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.
