Those who followed the United States presidential election campaign and the debates between the presidential candidates may have noticed that social security was one of the important domestic issues on which candidates’ views were sought.
This reflects the importance Americans attach to social security pensions and the concerns they have about possible benefit cuts, social security tax increases and an increase in the retirement age, as authorities grapple with the problem of how to prevent United States social security funds becoming exhausted within the next 20 years or so.
About 40 million senior citizens in the US receive social security benefits. The average pension there is $1 200 per month.
Perhaps as you read this you are thinking: “Wow. I wish our elderly people could receive that level of pension, instead of the meagre $50 that those retiring at the moment are receiving.”
It must be remembered that the social security scheme in the US has been running for 75 years, going back to 1937, when the first social security payroll taxes were collected. As time has gone by the scheme has developed to its present level.
Social security taxes have increased over the years, as have pension levels and the maximum income on which social security taxes (what in Zimbabwe would be called social security pension fund contributions) are calculated.
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Most of those retiring in the US have been paying social security taxes all their working lives, which could span close to 50 years, since the normal retirement age in the US is currently 67.
Zimbabwe’s social security scheme is also designed to develop over time. Those who began contributing to the NSSA social security pension scheme at 18 could have been contributing for up to 47 years when they finally come to retire, if they take late retirement at age 65, at which stage their pension should be the equivalent of 79,7% of their insurable income.
The percentage of insurable income that a pension replaces depends on how long the pensioner has contributed to the pension scheme for. After contributing for 40 years, the insurable income replacement rate should be 63,3%. After 45 years it is 75%.
The local social security pension scheme has been operational for only 18 years, having begun in 1994. The maximum period that anyone can have contributed for at the moment, therefore is 18 years, at which stage the insurable income replacement value of a pension is 24%.
Why then, one might wonder, are those who retire at the moment receiving pensions of less than $50. Surely those retiring on a salary of $400 a month, who contributed to the scheme for 18 years, should be receiving $96, since that is what 24% of $400 would be.
Someone retiring after 18 years contributions on a monthly salary of $800 should surely receive a monthly pension of $192.
The reason they are not is that insurable income is not necessarily the same as actual income. The insurable income is the figure on which pension contributions are calculated. At present there is a maximum insurable income level of $200 per month. Twenty-four percent of $200 is $48.
In other words, those earning $400 or $500 a month are paying the same pension fund contribution as a person earning $200 a month. If they retire while this remains the position, they receive the same pension as a person earning $200 a month who has been contributing for the same length of time as they have.
In some countries there is no maximum insurable earnings limit. In others there is. In the US there is a maximum salary on which social security tax is paid but it is quite high. It is currently $9 175 per month or $110 100 a year. In 1937, the year the scheme began, it was $3 000 a year, which is $250 a month, slightly higher than our own maximum of $200. Over the years it has been increased. In 2000 it was $76 200 a year, which is $6 350 per month.
Each year since then the upper limit has increased.
No doubt with time the maximum insurable earnings limit in Zimbabwe will be increased so that those who have contributed all their lives to the pension scheme receive a reasonable pension.
Unfortunately, that will not benefit those currently retiring, who will continue to receive a pension that is a percentage of no more than $200 a month at the most.
Why then does NSSA not increase the maximum insurable income to a much higher level, so that those retiring receive higher pensions? The answer is that there are a number of stakeholders whose views have to be considered. Apart from employees, there are employers, who have to match their employee’s contributions with equal contributions of their own, and the government, which is an employer and also has to take into account the larger economic picture.
Changes to the contribution rate, insurable earnings ceiling and benefits can only be effected once the government has agreed to them and gazetted them.
NSSA tried to increase the insurable earnings limit at the beginning of this year to $1 000 a month. However, it met with strong resistance from various stakeholders, resulting in the retention of the $200 insurable earnings limit. Over time, however, there have to be changes. In the meantime, NSSA continues to try to increase awareness among stakeholders of the negative effect that a low insurable earnings ceiling has on pension levels.
Talking Social Security is published weekly by the National Social Security Authority as a public service.
There is also a weekly radio programme, PaMhepo neNssa/Emoyeni le NSSA, discussing social security issues at 6.50 pm every Thursday on Radio Zimbabwe and 6.50pm every Friday on National FM.
Readers can e-mail issues they would like dealt with in this column to mail@mhpr.co.zw or text them to 0735 041 278. Those with individual queries should contact their local NSSA office or telephone NSSA on (04) 706517-8 or 706523 5.