Social Security schemes are long-term schemes. They develop slowly, encompassing more and more people over time, gradually increasing contribution rates and benefits, with young employees only realising their retirement pension benefits when they become senior citizens.
Contribution levels and insurable earning ceilings, where they are in force, are gradually raised over a period of time.
The greatest benefits generally accrue to those who began contributing to the scheme in their youth, continue contributing until they reach retirement age and live for many years after their retirement.
The social security scheme in the United States, for instance, has been in operation for about 75 years. The US Social Security Act was passed in 1935, but it was only in 1937 that the first payroll taxes for the scheme, which in Zimbabwe would be called contributions, were collected.
The first benefit payments, which were lump-sum death benefits, were paid the same year. The first retirement benefit was paid to a man who retired the day after the scheme began. Five cents had been deducted from his pay. He was given a lump-sum payout of 17 cents.
The first pension payment was made in 1940 to a lady who had paid a total of $24,75 into the scheme over the preceding three years. She was paid a pension of $22,54. After her second payment she had already received more than she had contributed. She lived to be 100, by which time she had received more than $22 888,92 in pension payments.
When the US scheme started the retirement age was 65. Since 1960 the normal retirement age for the US social security pension has been 67, though some people take early retirement at age 62 with reduced benefits.
The average life expectancy in the US when the scheme began was 66. Today it is 79, which is one of the reasons why the social security scheme is now paying out more than it is receiving and why questions are being asked about the need to further increase contribution rates, reduce benefits and increase the retirement age.
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When the scheme began a number of categories of employment were excluded. Over the years various categories were added so that today most workers are included in the social security scheme, even those who are self-employed, who pay into the scheme at a rate equivalent to the combined employee and employer rate.
The contribution rate in 1937 was 1% of the employee’s wage up to a maximum annual wage of $3 000. The employer paid the same amount. This gradually increased over the years to the position today where the employee and employer each pay 6,2% of the employee’s salary up to a maximum annual salary of $110 100. In addition the employer and employee each pay a further 1,45% of the employee’s salary for Medicare, which is the national medical insurance scheme.
In Zimbabwe the social security scheme began in 1994. That was when the first contributions to the scheme were made. Those who retired within 12 months of their contributions starting were paid back the contributions plus interest. After 12 months of contributing retirement grants were paid to those reaching retirement age. The first pensions were paid towards the end of 2004.
While minimum pensions are admittedly low in terms of what the money will buy, those receiving them would probably discover, if they worked out how much they paid into the scheme, that they were receiving more than they paid into it.
At present, because employee contributions are calculated at 3% of basic salary up to a maximum monthly income of $200, the most that any employee pays in contributions is six dollars per month. The employer pays the same amount, The minimum retirement pension is $40 per month.
Fewer categories of employment were excluded from the scheme in Zimbabwe than was the case when the US scheme began.
Those initially excluded from the scheme in Zimbabwe were civil servants, domestic workers and those employed in the informal sector.
Civil servants joined the scheme almost 10 years ago. Domestic workers and informal sector workers have not yet been included in the scheme, although those who leave the formal sector can opt, when they do so, to continue contributing to the scheme at a rate equivalent to the combined employee and employer contribution.
In the US, domestic workers and the self-employed were included in the scheme in 1950, while state and local government employees were added in 1954, 17 years after the scheme began.
The US scheme has been running for about 75 years. The Zimbabwe scheme has been going for just over 17 years.
Those who will benefit most from the scheme are those who began contributing to the scheme as young people and live to a ripe old age. The longer the contribution period the higher the percentage of insurable income the pension will be.
Talking Social Security is published weekly by the National Social Security Authority as a public service.
