Why Tanzanian pension schemes are subject to evasion and manipulation

PPF TOWERS
By Christian Gaya: Business Times

Related to this issue, however, is the point that there is a trade off between a pension that is highly redistributive and one that will not encourage evasion. For a high income worker, redistributive social security contributions toward poor retirees’ results in a lower rate of return for the worker on his or her own social security contributions.

As a result, the high income worker would regard much of contribution as a tax and not as a deferred wage, which lessens his incentives to pay. So the social security system needs to strike a balance between effective poverty alleviation and delivering good value to the contributing worker of the pension scheme.

However, many more have encountered severe problems. These are well documented in the publication, averting the old age crisis, and include high payroll taxes, evasion, excessively long retirement periods, misallocations of public resources, and perverse redistribution, from the poor to the rich.

High payroll contributions, as high as 62 percent in countries like Hungary or 50 percent in Argentina, lead both employers and employees to look ways to avoid paying such high contributions. Employers often underreport to number of employees working or under-report the hours worked in order to minimize these contributions. As a result, high income payroll contributions do not always generate additional revenue as the contributable base often falls to compensate.

High payroll contributions or taxes are also partially responsible for low employment growth. Employers have been steadily moving manufacturing sites away from the highest wage and highest contributions or tax countries in Europe. Countries like United States, which have lower wages and lower social security costs, have experienced far higher employment growth than countries in the European Union in last 30 years, 24 million jobs versus 9 million since 1980

Similarly, many systems are subject to evasion and manipulation. If, for example, workers are only requires to contribute for 20 years before receiving a pension or before receiving a minimum pension, many workers contribute for only as long as necessary to guarantee their pension rights before returning to the informal sector. If the wage base on which the pension is based is the final salary or the average of salary for the last five years as National Social Security Fund (NSSF) of Tanzania does. Wages are often under-reported in the early years of employment and individuals receive huge salary increases immediately prior to retirement 

Early retirement officially sanctioned or otherwise, is also a problem for many countries. In most cases, minimum retirement ages have not kept pace with increased in life expectancy, increasing the length of time individuals can expect to spend in retirement. For example, the minimum retirement ages have not changed in the USA system since its institution, although life expectancy at retirement age has increased by at least 10 years. In Tanzania the minimum retirement ages have changed in public pension schemes since 1997, while life expectancy at retirement age has decreased by at least 5 years so the reverse is true.

Unofficial early retirement, in the form of lax disability certification and falsely pre mature withdrawal of pension contributions, has also become a problem in many countries.  In countries as diverse as Poland and cost Rica, more than third of pensioners are claiming some form of disability including Tanzania where more than third pension scheme contributors are withdrawing their pension contributions falsely before reaching either voluntary retirement age of 55 or compulsory age of 60. In countries as diverse as Poland and cost Rica as unemployment increases and individuals exhaust time limit for collecting unemployment benefits, they turn to disability

In those countries which have maintained fully or partially funded public schemes, the funds have often been poorly managed. In most developing countries like Tanzania pension schemes have often earned negative rates of return on their assets, in some countries like Peru have often earned negative rates of return on their assets as low as -37.4 percent. The low and negative rates of return are not indicative of poor management skills among the public managers, but indicative of the politicization of investment policy. Managers are forced to invest in the pet projects of politicians, in loss-making state –owned enterprises, and exclusively in government securities which pay lower than normal rates of return

Some problems can be improved by computerization and increased efficiency in pension administration. However, many of these problems are simple issues of incentives. When payroll contributions are high employees and employers have incentive to evade and will find a way to do so despite strict administration procedures. When funds are accumulated, politicians will find a way to divert them for their own purposes.