adminContribution levels and insurable earnings ceilings, where they are in force, are gradually raised over a period of time.
The greatest benefits generally accrue to those who began contributing to the scheme in their youth, continue contributing until they reach retirement age and live for many years after their retirement.
The social security scheme in the United States, for instance, has been in operation for about 75 years. The United States Social Security Act was passed in 1935 but it was only in 1937 that the first payroll taxes for the scheme, which in Zimbabwe would be called contributions, were collected.
The first benefit payments, which were lump sum death benefits, were paid the same year. The first retirement benefit was paid to a man who retired the day after the scheme
began. Five cents had been deducted from his pay. He was given a lump sum payout of 17 cents.
The first pension payment was made in 1940 to a lady who had paid a total of $24,75 into the scheme over the preceding three years. She was paid a pension of $22,54. After her second payment she had already received more than she had contributed. She lived to be 100, by which time she had received more than $22 888,92 in pension payments.
When the US scheme started the retirement age was 65. Since 1960 the normal retirement age for the United States social security pension has been 67, though some people take early retirement at age 62 with reduced benefits.
The average life expectancy in the United States when the scheme began was 66. Today it is 79, which is one of the reasons why the social security scheme is now paying out more than it is receiving and why questions are being asked about the need to further increase contribution rates, reduce benefits and increase the retirement age.
When the scheme began a number of categories of employment were excluded. Over the years various categories were added so that today most workers are included in the social security scheme, even those who are self-employed, who pay into the scheme at a rate equivalent to the combined employee and employer rate.
The contribution rate in 1937 was one percent of the employee’s wage up to a maximum annual wage of $3 000. The employer paid the same amount.
This gradually increased over the years to the position today where the employee and employer each pay 6,2 percent of the employee’s salary up to a maximum annual salary of $110 100. In addition the employer and employee each pay a further 1,45 percent of the employee’s salary for Medicare, which is the national medical insurance scheme.
In Zimbabwe the social security scheme began in 1994. That was when the first contributions to the scheme began. Those who retired within 12 months of their contributions starting were paid back the contributions plus interest. After 12 months of contributing retirement grants were paid to those reaching retirement age. The first pensions were paid towards the end of 2004.
While minimum pensions are admittedly low in terms of what the money will buy, those receiving them would probably discover, if they worked out how much they paid into the scheme, that they were receiving more than they paid into it.
At present, because employee contributions are calculated at three percent of basic salary up to a maximum monthly income of $200, the most that any employee pays in contributions is six dollars per month. The employer pays the same amount, the minimum retirement pension is $40 per month.
Fewer categories of employment were excluded from the scheme in Zimbabwe than was the case when the United States scheme began.
Those initially excluded from the scheme in Zimbabwe were civil servants, domestic workers and those employed in the informal sector.
Civil servants joined the scheme almost 10 years ago. Domestic workers and informal sector workers have not yet been included in the scheme, although those who leave the formal sector can opt, when they do so, to continue contributing to the scheme at a rate equivalent to the combined employee and employer contribution.
In the United States, domestic workers and the self-employed were included in the scheme in 1950, while state and local government employees were added in 1954, 17 years after the scheme began.
The United States scheme has been running for about 75 years. The Zimbabwe scheme has been going for just over 17 years.
Those who will benefit most from the scheme are those who began contributing to the scheme as young people and live to a ripe old age.
The longer the contribution period the higher the percentage of insurable income the pension will be.
Once Zimbabwe’s social security scheme has been in place for 40 years, the social security pensions for those who have contributed to the scheme all their working lives should
be as good as in many other countries, provided the insurable earnings ceiling is sufficiently high for it to be above most people’s earnings.
This is because the pension is equivalent to a proportion of a person’s insurable earnings (the income on which the pension contribution is calculated) at retirement rather than actual salary that is used to determine the pension. After 40 years the replacement value is 63,3 percent.
In the United States the maximum earnings on which contributions were calculated in 1947 was $3 000 per year, which would be $250 per month. In 2012 the figure is $110
100 per year, which would be $9 175 per month. In Zimbabwe it is $200 per month.
- 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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