Pooling, investing contributions

the state to those who have no other means of livelihood.
Only those who have contributed to a social security scheme or, in some cases, their dependants are entitled to normal social security scheme benefits.
In some countries though, social assistance is administered through a supplementary benefit scheme for those who have not contributed but who have no income or an income that falls below a set Poverty Datum Line.
In Zimbabwe the National Social Security Authority administers social security schemes, while the Ministry of Labour and Social Services provides social assistance.
Contribution-based social security benefits are related to contribution levels. However, the pooling of contributions and income earned through investments makes it possible for many pensioners to be paid more in benefits than they may have contributed when they were in employment.
Although individual contributions to the NSSA Pension and Other Benefits Scheme are low, cumulatively they amount to significant sums that NSSA invests in order to grow the funds and be able to pay current and future pensions in accordance with its standard formula for calculating pension levels.
This pooling and investment of contributions also makes it possible to set minimum benefit levels, where the normal formula for benefits would result in a pension that is below that minimum level.
The maximum combined contribution of employee and employer to the NSSA administered Pension and Other Benefits Scheme is US$12 per month, while NSSA makes pension payments each month ranging from US$40 per month, which is the minimum pension level, to more than US$1 000.
The contribution period and the person’s insurable earnings at retirement determine the amount of each person’s pension.
The formula NSSA uses is multiplying the number of contribution years by the individual’s insurable earnings at retirement by a factor of 1,333 percent.
Making insurable earnings at retirement part of the formula is intended to ensure that the pension is related to the earnings of the pensioner at retirement — which helps to measure how much the pension level replaces the earnings at retirement.
This is meant to gauge the extent to which the pension restores the pensioner’s standard of living while he/she was still working.
That would mean, if the insurable income is close to actual income, that the standard of living a person enjoys before retirement has a bearing on the standard of living he or she is able to enjoy after retirement.
Whether or not that turns out to be the case in reality will depend on how close to actual earnings the insurable earning are. Insurable earnings are the earnings that a person’s contributions are based on. At present, for instance, the pension of somebody retiring after contributing to the pension scheme since its inception nearly 17 and a half years ago would be equivalent to almost 23 percent of his or her insurable earnings at retirement.
The longer the contribution period, the higher the insurable earnings replacement value would be, with it rising to 69,3 percent after 40 years of contributions and 79,7 percent after 47 years of contributions.
If the insurable earnings and actual earnings were the same, then the pension would be the equivalent of these percentages of actual earnings. In Zimbabwe at the moment the maximum insurable earnings for NSSA pension contribution purposes is US$200.
That means the insurable earnings replacement value for those earning above US$200 is a percentage of US$200 rather than a percentage of actual earnings.
For those on relatively high salaries, the gap between the pension they will receive on retirement and their earnings while they were in employment will be considerable, therefore.
This will be the case for as long as the maximum insurable earnings limit remains substantially below their actual earnings.
As Zimbabwe’s pension and other benefits social security scheme develops, the contribution rate will need to be increased and the insurable earnings ceiling raised in order to ensure the maximum benefit for pensioners.
The maximum pension that a person retiring at the moment could expect from NSSA is only slightly more than the minimum pension of US$40. This is because of the low maximum insurable earnings ceiling. The few pensioners who receive monthly pensions of hundreds of dollars retired when there was no insurable earnings limit.
Resolving this dilemma is not an easy matter. While workers might be willing to pay a higher contribution for the sake of a better pension, the increased financial burden for employers might be considerable, if they employ a large number of people.
Of course, many employers pay a much larger amount to occupational pension schemes.
However, those are schemes they have chosen to contribute to, whereas contributing to the national social security pension scheme is compulsory for all formal sector employers.
While pooling and investing contributions enables NSSA to pay out monthly pensions that are higher than monthly contributions, this can only be done within limits that are sustainable and will ensure there are adequate resources to finance pensions in 20, 30 or 40 years time and more.
NSSA, like other social security schemes, relies on the advice of an actuary to determine what benefits levels are sustainable with particular contribution levels. An actuarial assessment is done at least every three years.
If the NSSA board accepts the actuary’s recommendations, it seeks Government permission to implement them.

l 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.In considering whether to allow the proposed changes, the Government will look at the broader picture and the effect of contribution and benefit increases on the economy as a whole.
There are those in the United States, where the future of the social security system is threatened, who argue that had past actuarial advice been accepted there then the scheme would not now be under threat.
However, governments have a difficult balancing act to do in weighing up various interests and assessing what is best for a country’s economy as well as for individual citizens.