The Case For Increasing Social Security Contributions

Savings Digest - Issue 2

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Esteemed Readers,

Across the border to the East, and Southwest, two significant social security reforms were recently implemented.

Rwanda adopted a Presidential Order increasing the rate of contributions for the mandatory scheme – the Rwanda Social Security Board (RSSB) to 12%, and it will rise to 20% in four years. The increase is intended to ensure “a sustainable pension system.”

In Kenya, despite ill-informed opposition from the political class and a few employers, NSSF Kenya implemented reforms that saw adjustment of the upper-income limit and lower-income limit from KSh 36,000 (approx. USh1m) to KSh 72,000 (approx. USh2million) and KSh 7,000 (approx. Ugx198,000) to KSh 8,000 (approx. USh227,000), respectively.

Workers in Kenya earning KSh 50,000 (approx. USh1.4m) monthly, now contribute KSh 3,000 (approx. Ush85,000) up from KSh 2,160 (approx. Ush61,000), while employees taking home KSh 72,000 (approx. USh2m) have KSh 4,320 (approx. Ush122,000) deducted, up from KSh 2,160 (approx. Ush61,000).

The increase of the rates by both countries addresses the question of adequacy – whether social security contributions made during one’s working life are sufficient to meet their retirement needs.

In Uganda, the contribution rate stands at 15% - the employer deducts 5% from the employee’s total gross monthly wage and adds 10% of the total gross monthly wage.

However, in spite of this seemingly sufficient rate, two astounding statistics stand out: about 83% of the Fund’s total membership has only USh10m or less. In addition, only 8% have balances of USh 50m or more.

Are we saving enough?

In this issue, we tackle the question of the adequacy of savings. In attempting to answer the difficult question of “what is enough?”, we put forward a guiding worksheet that you can navigate to determine what may be considered “enough” savings for your retirement, depending on your current income, age, lifestyle, and retirement you desire.

At a macro level, we spotlight the common thread about countries that have the highest savings rate, and how they got there.

Our analysis raises some uncomfortable questions:

Do we Ugandans meet the International Labour Organisation’s (ILO) recommendation of a replacement ratio of 75%? (Replacement ratio is, in simple terms, the percentage of pre-retirement employment income that is replaced by income in retirement).

Do the recent reforms that culminated in the current NSSF Act (Cap 230) go far enough?

Is it time to consider increasing the current contributions rate from 15% to perhaps 20% through voluntary top-ups?