Africa
January 16, 2007
The continental headlines from Cape
Town to Cairo speak about the new cadres of poor, old retirees or the
so-called pensioners.
From Cote D’Ivoires screams the
headline: La vie de misère des retraités — the miserable life of
retirees. Cameroon: Where did the Pension’s 5 Billion Francs CFA Go?
Uganda: Uganda NSSF to become pension fund. South Africa: Investing in
risky ventures to maintain the benefits for retirees. Kenya: Kenyan
retirees doomed to poverty as pensions eat up 25 percent of
GDP
.
In Africa, it seems, governments and
citizens alike are just now waking up to the realisation that retirees are
living longer, require a lot more money to maintain in their last years,
and that the national coffers cannot provide the necessary pension.
Though many of the retirees worked
throughout their lives, the cost of living, looking after an extended
family and education, have eaten up whatever savings they had.
Moreover, where retirees once relied
on the traditional system where the younger generations cared for elders
in their twilight years, the new generation ofurban-raised Africans feels
little obligation beyond its immediate nuclear family.
Not surprisingly, throughout the
continent, governments are scrambling to create systems for retirement.
Early in 2006, the South African
Treasury sought to change taxation laws to eliminate tax on retirees
pensions. Meanwhile, Kenya continues to tinker with the National Social
Security Fund to make it less expensive to administer yet viable for
Kenyan retirees. Nigeria went further by passing the Pension Reform Act in
June 2004 which created the National Pension Commission to oversee the
administration of pension by pension custodians.
The pension custodians receive
contributions of 7.5% each of the employee’s gross salary from both the
employer and employee, while the pension administrators ensure that the
funds are well-maintained and wisely invested.
However, in order to avoid layers of
bureaucracy created by the Nigeria National Pension Act and eliminate
waste, mismanagement and corruption, African countries need to spend good
money to study pension systems in Europe, Australia, and Canada.
Canada’s pension system, for
example, operates at the federal level, provincial level, and the
individual level. At the federal level, it is mandatory for every person
in Canada (except in the province of Quebec which runs the Quebec Pension
Plan) over the age of 18 who earns a salary to pay into the Canada Pension
Plan (CPP). The employee and his or her employer each pay half of the
contributions.
The government keeps accurate records
of earning for each Canadian to ensure everyone under the age of 70 who is
working contributes to the CPP.
A self-employed person, say a
building contractor or business consultant or a farmer or bee-keeper or
cattle farmer pays both the employee and employer portions of the CPP.
Meanwhile, at the provincial level,
employees contribute to a workplace pension fund which, by far, pays a
bigger portion of pension at retirement. A teacher in Ontario, for
example, contributes to the Ontario Teachers Pension Plan, while Ontario
civil servants and public workers employees contribute to Ontario
Municipal Employees Retirement System (OMERS), and Ontario Public Service
Employees Union (OPSEU) Pension Plan.
The other nine provinces and three
territories have their own public pension plans. Private companies such as
banks, insurances and industries have pension plans for their employees.
Finally, self-employed workers such
as doctors, lawyers, farmers, pharmacists, and every Canadian including
those already contributing to workplace pension plans and CPP are allowed
to squirrel away money for retirement from their income.
Known as registered retirement
savings plan (RRSP), this is a self-directed fund that the individual
worker saves and manages. The difference between RRSP and other forms of
personal financial savings is that RRSP is tax-free, meaning that the more
money a worker puts away into RRSP (which is registered with the
government), the less tax he or she has to pay to the Government of
Canada.
Millions of Canadians will try to
beat the RRSP registration deadline of
midnight
March 1, 2007
for the 2006 financial year.
The beauty of the RRSP is that
individuals contribute, manage, and administrate retirement finances as
they see fit. One can even take money out of the RRSP and use it toward
another investment — The Federal Home Buyers Plan allows first- time
Canadian home buyers to withdraw up to $20,000 from their RRSP to buy or
build a qualifying home.
However, the individual is required
to pay the government the portion owed in taxes should he or she use RRSP
to buy a car or pay a loan or whatever. For African countries like Uganda
which are planning to revamp the current national social security funds
system into pension, there must be clear policies outlining how the
various pension funds will work in tandem.
Should the government choose to
operate a national fund to which every worker is required to contribute
like the CPP or should it be a workplace pension fund like the Ontario
Teachers Pension Plan?
If the choice is to go with a
workplace pension plan, then as demonstrated by the experiences of big
pension funds like the Ontario Teachers Pension Plan, African governments
must be prepared to allow the funds to operate autonomously and
independently, run by fund managers who are directly accountable to the
workers.
It is the crack team of financial
investment experts (and not the government) that transformed the Ontario
Teachers Pension Plan into one of the world’s biggest financial players,
investing in high yield portfolios in Canada and abroad worth $100
billion, all the while paying pension to retired teachers. Whatever the
choice, no African government can choose not to act now.
