adminThis is the norm in countries with long established social security schemes. When a person begins work after leaving school or university he or she begins paying a monthly social security contribution, which is deducted from his or her salary.
The employee continues doing this until reaching retirement age, which in most countries is 65. By this time the employee may have been making social security payments for 45 years or more.
In Zimbabwe the social security pension scheme started less than 18 years ago.
Those who have since become eligible for retirement pensions, on reaching the age of 60 or more have thus contributed for only a fraction of the period those pensioners in countries with long-established pension schemes have contributed for.
The longer the contribution period the higher the pension will be. The higher the insurable income — that is the income on which contributions are made — the higher the pension will be as well.
There are two reasons why the current pensions are low. The first is that the pension scheme has not been running long enough to have pensioners with 40 years or more of contributions behind them.
The second is that there is a low insurable income ceiling of US$200 per month, meaning that nobody pays a contribution of more than 3 percent of US$200, no matter how much they may be earning.
This also means that nobody retiring at the moment receives a pension that is higher than a person earning US$200 a month would be entitled to, no matter how much more than that they might be earning.
It may seem unfair that a person earning US$1 000 and a person earning US$200 both pay NSSA the same amount, US$6.
The person earning US$1 000 is only paying 0,6 percent of his income, while the person earning US$200 is paying 3 percent of his.
However, if this situation remains the same when they retire, both will be paid the same pension, if they have both been contributing for the same period of time.
Pensions are ideally supposed to replace a portion of one’s earnings at retirement.
The NSSA pension scheme is designed to provide an insurable income replacement rate of more than 63 percent after 40 years of contributions and 80 percent after 47 years of contributions. Anyone who joined the scheme straight from school or university could easily look forward, therefore, to a pension equivalent to 63 percent or more of insurable income on retirement.
That would not be a bad pension, particularly if one’s actual income at that time was the same as one’s insurable income.
However, if there was still a maximum insurable income level in force at that time, then the pension of those earning above that ceiling would be equivalent to 63 percent not of their actual earnings but of the maximum insurable earnings figure.
Coming back to the present, since the pension scheme has only been running for 17 years and eight months, the insurable income replacement rate is only around 23 percent for those who have contributed to the scheme since its inception.
Because the maximum insurable income is US$200, anyone earning above that will be entitled, after contributing to the scheme since inception, to a pension
equivalent to about 23 percent of US$200, which is about US$46.
Where there no insurable earnings limit, a person earning US$1 000 would be entitled to a pension of about US$230. A person on an income of US$500 would receive a pension of US$115.
Towards the end of last year NSSA proposed an increase in the maximum insurable income level to US$1 000, along with an increase of 1 percent in the contribution rate.
This would have resulted in these higher pension levels and an increase in the minimum pension.
Readers may recall the hue and cry there was about the higher contribution levels at the beginning of the year, resulting in NSSA having to cancel those plans and revert to the maximum insurable income level of US$200.
Those who advocate for the payment of minimum pensions of US$150 or US$200 per month, as one newspaper appeared to do last week, do not seem to take into account the fact that the maximum combined employer and employee contribution that NSSA receives at the moment is US$12 a month.
It is therefore difficult to imagine how NSSA can sustain such payments per person per month, while receiving US$12 per person per month. Another factor that is often overlooked is that the frequently quoted poverty datum figure of US$500 is for a family of six, not for an individual or an elderly couple.
Social security pension schemes are contribution-based schemes. Current contributors are contributing towards a pension they hope to receive in their old age.
Projections have to be made, therefore to ensure there will be sufficient funds to pay current contributors when they retire at age 60 or 65.
That is why NSSA, like social security pension funds elsewhere, has to be guided by the recommendations of actuaries, whose professional skill it is to make such projections and recommend the benefit levels that are sustainable and the contributions levels required to ensure desired benefits are sustainable.
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.
Online Reporter