The role of Social Security institutions in savings mobilisation

Presidents Paul Kagame (L) and Uhuru Kenyatta during their meeting at the State House in Nairobi yesterday. The New Times/Village Urugwiro.

The role social security institutions and the extent to which these avail various instruments that can tap private savings is yet another critical determinant to our savings model. 

Institutions such as Caise Sociale and life policies offered by insurance companies have the potential to attract large of pool of savings, of precautionary in nature. 

Such savings, which are used to provide income during retirement, or unforeseen calamities, serve to smoothen income at a time when one’s income generating capacities are no more. 

Lots of research in this domain point out that, there is a significant relationship between social security systems and increase in private savings. 

These studies point out that, pension as well as provident funds have been a major source of savings especially in East Asian countries and has financed massive infrastructure investments that bank based finance could not have financed. 

Thus for instance, a study by Lin (1994:133) found out that “employees provident funds (EPF) is by far the largest mobiliser of savings in Malaysia. 

Its contributors’ balances rose at average rate of 17.4% of GDP during the period 1980-1992, raising from only (Malaysian Ringgit- RM)  9 billion or US $ 2.7 billion at the end of 1980 to a staggering RM 62 billion or US $ 18.8 billion by the end of 1993 or 50% of nominal GDP”. 

Public pension schemes are supposed to serve two primary roles; first, to provide a compulsory savings mechanism, and second, to provide for the needs of the retired employees, so as to maintain some balance in their standards of living. 

In the case of compulsory savings mechanism, pension scheme ‘force’ individuals to save, who might otherwise be myopic with regard to their future income needs, and who might expect to rely on the government social security or charity for their financial needs and thus survival. 

However, countries can only use social security institutions to effectively mobilise large pool of savings if, and only if, they maintain stable macro economic environment, and especially more, if they maintain low or waive taxes on retirement benefits. 

Evidence from countries such as Singapore points out to the fact that, employees provident funds (EPF) contributed to the overall national savings at a rate of 30% of GDP, a fundamental increase in savings by any standard. 

In developing countries however, where inflation is endemic, social security benefits received at retirement are seriously eroded in real terms so much so that and this negates the ability of these institutions’ ability to savings mobilisation.

Social Security Institutions and Savings Mobilisation in Rwanda

Unlike many countries where social security contributions are used to finance projects where political patronage is the main criteria, a situation that has seen massive corruption in use of these resources, Rwanda maintains robust institutions that should attain government savings mobilisation strategy. 

Social security funds, along side life insurance premiums provides a pool of long term savings that are used to finance long-term investments. 

Indeed most of long-term infrastructure investments in western countries, and East Asia, used these funds to under take heavy public investments. 

This is pertinent in that, some of these savings are held for as long as the savers attains the age of 55/65 years. The only lacuna with our systems is the coverage, which is very shallow. 

Thus for instance, whereas Sub-Saharan Africa has an average of 12% of social contributions as percentage of GDP; Rwanda’s stands at 1.3% of GDP. 

This decimal performance of our social security sector, calls for serious reforms, if it is to serve as a vehicle for savings mobilisation, and their long-term investment. 

Simple survey suggests that, most of the contributors to these institutions are those working in formal sector, and even then, a small proportion of these. 

Our informal sector, (which according to available statistics accounts for around 40% of our GDP) has not come on board to contribute to these social security institutions.

Specific products targeting this particular sector, would go along way to mobilise ‘hidden savings’ in this otherwise major sector of our economy. 

Our Diaspora is yet another target group that should contribute to this sector, if only there are suitable financial instruments designed to cater for their savings needs. 

As long as these savings are guaranteed by the government through a protection fund, savers will be incentivised to save with them. Tax holidays on these savings will certainly boost the amount one can save with them.

A part from government social security institutions, private social security institutions could supplement government efforts, and ensure efficiency, while giving mass savers alternative vehicles for their savings needs. 

These private social security institutions will need similar incentives as those given to state institutions if there are to make an impact in savings mobilisation. 

Private social security institutions will have to be regulated, and their savings insured, to avoid loss of savings by the same, which would negate our savings mobilisation strategy. 

Of particular interest is the life insurance in Rwanda, which has the potential to mobilise long-term savings, but this potential has not been exploited as it has not been promoted to would be savers.

In East African region life policies are a common feature, and an instrument of savings mobilisation, an  instrument yet to develop in Rwanda.