Empirical evidence shows that there are immense benefits of pension fund growth and accumulation of pension’s funds
By Ezra Munyambonera
The initial reform proposals suggested complete liberalisation of National Social Security Fund (NSSF) as an institution to open it up to market competition. This is because the NSSF was perceived to be an inefficient organization, was not enforcing compliancy to funds collections and not addressing the question of limited scope and coverage with exclusion of the informal sector.
However, given the uncertainties in the economy and the financial investments the fund offers to the economy, the study by EPRC (2018) reveals that NSSF as an institution should be preserved as a public fund pillar and the reforms process should instead amend the NSSF Act to address the prevailing challenges. Bringing the NSSF Amendment Bill to the Public and Parliament is timely to verify the feasibility these reform measures and how they will improve the performance of the NSSF to the benefit of the workers and government equally. Key stakeholders interviewed anticipated that amending the NSSF Act would enable the fund to tap into an estimated 250,000 small-scale and medium-sized enterprises employing about 1 million employees, which would increase NSSF membership to 3.5 million by 2025 and fund accumulation to about UGX 20 trillion. This creates a significant increased reserve fund in the economy which is more fundamental.
Empirical evidence shows that there are immense benefits of pension fund growth and accumulation of pension’s funds. Growth and accumulation of pension funds in the economy contributes to economic growth by increasing the capitalization and liquidity of financial sector especially in capital markets and banking sector. This is expected to increase financial intermediation, total factor productivity, and resultant GDP growth. Increased savings would also lead to reduction in interest rates for borrowing, leading to private sector profitability and subsequently to growth through creation of jobs. Funds from the pension sector can also be used to finance government projects such as infrastructure developments and in the medium-term they reduce government reliance on donors. For government case, this would be the fundamental benefit of amending the NSSF Act, 1985. For the savers, the study findings suggest that the NSSF Act should be amended to allow for: (i) consideration in the medium-long term convert the lump sum payments to annuity payments at retirement; (ii) mid-term access of loans for mortgage and other investment loans; (iii) liberalize the 5 percent contribution for workers while preserving the 10 percent for employers; (iv) diversification of investment funds of NSSF for medium and long-term finance of government infrastructure and (v) allow mid-access of 30 percent of pension benefits at 45 years.
While some of these recommendations, are being considered and some few others being included like tax exemption of workers contributions and returns to NSSF investment funds, there has to be a win-win situation that will put government and workers in a better position, not none of them in a worse position. This implies that any reform within NSSF that puts government in worse position or the workers is not feasible and must not be adopted. For example, when NSSF attempted to demonstrate the formula and net benefit of the proposed scenario in press recently, they left the public guessing and this has to be cleared. This is fundamental to policy makers and workers. Let the formula, tax rate and calculations be put clear in place for people to see.
Fundamentally, even the tax rate cannot not be based on the current income tax law of 30 and 40 percent, when workers are to pay taxes on their wages over their life time. It is if fundamentally NSSF is looking at savers’ funds as government source of tax revenue and this should not be the case. It is against the fundamental objective of old age social security savings. While NSSF is proposing different tax measures to the workers’ savings, the following are questions that are not being answered in all arguments: i) Is the tax at exist going for only 5 percent workers’ savings?; ii) Does the tax at exist distinguish between interest income and accumulated contribution; and iii) What tax rate is going to be used at exist? There seems to be an ambiguity in explain this by NSSF?. If a tax rate is to be imposed on workers’ savings, it has to be clear and simple to understand by the public to adopt. Instead, the tax arguments by NSSF are bringing more confusion not only to the workers, but also the key stakeholders including parliament. This shows that this proposal is not convincing and should therefore be held.
We propose that government maintains the current tax regime to the workers savings. What is important is for government to implement reform measures that improves performance of NSSF in terms scope and coverage, compliance and widening the incentive structure to the benefit of workers. Also given that the pension sector is wide than NSSF, government should avoid peace’s mean reforms that affect one sub-sector like NSSF when there are other pension schemes like public and parliamentary pensions, that would also be covered in a comprehensive reforms. That also means the tax regime being suggested should not only apply to NSSF only, but to all saving schemes. Even event the tax was to be imposed on the savings, NSSF should be thinking about a different regime not based on the Current Income Tax Law. This creates more uncertainties to the savers’ money as future policy changes on income and interest incomes may change drastically not in favour of workers, depending on the prevailing political and economic conditions.
On complete liberalization of NSSF, different key stakeholders including the private sector had mixed feelings given the importance NSSF plays in the economy. The observed that “it may be risky to have complete liberalization of NSSF assets without safeguards to protect savers money and their future social security”. Opening the fund assets to private competition without safeguards, would end up eroding the fund assets through illicit financial flows and money laundering. If a reform is to be implemented on the NSSF, partial liberalisation of the 5 percent of 15 percent worker’s contribution, and reserving 10 percent should be reserved for NSSF. It was suggested that even with 5 percent liberalisation, Parliament should have powers to review after 10 years. These are safeguards that should be emphasized. Other reform measures suggested was gradual conversion from lump sum payments against annuity, mid-term access of 30 percent at 45 years, should be assessed key stake holders and workers to the benefit of both worker and government. On reforms of NSSF schism, Uganda can draw from other African countries like kenya, Tanzania, Botswana and Nigeria; where the NSSF schemes have been maintained as public pillar institutions within a framework of wide pension sector schemes in governments.
In Conclusion, partial reforms, not fully liberalisation of NSSF is the most preferred for Uganda, taking in consideration the current prevailing economic conditions. This would improve the scope, competitiveness and compliance of NSSF. Including the voluntary and informal sectors schemes would increase the level of savings contributions to the fund and also improves competition in the pension space. Any reform however that puts workers to the disadvantage, could be a dis-incentive especially to attract more savings in the economy. As the NSSF becomes efficient, more incentives like mid-term access at 45 years of service should be introduced, but there has to be established thresholds not to undermine the main objectives of social security savings for the g workers. The big debate on taxation should be looking at introducing a different tax regime that will not be affected by future changes in income tax policies and laws. Given the uncertainties in the future policy changes that could adversely affect inflation, exchange rate and interest rate, the current tax regime of the workers’ savings is a better option and should be maintained by government. Government need the taxes now to finance the budget than tomorrow. What the public should look for is the growth of the fund collections to provide adequate reserve fund for the economy through the budget and capitalisation of the financial sector. These have greater multiplier effects than concentrating on how much taxes government is to collect from workers’ savings!
The author is a senior research fellow at Economic Policy Research Centre, Kampala