KAMPALA – Many of you have implored me, been in my inbox and/or tagged me to submissions or posts about the now-famous proposed 20% pay of NSSF Benefits so as to enlist my take on the proposal. I have also taken keen interest in the matter because not only do I sit on the National Thematic Committee on Social Protection as a Founder of Mazima Retirement Plan, I also wrote one Uganda’s best sellers on retirement Planning called “Investing for the future”. Over the last 4 years I have participated and/or contributed to about 6 in-depth studies on social protection and micro pension in Uganda. All studies have examined the role of the National Social Security Fund (NSSF) in detail and in almost all cases they have found out that neither is NSSF a Social Security Fund nor does its design offer sufficient benefits for old age security. In this submission I am going to argue that is overrated, poorly designed and an exclusive club that takes our eyes off the national duty of providing old security benefits for all.
It’s worth submitting on the historical formation of NSSF. You could trace its roots from independence and the subsequent regimes but the current design of the fund was meant for people that worked in government corporations like Lint Marketing Board, Coffee Marketing Board, Food and Beverages etc. These employees worked for the government but were not considered civil servants and hence were not pensionable. In order to provide for these, the government of the day came up with NSSF Act of 1985 that established the fund. Note that because the government wanted to provide comparable benefits to those in the civil service it provided for the employer (mostly government corporations that could call upon the Uganda Treasury if they run broke) to contribute 10% and the employee to contribute 5%.
Interestingly this same proposal is being mooted for the Current Uganda Civil Service but many of them don’t want it and they are fighting it tooth and nail.
1. As already hinted on NSSF benefits don’t provide sufficient old-age benefits. It’s on record that money received from NSSF payouts is usually spent on constructing a house, starting a business or that “grand idea” the member has always wanted to do but was unable to do so. Usually, the money is gone in less than 3 years from retirement. This tells us that periodic and periodic payments to people savers would make better deal especially if they are in need as there are now with the COVID-19 Effects.
2. What is good for the goose is usually good for the gander. Note that the Parliamentary Pension Scheme (PPS) allows for periodic withdraw after the end of each parliamentary house which is 5 years. So every 5 years members are allowed to get a lump sum payout if they so wish. If this is good for lawmakers, why is it bad for wanainchi?
3. The concept of a pension fund like NSSF is grounded in disciplined fiscal and monetary policy. It presupposes stable macro-economic terms and a stable national currency. All these hardly exist in a country like Uganda. Most loans advanced in Uganda rarely go beyond 5 years and rightly so because it’s hard to predict what the economic environment will be beyond that. Why should we force our workers of society to try to predict 30 years ahead into the future in a volatile environment! Stories of pensions wiped out as a result of economic mismanagement or inflation are too common to derive into but for the sake of this submission let me mention the Zimbabwe Hyper Inflation which took pensions to the cleaners and The Steinhoff crash in South Africa wiped more than R200-billion (UGX 40.8 Trillion) off the Johannesburg Stock Exchange and in which many South African Pension Funds were invested. It would therefore make a compelling case for members to be paid their benefits every 5 years so they can rebalance their finances, learn to deal with lump sums and pay off interest choking loans. We should start this with the proposed 20% and amend the NSSF Act to provide for such.
4. I call NSSF an exclusive club because NSSF with all its financial might covers a very small percentage of the working population. Uganda is estimated to have a working population of 17 Million people as of 2019 and out of this only
2.3 Million are on the NSSF Register. As many have submitted (including NSSF itself) 100,000 workers own more than 80% of the fund with more than UGX 50M per member on their accounts. These are the privileged of Uganda and people that already have and know how to handle financial resources and have built networks to support them to do so. These should be given access to their money and therefore the 20% should be paid to them. What need to be concerned with is how to provide social security for all and not an exclusive club of already “lucky” Ugandans.
5. Also allow me to submit that NSSF is based on unrealistic economic model. The assumption that the people’s future should be secured at the expense of the present is myopia of the highest order. Milton Friedman on his submission on consumption contends that people consumption combines the future and the present to influence aggregate demand. If they expect their future to be better they spend more today. If they expect to be worse they save more today. This creates periods where savings and dissavings periods are necessary. Covid-19 effects demand that we allow the people to dissave (as in consume on their savings). Once they effects are over they will save better again. What we have proven with Mazima Retirement Plan is that people can voluntary save, withdraw and save again if the fund is well managed and people are educated on what is in their best interest.
6. Related to the above is that the notion that poor don’t save and therefore should be forced to, is misplaced. The poor do save more than the rich do as a percentage of their income. Some studies have shown that they save up to 40% of their savings while those that economically well to do really get to 10%. The interesting thing is what they save for: they actually do save for emergencies like health care, funeral expenses etc. They well to do on the other hand save for investing. So if you look for the poor to give you money for investing you conclude that they don’t save. Building a new social security paradigm or amending NSSF to accommodate this kind of insight is a great start to provide a robust national social security framework.
7. The Current NSSF set up is such that once you start working say at the age of 25, you should work for the next 30 years and only get to touch your money at age 55. Surveys and studies have shown that people regard NSSF as a form of taxation. Not only does it contribute to depressed wages and therefore reduced aggregate demand, it also, unfortunately, concentrates power in the hands of a few elite managers appointed by politicians whose focus doesn’t go beyond how long they can stay in power. This creates a deadly mix of interests at the detriment of the fund members. A stage is then perfectly set for economic hitmen to enjoy the fruits of labour of many. The irony is that members have to go through these same hitmen to access their savings!
8. My work with Mazima Retirement Plan has enabled to interact with the regulating agency, Uganda Retirement Benefits Regulatory Authority (URBRA) extensively. My view (and which is supported by many studies) is that the regulator is not concerned with social security as a whole but the financial aspect of it. They, therefore, concentrate on the financial prudence of funds under management. This, unfortunately, leads to protecting the status quo rather than innovating for expansion of coverage and benefits. The reality that if we look at social security as a whole we need to provide for housing, unemployment benefits, healthcare, old age security and funding education. If a member would want to use their savings at NSSF to provide for any of the above, its in the best interest of all stakeholders. Getting fixated on old age security (where NSSF, by the way, fails miserably) is not.
9. NSSF is notorious for borrowing from the poor to finance the rich. It builds houses the poor can’t afford, lends to foreign corporations and government whose expenditure the masses have a right to query. It therefore, unfortunately, helps to perpetuate income inequality. Giving the working poor access to these savings on a periodic basis can help in reducing this inequality.
10. My last point on this subject is something that has puzzled many about NSSF Interest calculation. Members lose billions every year because the way interest is calculated and vested is utterly mischievous. When you make contributions to the Fund every year, the contributions for the current financial year receive 0% interest. For example, if you had a closing balance of UGX 50M as of close of financial year 2017/2018 but also contributed UGX12M in the financial year 2018/2019, when they awarded 11% interest for the financial year 2018/2019, the interest was applied to your closing balance of 2017/2018. What happens to the interest earned on your contributions of UGX 12M during 2018/2019 is anyone is guess.
In conclusion my submissions have ably demonstrated that NSSF design is flawed and that members deserve to receive periodic and periodic access to their savings. My recommendation is that it’s in the interest of our economy and for members to receive periodic payouts of their savings rather than lump sums at the end of their working career. We should also focus our attention on building working social security framework for all covering all the key pillars like housing, unemployment benefits, healthcare, old age security and education. COVID-19 has greatly impaired our collective social security safety net and a payout of some of NSSF Savings would be a step in the right direction of helping thousands begins to rebuild their lives. I thank you.
Livingstone Mukasa is the CEO/Co-Founder, Four One Financial Services Limited