adminthe financial burden of national pension fund contributions for both employees and employers. However, it keeps pension payments low as well.
The formula that the National Social Security Authority uses for calculating pensions takes into account, like similar social security pension schemes elsewhere, the number of years contributions have been paid for and the pensioner’s insurable income on retirement.
Contributions are calculated on the basis of a percentage of an employee’s insurable earnings. Where no ceiling has been imposed, the gross salary constitutes the insurable earnings. The contributions due are calculated as a percentage of the gross salary.
As the years go by the salary normally increases. So too do the contributions. When eventually the employee retires, his or her salary, which constitutes the earnings on which pension contributions have been calculated, is used, along with the number of years of contributions that have been made, to calculate his or her pension.
Where, however, insurable earnings ceiling has been imposed, the monthly contributions remain the same. So too do the insurable earnings on which the pension calculations are based regardless of improvements in actual wages and salaries.
That means that all those earning above US$200 per month pay the same monthly contributions to the fund. If they have been contributing to the fund for the same period of time, they receive the same pension. Where there is a ceiling on the level of insurable earnings, pensions can only be calculated on the basis of earning up to that ceiling.
The rationale for taking into account in pension calculations an employee’s salary on retirement is that the pensioner will have become used to living on the income he or she retires on.
Although the pension does not totally replace that income but only a proportion of it, there is normally a variance in the pension different people receive based on the income they have been receiving.
However, where there is a ceiling on the level of insurable earnings, pensions can only be calculated on the basis of earning up to that ceiling, taking the pensioner further away from the standard of living enjoyed during employment.
With private occupational pension schemes there is no such ceiling. Contributions to these schemes are normally calculated as a percentage of an employee’s gross salary.
The reason for the ceiling that Government has imposed on insurable earnings for the purposes of the national pension fund is believed to be two-fold. It is to maximise employees’ disposable income and to provide private pension schemes with some protection against competition from the national pension fund, given the compulsory nature of the national fund.
While there may be sound arguments for imposing a ceiling on insurable earnings in relation to the national pension fund, a ceiling of US$200 results in a low pension.
A pension fund such as the national pension fund administered by NSSA is designed to see contribution rates rising as the fund ages. This is to ensure the scheme is adequately funded to pay pensions on a sustainable basis to all those who reach pensionable age at whatever time in the future that may be.
Where contribution rates remain static and a relatively low ceiling is placed on insurable earnings, the result inevitably is low pensions and a threat to the fund’s long-term viability.
Pension funds such as the national pension fund rely on the advice of professional actuaries in determining the optimum contribution rates in relation to benefits.
In line with such advice, the contribution rate was raised in January 2009 from combined employee and employer contributions of six percent (3 percent from the employee and 3 percent from the employer) to 8 percent (4 percent from employee and 4 percent from employer). There was no insurable earnings ceiling.
However, in May 2010 the rate was reduced to six percent again and an insurable earnings ceiling of US$200 was imposed. This was not based on actuarial advice but was a Government decision.
Those who retired during the period January 2009 to May 2010 were paid pensions based on their contribution period and their gross salary when they retired. They are still being paid those pensions based on their salary at retirement.
Those who have retired since then have received only small pensions, since they are based on maximum insurable earnings of US$200 per month.
Employees and employers were no doubt delighted by the reduction in pension contribution rates and the imposition of an insurable earning ceiling which saw the maximum monthly contribution limited to six dollars from the employee and six dollars per employee from the employer. Those who are now retiring are less thrilled by the pensions they are receiving.
A person reaps what he sows. Low pension contributions unfortunately mean low pension payments.
- The Talking Social Security Column is published by the National Social Security Authority as a public service. Readers who have any questions they would like dealt with in this column are welcome to e-mail their questions to [email protected] or text them to 0772 469801.
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