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There is a common misconception that social security pension schemes such as the national pension scheme operated by the National Social Security Authority are or should be safety nets for the poor and vulnerable.
At the recent Zimbabwe Association of Pension Funds congress one of the participants in a panel discussion argued that the national pension scheme was a safety net and contribution and benefit levels should remain low to reflect this safety net status.

This followed a presentation in which examples were given of national pension schemes in East Africa where replacement rates were, it was said, as low as two percent. The replacement rate is the percentage of a person’s insurable earnings that a retirement pension replaces.

The presenter suggested that the role of national schemes such as the NSSA pension scheme should be circumscribed because they offered little benefit to their members.

Zimbabwe’s national pension scheme is not and was never meant to be a safety net for those without other means of support in their old age. It is a contributory pension scheme with defined retirement benefits that depend primarily on an individual’s contribution period and insurable earnings at retirement.

Safety nets are defined as non-contributory transfer programmes seeking to prevent the poor or those vulnerable to shocks and poverty from falling below a certain poverty level.

Such safety net programmes may be provided by the state and aid donors or by non-governmental organisations, private firms, charities and informal household transfers of funds or assistance.

Safety net transfers may consist of cash transfers; food-based programmes such as supplementary feeding programmes and food stamps or vouchers or coupons; in-kind transfers such as school supplies and uniforms; conditional cash transfers; price subsidies for food, electricity or public transport; public works or fee waivers and exemptions for health care, schooling and utilities.

It should be clear from this that the national pension scheme (NPS) is not a safety net programme. It is a social insurance scheme, members of which have a right to defined benefits on the basis of their contributions to the scheme.

A defined benefit pension plan is one in which an employee is entitled to a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age.

In the case of the NPS the formula is based on the employee’s contribution period and insurable earnings at retirement.
Not only is the NPS not a safety net to prevent the poor and those vulnerable to shocks and poverty from falling below a certain poverty line but it currently excludes, in addition to the unemployed, those employed in the informal sector, gardeners and domestic employees.

Safety net programmes in Zimbabwe are the responsibility of the Ministry of Public Service, Labour and Social Welfare, which runs such programmes through its Social Welfare Department.

The insurable earnings replacement rate of NPS pensions depends on the number of years that an employee has contributed to the pension scheme. The minimum replacement rate is 13,3 percent for a person who has contributed to the scheme for 10 years, which is the minimum contribution period for a pension.

After 20 years of contributions the replacement rate is 26,7 percent. After 25 years it is 33,33 percent. After 30 years it is 40 percent. It is 51,7 percent after 35 years, 63,3 percent after 40 years, 75 percent after 45 years and 79,7 percent after 47 years.

The replacement rates for someone who has contributed to the scheme for all his or her working life are comparable with replacement rates in countries where national pension schemes were established many decades ago.

Of course there is nobody yet who can enjoy the replacement rates that come after 40 or even 30 years of contributions, because the pension scheme is not yet 20 years old. It will be 20 years old in October. A further limiting factor is the imposition of an insurable earnings ceiling. The replacement rate is a percentage of an individual’s insurable earnings at retirement. The insurable earnings are the earnings on which one’s pension contribution is based.

The amount of an individual’s pension depends primarily on the insurable earnings at retirement and the number of years one has contributed to the scheme for.
In 2009, when there was no insurable earnings limit, the insurable earnings of those who retired then were equivalent to their actual basic earnings, since those were the earnings on which their contribution had been based. Some of those who retired then on good salaries are receiving monthly pensions of more than $500.

However, in May 2010 Government re-imposed an insurable earnings limit of $200 per month. This limit was raised to $700 in June last year.
Had the $200 ceiling still been in place, then the pension that would have been paid to a person earning above $200 who retired today after contributing to the scheme since its inception would be $52. However, with the new ceiling of $700 such a member would take home a pension of $185,if he or she earned above $700.

Pensioners often complain that workers who retired after them are receiving better pensions than them. This is because of the new ceiling on insurable earnings and because the person has contributed for longer. The longer the contribution period and the higher the insurable earnings, the higher the pension will be.

In the developed world most national pension schemes are administered by the state. They are the primary pillar of social protection in old age. The NSSA scheme is intended to be the same.

It is not designed to pay minimal pensions as a safety net. It is meant to pay a living pension to contributors. Once people start retiring after contributing for 35 or 40 years, they should receive significant pensions, particularly if the insurable earnings limit has by then been increased significantly or abolished.

Talking Social Security is published weekly by the National Social Security Authority as a public service. There is also a weekly radio programme on social security, PaMheponeNssa/Emoyeni le NSSA, at 6.50pm every Thursday on Radio Zimbabwe and Friday on National FM. Readers can e-mail issues they would like dealt with in this column to [email protected] or text them to 0772-307913. Those with individual queries should contact their local NSSA office or telephone NSSA on (04) 706523/5, 706545/9, or 799030/1.