- The rationale behind why social security pay-outs to savers tend to be delayed until a later age in life is because the savings are meant to protect against failures of the savers’ own routine investment planning in the course of their active employment life.
Life expectancy for Ugandans has been increasing over recent years. In the last thirty years, it has averagely risen by 35 percent. It was about 46.01 years in 1989. Uganda’s National Social Security Fund was founded 34 years ago. At that time, the age for accessing one’s savings was ordinarily put at 55. Today, the intention is to lower this age to 45. With an improving life expectancy trend, it is implied that savers will live longer post-retirement lives going into the future.
In attempting to manage the risk of the population having to live in financial difficulty as they get older, with prudence, the age at which they can withdraw social security savings should be increasing, in an environment where life expectancy is improving. In the worst case, it should not be tampered with at all.
For a longer living population, it is important that the Fund is enabled to pay savers higher interest on savings so that at the time of their exit from the scheme, they receive sufficient amounts to safely navigate through the expected longer life out of work. The Fund can only do this, if it has sufficient monies for reasonably long enough to invest and grow its portfolio.
A sudden lowering of the age at which savers will access their savings will cast instant pressure on the Fund’s investments, cash-flow plans and by implication threaten the Fund’s growth strategy. According to the 2016/17 national labour force survey conducted by the Uganda Bureau of Statistics, 50 percent of the working population fell in the age bracket 31 to 64 years. Overall, Ugandans aged 45 to 55 account for about 4.7 percent of the population according to World Bank development indicators for the year 2016. If the NSSF Act is successfully amended, a number of savers proportionate to this age bracket may instantly qualify to withdraw their savings. About 3.7 percent of Ugandans are aged 40 to 44 years and as a result, a proportionate number of savers will also qualify to pull out their savings within the next five years as they hit the proposed new threshold of 45 years. Collectively, a number of savers that correlates to 8.4 percent of the country’s population will qualify to pull out their savings between now and the next 5 years.
Savers’ account balances with the Fund grow with age and so these individuals hold the largest balances with the fund since they constitute the oldest bracket of savers. It is possible that the Fund has been working out their medium term to long term cash-flow planning without such a drastic change being taken into account but even if their stress testing scenarios could have considered such a scenario, the Fund will be faced with very stiff liquidity challenges that might reach a level that calls for significant scaling down of operations, premature liquidation of investments to meet escalating pay-out obligations and remarkable reduction of interest paid to savers.
The rationale behind why social security pay-outs to savers tend to be delayed until a later age in life is because the savings are meant to protect against failures of the savers’ own routine investment planning in the course of their active employment life. Allowing savers to access the monies at a relatively young age, especially if all or a significant portion of the savings is availed to them, means that they have lost the benefit of a divested investment portfolio.
The monies paid out to them will effectively be exposed to the same risks that their other investment ventures are exposed to, prone to weaknesses in their personal decisions and individual investment risk appetite. An individual can lose everything and get desperate in old age. On the other hand, with NSSF the risks taken in investment are shared by the numerous savers in the Fund’s pool and the loss that an individual takes in case of an investment hiccup is less. If someone was not fortunate to meet success with their personal investments during their working life, they will still have a fall-back with the Fund to rely on as they age.
Amendment of the NSFF Act therefore poses significant risk to Ugandans and could result in a vulnerable old population, years from today. The risk could be lessened if the pay-outs are possibly structured to be made piecemeal to savers, at preferably well spaced intervals.
The writer is a Chartered Risk Analyst and risk management consultant.