-old could be paid in 42 or 47 years time!
NSSA has to ensure the money they contribute now is grown and is there to pay them when that time comes. The reason contribution income is higher than benefit payments in that there are more people in employment than there are pensioners and other beneficiaries (i.e. the scheme still has a low dependency ratio) and that the scheme is fairly young, only paying at low replacement rates.
The contributory national pension scheme that NSSA administers is a partially funded scheme. Under this system current pensioners are paid partly from the investment income of their contributions and from contributions they made, and partly from current contributions. A portion of current contributions is invested in a fund – hence the term “partially funded”.
If all current contributions were to be committed to paying the pensions of those retiring now and meeting expenses without investing this would jeopardise the pensions of those currently in employment.
In last week’s column, it was explained how the NSSA pension scheme is designed to pay pensions equivalent to an increasing proportion of a pensioner’s employment earnings on retirement.
Clearly, if the contributions of current employees were to be used to pay higher pensions to existing pensioners and other beneficiaries, this would jeopardise the pension fund’s ability to pay them the pension they are entitled to when the time comes for their own retirement.
There is a fixed formula applied to determining pension entitlement, which results in different income replacement levels. The formula used by NSSA is 1,333 percent of the person’s insurable income (the income on which contributions have been based) multiplied by the number of years that contributions have been made. This formula holds good for up to 30 years of contributions. For contributions beyond 30 years a 2,333 percent accrual rate is applied to the additional years.
NSSA has a regular actuarial evaluation performed by an independent actuary to review its schemes and make recommendations on benefit and financing provisions. Actuaries give advice on the long-term stability and viability of the social security scheme.
Ideally, current pensions have to be paid out of the pensioner’s past contributions and returns on the investment of those contributions, although the National Pension Scheme is designed in a way that enables part of current contributions to be used to meet current pensions.
Much of the value of those investments, other than real estate investments, was lost when the multi-currency system was introduced in 2009. Nevertheless, NSSA managed to increase the minimum pension this year from US$25 to US$40 on actuarial advice.
It continues to keep this under review, relying on actuarial advice to ensure that the pension scheme remains viable and capable of delivering the intended pension levels the scheme is designed to offer, which, as mentioned before, should increase as it matures and contribution periods increase.
Those in current employment can look forward to ever better pensions depending on how long they contribute.
The NSSA scheme is in line with similar schemes elsewhere in the world. However, implementation of the scheme in the manner it was designed is dependent on Government approval of contribution rates, which may sometimes be influenced by policy issues that override actuarial advice.
This was the case with the reduction in rate and imposition of a US$200 per month cap on insurable earnings implemented last year.
l The Talking Social Security Column is published each week by the National Social Security Authority as a public service. Readers are welcome to e-mail their questions to [email protected] or send an SMS to 0772 307913. Those who have 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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