Mothers with Mutuelle cards await for medical service at a health facility. File.
BY FRED NYAYIEKA
In line with trends in both
developing and developed countries, Rwanda has over the years reviewed
its social security system as a major component of inclusive social
economic development.
Whereas it is envisaged in social security policy that the country achieves universal social security coverage, in reality, 44 years ever since the first national social security scheme was established
through the Decree Law of August 22, 1974 on the Organization of Social Security in Rwanda emerging trends point to the need for a different approach in achieving this objective.
First, to be able to appreciate the need for a new approach, we need to look at the current realities in terms of coverage, adequacy of benefits and funding of the Rwanda Social Security Board.
Membership to the Rwanda Social Security Board is mainly in the formal sector with a coverage estimated at below 10% of the population. In a country with more than 80% of the population in the informal sector, majority of the population remain excluded from this vital pillar of social security.
To address this problem, there is need for the RSSB to formulate innovative management structures to capture the informal sector employees. For instance, RSSB could partner with mobile telephone service providers to enroll members and collect contributions. The experience of mobile money banking and money remittances attests to the success of this approach.
With proper national sensitization and management, this will go a long way in increasing the coverage of the scheme.
The current pension formula under RSSB provides for income replacement ratio of 60%, 80% and 100% at 30, 40, and 50 years of service respectively.
Taking 80% for instance, what this means is that for one to be entitled to 80% of average salary, one needs to have joined the scheme at the age of 20 years and remained a contributing member for the next 40 years to retire at the age of 60 years. Again factoring in salary inflation in 5 years, the average of 5 years may not be a good indication of retirement salary.
This in essence means that in normal circumstances and irrespective of years of service, the benefits payable under the RSSB are not bound to compare favorably with salary at retirement and therefore not able to take good care of retirement needs.
This however is not the issue as the RSSB is the first or primary pillar of social security and the benefits must be supplemented with benefits from other pillars of social security.
To address the problem of inadequate benefits, there is need for a comprehensive legal and management framework to introduce compulsory membership and preservation of benefits in occupational schemes.
Although Law No. 05/2015 of 30/03/2015 governing the organization of pension schemes was enacted in 2015, the law has fundamental weaknesses that fails to address the challenges of inadequate pension savings hence benefits.
For instance, the law does not prescribe minimum contributions, allows members of occupational schemes to withdraw their savings at any time and does not impose maximum commutation. In essence, members can withdraw the entire savings at any time in lump sums.
The occupational schemes are therefore provident funds and not pension schemes although the name suggests otherwise.
The other major problem with the RSSB is the method of funding, the pension benefits are defined benefit. This is significant for many reasons; one, the contributions have no bearing on pension benefits and may change at any time without corresponding benefits.
Two, earnings on investments have no bearing on benefits promised. Irrespective of rate of return on investments, the benefits remain as promised. Such schemes in their very nature are designed to penalize those who leave early while compensating longer service.
However, the major problem with this structure for state sponsored schemes is that the risks are borne by future contributing members.
With the current youthful working population, the problem may not manifest itself at the moment. However, as the membership matures, there will be pressure on funding brought about by increased number of beneficiaries, sometimes with no corresponding increase in new contributors.
The net effect will be less contributors with more beneficiaries leading to increase in rates of contributions for active members. In other words, future contributors will guarantee benefits promised to current members. This creates inequity amongst different generations of members as future members may be required to pay more for the same benefits.
Experience with defined benefit schemes all over the world have proved that whereas they guarantee promised benefits, their funding is unsustainable in the long term as both demographic and economic dynamics become complex.
With a well management framework, defined contribution schemes can provide same or better benefits at the same cost with individual members bearing scheme risks.
fnyayieka@liaisongroup.net
The views expressed in this article are of the author and do not necessarily represent those of The New Times.
Whereas it is envisaged in social security policy that the country achieves universal social security coverage, in reality, 44 years ever since the first national social security scheme was established
through the Decree Law of August 22, 1974 on the Organization of Social Security in Rwanda emerging trends point to the need for a different approach in achieving this objective.
First, to be able to appreciate the need for a new approach, we need to look at the current realities in terms of coverage, adequacy of benefits and funding of the Rwanda Social Security Board.
Membership to the Rwanda Social Security Board is mainly in the formal sector with a coverage estimated at below 10% of the population. In a country with more than 80% of the population in the informal sector, majority of the population remain excluded from this vital pillar of social security.
To address this problem, there is need for the RSSB to formulate innovative management structures to capture the informal sector employees. For instance, RSSB could partner with mobile telephone service providers to enroll members and collect contributions. The experience of mobile money banking and money remittances attests to the success of this approach.
With proper national sensitization and management, this will go a long way in increasing the coverage of the scheme.
The current pension formula under RSSB provides for income replacement ratio of 60%, 80% and 100% at 30, 40, and 50 years of service respectively.
Taking 80% for instance, what this means is that for one to be entitled to 80% of average salary, one needs to have joined the scheme at the age of 20 years and remained a contributing member for the next 40 years to retire at the age of 60 years. Again factoring in salary inflation in 5 years, the average of 5 years may not be a good indication of retirement salary.
This in essence means that in normal circumstances and irrespective of years of service, the benefits payable under the RSSB are not bound to compare favorably with salary at retirement and therefore not able to take good care of retirement needs.
This however is not the issue as the RSSB is the first or primary pillar of social security and the benefits must be supplemented with benefits from other pillars of social security.
To address the problem of inadequate benefits, there is need for a comprehensive legal and management framework to introduce compulsory membership and preservation of benefits in occupational schemes.
Although Law No. 05/2015 of 30/03/2015 governing the organization of pension schemes was enacted in 2015, the law has fundamental weaknesses that fails to address the challenges of inadequate pension savings hence benefits.
For instance, the law does not prescribe minimum contributions, allows members of occupational schemes to withdraw their savings at any time and does not impose maximum commutation. In essence, members can withdraw the entire savings at any time in lump sums.
The occupational schemes are therefore provident funds and not pension schemes although the name suggests otherwise.
The other major problem with the RSSB is the method of funding, the pension benefits are defined benefit. This is significant for many reasons; one, the contributions have no bearing on pension benefits and may change at any time without corresponding benefits.
Two, earnings on investments have no bearing on benefits promised. Irrespective of rate of return on investments, the benefits remain as promised. Such schemes in their very nature are designed to penalize those who leave early while compensating longer service.
However, the major problem with this structure for state sponsored schemes is that the risks are borne by future contributing members.
With the current youthful working population, the problem may not manifest itself at the moment. However, as the membership matures, there will be pressure on funding brought about by increased number of beneficiaries, sometimes with no corresponding increase in new contributors.
The net effect will be less contributors with more beneficiaries leading to increase in rates of contributions for active members. In other words, future contributors will guarantee benefits promised to current members. This creates inequity amongst different generations of members as future members may be required to pay more for the same benefits.
Experience with defined benefit schemes all over the world have proved that whereas they guarantee promised benefits, their funding is unsustainable in the long term as both demographic and economic dynamics become complex.
With a well management framework, defined contribution schemes can provide same or better benefits at the same cost with individual members bearing scheme risks.
fnyayieka@liaisongroup.net
The views expressed in this article are of the author and do not necessarily represent those of The New Times.
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