The talk about higher retirement contributions is misplaced under the current circumstances
By Ephraim Njega
National Social Security Fund (NSSF) Act of 2013, which sought to increase monthly contributions from Sh200 to Sh2,000, is now legal after Appeal Court judges Hannah Okwengu, Mohamed Warsame and John Mativo ruled that the government will start deducting the new rates.
The reinstated law is timely in the context that adequate retirement income is what will transform peoples’ living standards at old age. However, to make social security work, more reforms are needed at NSSF than money.
In Africa, social security systems were guaranteed because of social norms that ensured that the old members of the society were taken care of by the young. It has always been a communal responsibility where the young take care of the old; the financially well-heeled would help out the struggling relatives. Today, that approach is not feasible anymore.
The levels of dependency in Africa are extremely high. The term “black tax” was coined to describe that sad state of affairs. The expectations to help are so high that talking negatively about the black tax issue is often seen as taboo, yet times are changing. Life is becoming more urbanized and complicated. The cost of living is skyrocketing. We are in a time when, as it was once said, economics oppose charity.
Black tax is the greatest threat to upward mobility and planning for retirement. The parents in our generation cannot perpetuate the idea that their kids will serve as a retirement benefits scheme in old age. These are outdated ideas. With the country’s high unemployment rate, there are cases of young people depending on their parents deep into their 30s. How can such a broke lot offer post-retirement financial support to their retired parents? Should retirees worry?
The social structures society once relied on to offer social security are crumbling like a house of cards. The demands on the income of most workers are so high that there is hardly anything left to save. Satiating these highly elastic expectations is a task only the gods can fulfill satisfactorily. Humans will fall short and eventually fall.
In contexts where many people operate without much savings for a rainy day, when economic shocks happen, even people who were once doing exceedingly well would easily slide into poverty. That is why the government must focus on reliable social security systems to guarantee senior citizens a stable post-working life – it must put in place many social security programmes on things like food and housing.
It is also vital to note that savings rate of most workers is low, and planning for retirement is non-existent in most cases. We are staring at an old-age poverty crisis. Many individuals spend most of their adult lives in urban places with little or no attachment to the village. The humble village has seemingly lost its shine as the ultimate retirement safety net. And today’s fast-paced urban life is brutal and hostile to the elderly. We are in a dilemma and a fix so much that it is time to quickly think of the best ways to plan for retirement.
Value of money
In finance, the time value of money is essential – a shilling today is not worth more than the same shilling in the future. This is because of value erosion over the years because of inflation.
With the current high cost of living, the talk about saving for retirement almost sounds insensitive and elitist. You can only save what you have. The majority of people are informally employed with short cash flow cycles. How do you think about retirement when your mind is entirely preoccupied with survival? How do you think about meeting future needs when you can’t (even) meet the current ones?
The talk about retirement savings is misplaced under the current circumstances. The government’s top obsession should be creating decent jobs and taming inflation. That way, people will have sufficient disposable incomes to meet their needs and even some to spare.
So far, a strong case has been made to increase National Social Security Fund (NSSF) contributions. But a stronger case needs to be made about reforming NSSF. For years, the scheme has become a symbol of corruption and bad governance. The chief executive position has become an ever-turning revolving door.
NSSF needs reforms to improve its efficiency and governance. That is the only way it will manage to deliver inflation-beating returns consistently. When NSSF’s returns are below inflation, the person saving gets a negative return. Under such circumstances, it is impossible to convince people to save more.
The economy’s structure, where over 80% of the people are informally employed, weakens the case for NSSF. It is only possible to box informal workers into a statutory contribution scheme. There is no way to enforce such. Even voluntary schemes such as the Mbao Pension Scheme, established in 2009 for workers in the Jua Kali sector, have had limited success.
The short revenue cycles and the meagre earnings in the informal sector make consistent saving an arduous task. The discipline and sacrifice that can sustain such would be
a rare find.
The idea by the government to match people’s contributions is welcome, but its sustainability needs to be considered. The government is operating in a tight fiscal space. There is little room for expansionist policies.
Also, reducing the issue of saving for retirement to NSSF contributions is simplistic. NSSF is just one option for saving for retirement. There are many other private retirement benefits schemes in the country. Besides, there are many strategies one can adopt towards securing retirement. The bottom line is to save regularly and invest wisely.
This is where passive income comes in. Many people see retirement as such a futuristic thing that it is almost unnecessary to think about it today. When you earn your first income, you should start saving for retirement. Retirement shouldn’t be considered something that will come in the distant future. It should be viewed as something that can happen anywhere in a person’s life.
Retirement wouldn’t always come naturally out of old age. Circumstances such as sickness can force one into retirement at any point in time. Furthermore, one should always aim to retire as soon as possible. In other words, one should always look forward to a day when one will not need to work to sustain their lifestyle. That is the ultimate goal of financial security.
True financial security can only be realised when our passive income consistently and sustainably overtakes our active expenses. Passive income is any cash you earn without having to be actively engaged. Examples include dividends, interest, royalties, rental income, etc. Active expenses are those you cannot do without for a comfortable life. They include food, rent, healthcare, school fees, clothes, personal care, airtime, internet, etc.
Planning for retirement must include investing in assets that deliver passive income to meet your needs now and in the future. Financial security shouldn’t be reduced to after retirement. This should be a goal to be achieved as soon as it is practically possible. Financial security isn’t to be confused with financial stability. Financial stability means you can comfortably pay your bills mainly from active economic engagement.
On the other hand, financial security means you can pay your bills whether financially active, or not. Retirement doesn’t mean stopping work. If you have sufficient passive income, you can retire early. You will still be working but doing what you like rather than what you have to do. The debate about planning and saving for retirement must be seen within the prism of this bigger picture. We need to broaden our perspectives on matters of personal finance. Every person has an innate desire to be free. The quest for financial freedom should always be part of that desire.
One of the hardest tasks I have faced as a consultant is convincing business owners to save money, which is delinked from their business. Most proprietors are ploughing back cash into the business with nothing kept aside for the future. Their mindset is that if they keep re-investing revenues, the business will reciprocate with growth and have strong financial backing.
Unfortunately, this is not how stuff works. Few are the ones who follow that philosophy, and things fall into place. Business owners must understand that there is life after business. They must separate their personal finances from business finances. No business is too big to fail. The collapse of the business shouldn’t lead to automatic and almost irreversible financial ruin. Even a business must save and invest money.
The government should lead by example when it comes to saving and investing. Building a social scheme such as NSSF sustainably calls for a major intervention – NSSF needs reforms more than money. At the same time, as a country, we need to establish a Sovereign Wealth Fund where the government can save and invest for the sake of future generations.
The writer is a business and development consultant. He is also an experienced business and economic analyst. He holds an MBA Degree from the University of Nairobi.