WHY NSSF AS A PENSION FUND IS A GOOD IDEA

Just when we had forgotten about the National Social Security Fund (NSSF) than it is back in the news.

A few weeks ago, an opinion hazarded in parliament that the Fund should payout 20% of members savings to help them over the corona crisis, caused an uproar.

On one side of the argument the NSSF management argued that the proposal was impractical, would hamper and even jeopardise its operations and above all they couldn’t execute it if they wanted to under the current law. 

The supporters of the  proposal argued that it was their money and it should be released, fear their money may have been pilfered and they are seeing ghosts and conspiracies lurking around every corner.

An amendment of the NSSF law currently winding its way through parliament has served to stoke the flames of the debate.

In the original amendment bill mid term access was restricted to access to funds for mortgage, medical, education and unemployment. But the committee that is working on the amendment has proposed that in addition people above 45 years or who have saved for at  least 10 years should be allowed to withdraw some of their savings.

No sooner had the dust settled on that discussion than it was proposed that NSSF be turned into a pension fund from its current status as provident fund. 

The difference is to shift away from a lump sum payment to workers when they retire to a monthly pension for the remainder of their lives.

The shift to a pension fund is likely to be an unpopular one. 

"For most members the expected payout at retirement is the most money any of them have had at one time. The mentality is that when they get their money their money problems will be done for good....

Unfortunately the numbers don’t support this feeling. According to NSSF eight in ten of its members have nothing to show for their money after two years following retirement.

The horror! You retire at 55 and probably have twenty years of life ahead and you have gone through your savings in two years.

But that shouldn’t be surprising.

If you get your current savings with NSSF and divide it by your annual salary, it is unlikely it can last you five years at your current standard of living..

 

I was amused to hear one person say that the people who wipe out their savings are only those with small take outs. That those who withdraw sh100m and above are doing well.

I would put my money on it that it’s the other way around. It’s the ones with big cash outs that blow up their savings and are back on the street looking for a job within two years.

"We seem to think that to improve our financial literacy we need a lot of money and we will be fine. And that is the problem....

If you can not manage the little you have, a lot of money will only serve to magnify your indiscipline with money. Hence the reason why the people who get the most money blow their money faster than the smaller savers.

So

a shift to a pension fund would actually save us from ourselves....

The compromise would be for members to be allowed to withdraw between 30 and 50% of their savings in a lump sum with the remainder being paid out as pension over the remainder of their lives.

There are other reasons why the turning NSSF into a pension fund makes sense, not least of all the anticipated massive payout in 15 to 20 years from now, when the majority of the current members seek to cash out, but keeping members living in dignity for the remainder of their lives has to be at the top of the list.

In the new law there is a provision for voluntary savings. While this is targeted at the informal sector it would do wonders for those in the formal sector, who can save over and above the mandatory 5% stipulated  by law. This allows one to have a bigger pool of cash from which to draw at retirement.

I expect the conversion to a pension scheme will be an unpopular one, but it will be the right thing to do, just as government compelling workers to save with NSSF 35 years ago was the right thing to do.

I can bet that even then people argued against handing over their monies to NSSF, arguing that they should be allowed to save how and where they wish. 

The figures again show that easily for nine in ten savers their NSSF stash is the biggest asset after years of hard work and squandering the remaining 95% of their income.