Targeting NSSF money

The truth and the lies

Kampala, Uganda | ISAAC KHISA AND JULIUS BUSINGE | Richard Byarugaba sits on the biggest pile of money in Uganda. He is the managing director of NSSF, the country’s only government-run compulsory pension savings scheme for workers valued at over Shs9.9 trillion as at June 2018. Most of this money is collected from the poorest people in the country who, after working and saving for over 30 years on average, collect  a one-off pay-out of Shs15 million or about a quarter of Byarugaba’s monthly salary.

It is unclear if Byarugaba knows it, but this dichotomy in income of NSSF savers is at the heart of the trouble that he is having attempting to sell to the public new reforms he wants at the Fund.

According to the government, the Bill is intended to expand social Security coverage by making contributions to NSSF mandatory for all workers in the formal sector and also allowing workers in the formal and informal sectors to make voluntary contributions to the National Social Security Fund. It also seeks to widen benefits to workers and to improve management of NSSF.

According to labour statistics, Uganda has about 19 million people of working age and potential NSSF savers. However, only about five million people are currently in formal employment. Of these, about 2.5 million are registered with NSSF. However, only 800,000 have active NSSF accounts. The rest are dormant either because the registered people fell out of formal employment, are absconding, or are dead. That leaves NSSF with only 32% of registered members active or 16% of all potential NSSF savers under current law, or just 3.2% of the labour.  Will proposed reforms improve this situation?

Taxing workers benefits

The reforms are contained in a Bill presented before Parliament on Aug.13 by the Minister for Youth and Child Affairs, Florence Nakiwala on behalf of the ministry of labour.  And Byarugaba has the tough job of selling it to members of the Fund.

Going by the uproar the Bill has caused, many people do not trust the government explanation. Many have questioned the government’s plan to force people into a discredited saving scheme such as NSSF. Such reaction could scuttle even minimal goodwill NSSF has built recently.

Although the Bill has 12 proposals of reforms, only one has attracted the most attention. It is the only one that directly touches on savers. The rest are administrative although important. The NSSF savers are concerned about a proposal to tax workers savings at the point of withdrawal from the Fund.  Under the current arrangement, the workers payout is tax free.

There  are  three  different  transaction  phases  that  constitute  the  process  of  saving  via  a pension scheme.

First is contribution. Here each member of a pension Fund pays a legally prescribed amount into the Fund each month. The Fund collects this money directly from employers.

Second is accrual of interest. Here the Fund gets returns from the investment of the contributions paid by members and capital gains accrued by the Fund.

Third is the benefits payment. Here the pensioners receive their benefits at the moment of the retirement. In Uganda, this is currently at the age of 55 years. The reforms want to change that to 60 years. Savers will still be free to collect their benefits at 55 years, but they will be punished for it – with a tax.

In any case, there are many ways of handling tax issues. The tax can fall or not fall at any of these three stages.

The Bill proposes to change the current tax regime from taxing employee’s contribution at the first and second level.

This means contributions workers make to NSSF will be tax free. In other, 5% of workers’ salaries will be removed before the Pay-As-You-Earn tax is computed. The 10% employer contribution for each worker will equally be tax free.

Secondly, the money NSSF earns when it invests the workers savings will also not be taxed.

Thirdly, however, the members’ benefits will be taxed when they withdraw them at retirement. Byarugaba calls this “EET” – Exempt, Exempt, Tax. It is a shift from the current system he calls “TTE” – Tax, Tax, Exempt.

Byarugaba says the new system is better because savers will walk away with a bigger lump sum retirement package. And he is possibly right. In fact, pension schemes in most countries use the EET approach because it is thought to give savers more money in the end.