Uganda’s Daily Monitor newspaper, on 9th April 2019, ran a headline – Workers to get NSSF savings at 45 years. In the accompanying article it was reported that Cabinet had already approved amendments to the National Social Security Fund (NSSF) Act 1985 aimed at this change, and others. Savers access their savings at 55 as per the 1985 Act.
This particular change will come with strategic challenges for the Fund which are possibly not envisaged at the face value of the proposed amendments. Indeed, the general public might be excited about this move because it is also sometimes perceived that it is better for savers to access monies from the Fund and invest for their old age when they still have an element of youth and therefore capacity and energy to commit the monies to lucrative ventures which they may then monitor and grow successfully before evening years set in.
Foremost, a sudden lowering of the age at which savers will access their savings will undoubtedly cast instant pressure on the Fund’s management of investments, cash-flow plans and by implication threaten the Fund’s growth strategy. According to the 2016/17 national labor force survey conducted by the Uganda Bureau of Statistics, 50% 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, suffice it to say that 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 qualify to pull out their savings within the next five years as they hit the proposed new threshold of 45 years. Following from the above we can say that, collectively, a number of savers that correlate to 8.4 percent of the population will pull out their saving between now and the next 5 years. These individuals have the largest balances with the fund since they constitute the oldest bracket of savers. Savers’ account balances with the Fund grow with age. Needless to say, it 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. Even if their stress testing scenarios could have considered related assumptions, 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 payout obligations and remarkable reduction of interest paid to savers.
On a second note, the reason why social security payouts to savers tend to be delayed to a later age in life is because the savings are meant to protect against failures of the savers’ routine investment planning in the course of their active employment life. So to speak, the saver is “helped” to have funds that are not readily available for their business, in the course of their employment tenure. They fall back on these funds in their later years in life. If social security funds are availed to the saver during his active employment life, this benefit of social security is defeated. The saver is exposed to the likelihood that he will commit his or her savings where their other investments are being invested, at a relatively young age, and risk their entire portfolio collapsing while savings have also been depleted. The result is that, effectively, you have an individual with no social security because they “consumed” their savings during a time when they should have ideally been continuing to grow the savings. There are high chances that if someone cannot successfully invest the income available to them after social security deductions without necessarily accessing their savings, they make also not register any more success if they access savings at a younger age and try to invest them along.
This particular threat to the saving population is worsened by the fact that Uganda’s life expectancy has been significantly improving in recent times. Between 1990 to 2017, life expectancy rose by an impressive 38%, on average. If this trend continues, 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 downwards. Decreasing this age is adverse to the population because they may find themselves living long lives after retirement but without much needed finances to support themselves.
Given that the relevant amendments are already on the move, in the case that the age at which savers can get their monies finally gets decreased to 45, it would help reduce attendant risks if the payouts are possibly structured to be made piecemeal to the savers, and at preferably well spaced intervals. This would reduce the potential of having citizens’ social security eroded by the technicalities that are to be introduced by the NSSF Act amendments. This would ensure that the Fund is given ample time to manage a smoother drop in the savings portfolio and therefore remain relatively able to deliver their strategic mandate and it will similarly help savers to reduce the possibility of having their savings completely eroded at an age so young, which would result in old-age financial difficulties.
The writer is a Chartered Risk Analyst and risk management consultant.