More reflection required on rates of compulsory savings

By Stephen Kiwanuka-Kunsa

Yes, the benefits of consistently saving a portion of one's income are not in dispute. Saving drives wealth creation, financial stability and fortitude. Its main purpose is to provide for legitimate future needs, and for some individuals, to allow the saver to become one of those special people who can fund important needs of others.

However, an appropriate nugget of saving is that on its own, saving does not engender personal financial wellbeing. It must be undertaken within a regimen of a financial   infrastructure with crafts that mutually and symbiotically coexist.

Recently the managing director of the National Social Security Fund (NSSF) was reported, in the media, to have proposed a doubling of the mandatory savings from 15% to 30 %. The proposal was supported by some senior public officials. Supposedly, the increase would enable the Fund to provide more attractive products to its contributors.

 However, though it was stated that the proposal was informed by a study, the justification for the proposal did not, in my view, come through clearly. Why do the NSSF savers fall into destitution soon after they retire, as reported? Is it because the savers fail to properly utilise the retirement benefits? Is it because of the inadequacy of the retirement savings?

Is it the absence of adequate survival and support systems? Or, is it a combination of these and other factors? If these are some of the reasons responsible for the undesirable and deplorable post-retirement conditions of the NSSF savers, like I am inclined to believe, then the proposal to increase contributions would not singly remedy the situation.

I submit that a combination of interventions would better serve the purpose. For instance, it might be useful to covert the NSSF from a provident fund to a pension scheme. Another measure would be strengthening of the Capital Markets structure to provide a range of investment opportunities and vehicles for absorbing the savings.

The insurance industry, in particular, would need to be able to efficiently convert the lump-sums to annuities of life-long income streams. Then the institutional framework for providing medical, housing and other social services must be efficient and robust, as is the case in the East Asian countries.

For the sake of elucidation, even if the individuals followed the golden rules of investing-saving early and diligently, holding a broadly diversified investment portfolio mix and never accessing their savings until retirement, their financial success would still depend on the state of the local and international financial markets.

Oftentimes, particularly in the developing countries, even if people wanted to save, they may not find reliable savings and investment vehicles, like robust life insurance policies, mutual funds, unit trusts, annuities and private pension plans.

Another market-related challenge is inflation which, when not controlled, eats into peoples' savings and jeopardises the credibility of the entire retirement saving and planning framework. Finally, a more pragmatic intervention would be to consider integrating a number public financial institutions, like the NSSF, within the EAC block. I know there efforts in this direction with regard to the banking sector. They should emulated by the non-bank financial sector.

Moreover, it is a fact that retirement poses psychological and financial challenges. Retirees, therefore, need to be enabled to anticipate and deal with the challenges.

Member Education on matters of retirement planning and personal finance is one thing that retirement managers, like the NSSF, need to address. This may go a long way to mitigate the undesirable repercussion and ramifications of the NSSF other retirees. I am not aware that Member Education is being done to the extent it should be.

Lastly, the rate of saving ought to be affordable to both the employee and the employer. The savings should not seriously constrain the consumption of the savers so as to deny them a reasonable lifestyle. The recommended rate is up to 20% of earnings, with the employer's matching contribution.

On the other hand, a high matching employer contribution rate raises employee-costs and would harm business profitability. High employees-costs may drive the employers to raise the charges for their goods and services, or they may curtail their establishments. Both of these measures are counter-productive.

For this reason, I submit that any increase of contribution, including the one proposed by the NSSF, should be informed by an empirical study, and thoroughly and objectively debated before giving it approval and acclamation.