NSSF AND OUR PERSONAL FINANCES

Last week a bill to amend the current NSSF Act came to parliament on its way to becoming law.

One of the 13 proposals that caught people’s attention was one that would change the way savers benefits would be taxed. As it is now our contributions are taxed before being passed on to NSSF. In the new law the taxing of our contributions would be deferred to the time we collect our benefits at 55.

"The uproar was understandable as most people are not aware that their contributions are taxed before we pay out, so they were feeling hard done by the fact that their eventual payouts would be taxed...

But in the new law one has the option to not collect their benefits at 55 and wait until they are 60 to get their full amounts without being taxed. Many lurched onto this provision complaining that government wants to force us to save with them till they are 60.

There were many things to learn from people’s reactions, mostly the loud ones who are in the minority, about our attitudes to money.

The world over governments realizing they cannot always take care of their citizens, especially in old age, force their citizens to save through one kind of social security scheme or another. Left to our own devises we will not put money aside, even if on an intellectual level we understand the wisdom of this.

It is a human condition, hardwired into us down the years along our evolutionary path.

"This is why the wealthy people are the minority in society. Not because resources are not enough to go around, but because the attributes of planning long term and delaying gratification do not come naturally to any of us. Even the wealthy have had to train themselves – apart from those who inherited or stole their riches, to behave unnaturally not for a day or a week or even a month but for years even generations.

You can bet there was an uproar as well when the government in 1985 enacted the current NSSF act, with people wondering why government wants us to save, that we can do it for ourselves. Thankfully there was no social media then.

NSSF has been bandying around the statistic that of its members who get their age benefits at 55, up to 80 percent of them have blown it within two years. This statistic was one that could have been used to amend the law to move away from paying out a lump sum to paying a pension. That is not among the amendments proposed.

But interestingly there is a small minority of the Fund’s two million members, about 40,000, who choose to leave their savings with NSSF after retirement. It is an unnatural thing to do – everybody else just can’t wait to get at their monies, never mind that they don’t know what to do with the windfall; but it is a wise thing to do. NSSF last year paid an interest of 15% on savings there are no banks that can pay you that amount in this town, so why not let the funds continue to accumulate?

Unfortunately, under the current law these people can only do this until their 60 after which NSSF hands over their money. It is being suggested that this provision be scrapped and members if they wish, can keep their money with the Fund until they die.

And assuming NSSF can maintain the track record of paying out double digit interest rates, in the five years between 55 and 60 these members savings will have doubled!..

That is the magic of compounding. Another unnatural phenomenon we are not conditioned to appreciate.

NSSF reported that if a person earns a million shillings a month and NSSF maintained a 10% interest for the duration of their 30 year working life under the new law they would receive sh345m compared to sh301m. The chattering masses jumped up and said this was a lie, given that of the worker’s income they only save sh50,000 a month or sh600,000 a year or sh18m over the 30-year period, so how does that become sh301m or better still sh345m?

They forgot the employer’s sh100,000 monthly contribution, the statutory 10% and were clearly ignorant of the power of compound interest, which Albert Einstein once said was the eighth wonder of the world.

NSSF also showed that while government tax from our contributions would amount to about sh67m under the current law in the new law government tax would more than double to sh143m. That set the critics off again. Why should government take more from us in tax? Tax, they say is the cost of civilization. Without civilization not only might you not get your money but if you do you might not enjoy it in peace.

But the clincher was that there is a proposal that workers can save up to 30 % of their income tax free. That if you earn a million a month, before the tax man wields his or her axe, you can commit up to sh300,000 to your retirement savings and leave only sh700,000 for NSSF tax. If you do the bare minimum savings of five percent or sh50,000 URA would tax sh950,000.

I am not holding my breath for Ugandans to max out on this benefit. Because the benefit will be enjoyed in the future. They would rather shoot themselves in the foot by saving less now and complain later when they tax their final benefits.

The argument to make would be that government should only tax the accrued interest on our savings, which are actually more than the contributions (thanks to compound interest), therefore not deferring taxing of our contributions but making them truly tax free.