Background
Social Security is the most important vehicle for the financial well being of old-aged Ghanaian citizens and their dependents.

According to a Post-Retirement Income Survey conducted by Africa Centre for Retirement Research (ACRR) in October 2020, 85% of retirees in Ghana are estimated to rely on social security payouts as their main source of livelihood. The Survey also revealed that on average, each retiree has six persons who economically depend on him/her for their living.

Another Research Survey conducted by ACRR in December 2020 established that retirees in Ghana aged 55 and above have recorded increased frequency of hospital visitation by 49% leading to increased cost of healthcare for such individuals by an average of 43.65%.

74.23% of the respondents indicated that their economic situation has further deteriorated during the period of the pandemic, citing that ‘Covid-conscious’ related medical cost to individuals represents a new expense for many retirees, many of whom are already living on tight budgets with limited discretionary spending.

The survey also revealed that a significant number of pensioners recorded a decline in earnings during the pandemic (due to job losses and small business closures), considering that a substantial proportion of Ghanaians go back to employment through part-time jobs or engaged in their own small businesses after retirement.

According to the Organization for Economic Cooperation and Development (OECD) Economic Outlook report in December 2020, the pandemic has disproportionately impacted on the aged population – visiting upon this group untold hardships.

The OECD therefore recommended that governments should step up targeted-support to vulnerable groups which include old-age citizens, as they have been disproportionately affected and have had their vulnerability further aggravated along the lines of sound health, social inclusion and economic well being.

The government of Ghana, while it can be commended for some highly impactful social and financial support programs as response measures to mitigate the economic impact of the pandemic on businesses and other vulnerable groups, it missed the opportunity to implement a well-coordinated support programs that target the aged population,
considering the global consensus that older citizens were significantly affected. A uniform special-purpose stimulus package for this group could have been implemented through the review of pensions in payment (pension indexation for 2021).

SSNIT PUBLICATION – 2021 PENSION INDEXATION
January is the most important time of the year for pensioners and their dependents, primarily because it is when the Social Security Administration announces the new pension indexation rate for the current year (i.e. increment that existing retirees will receive in their pensions).

Consequently, SSNIT announced in January 2021 that, the Trust in consultation with the National Pensions Regulatory Authority (NPRA) has approved 10% as the overall pension indexation rate for the year 2021. The basis of the rate, according to the publication was that “with a projected annual average Price Inflation rate of 9.34%, a fixed rate of
9.34% was awarded to every pensioner in order to maintain their purchasing power. The excess rate of 0.66% was then converted to a flat amount of GHS 6.47 for every pensioner in line with the Redistribution Policy of the Trust”.

Given the findings that the pandemic introduced new expenses on the already tight budgets of pensioners against the reality that pensions in payment were increased at an overall rate of 10% in 2021, (the second lowest since 2011, when it was 7%) in a period of a global pandemic has left many to ponder if that was sufficient.

An expense borne out of increased hospital visitation for instance would typically not be considered in determining inflation rate. This latent expenditure has therefore affected the purchasing power of retirees’ income and hence increased economic hardship and falling quality of life for the group.

The socio-economic effects of the Covid-19 pandemic and pension indexation report for 2021 have prompted the ACRR research team to examine the basis of pension indexation in Ghana, as provided in the National Pensions Act, 2008, (Act 766), and to determine if it is time to review the efficacy of existing legal provisions or policy options in that regard (not just in time of a pandemic), and to highlight the issues for the attention of policymakers.

The Research Team at ACRR examined the practices of the Social Security and National Insurance Trust with regards to reviewing pensions in payment (Pension Indexation) against the provisions in the National Pensions Act, 2008 (Act 766). The team also analyzed a 12-year trend of pension indexation rates of the SSNIT Scheme (2009-2021), as well as reference economic variables used in the exercise. The Trust’s last Actuarial Valuation Report (2014) and SSNIT Annual Reports were major sources of reference.

FINDINGS, ANALYSIS, AND POLICY RECOMMENDATIONS


(1) PENSION INDEXATION FRAMEWORK (SSNIT BASIS OF REVIEWING PENSIONS)

The National Pension Act, 2008 (Act 766 as amended) has stipulated in section 80 that “the Trust shall annually review the pensions in payment which shall be indexed to wage inflation rates of active members or another rate determined by the Trust in consultation with the Board of the Authority”.

The 2014 SSNIT Actuarial Valuation Report has stated that actuarial projections with regards to reviewing pensions are based on wage inflation of active contributors as the primary policy variable (and not price inflation)

Both the pensions Act and SSNIT actuarial valuation reports have emphasized the use of wage inflation as basis of indexing pensions (as opposed to the current practice of using price inflation). As evident in the SSNIT 2021 pension indexation report, for any particular year, the Trust increases pensions using average annual price inflation rate as the main policy variable.

The average annual price inflation rate of the previous year is used to derive the effective or fixed rate of increase, whilst the fixed amount (redistribution policy) is derived from the annual average salaries of active contributors, given the overall indexation rate. For instance, in 2010, the average annual inflation rate of the previous year (2009) was 19.25% based on which the fixed increment rate of 11% and constant amount of 13.25 was awarded and so on.

There are a number of policy issues with regards to the current basis of reviewing pensions. There is thus the need for Social Security policymakers to consider reviewing same – both in the law and in practice.

Firstly, the section 80 of the Act 766 has set the basis of reviewing pensions rather scantily without detailing the basis of calculation as it has at other sections of the law. This leaves room for basis of determining pension indexation rate in a given year overly reliant on administrative discretion rather than one informed by the legal framework or
requirement.

Secondly, the Trust and the regulatory authority have to consider revising the current mechanism of increasing pensions by using wage inflation of active contributors as the main policy variable (and not price inflation), as emphasized in the National Pensions Act.

The need for a change in basis of indexation is heightened by the fact that the COVID19 pandemic has caused major economic changes that have forced significant disparity between real value of pension payouts and actual pace of price inflation, thus insulating the economic challenges facing pensioners and their dependents. For instance, new expenditure on the budget of pensioners resulting from increased hospital visitation
certainly were not considered during measurement of price inflation.

Evidently, though ironic, most pensioners the research team spoke to appeared to have a positive view on inflation (they pray for increase in inflation).

In addition, the use of price inflation to index pensions practically erodes the living standards of old-aged pensioners over time relative to the working group (given that wages grow faster than prices).

For the period 2009-2020, salaries of active contributors of the SSNIT Scheme increased by an average of 15.82% annually, whereas annual price inflation averaged 12%. For the same period, pensions were increased (effective or fixed indexation rate) annually by an Average 9%, and average fixed indexation amount was GHS17.5.

The difference between growth rate of active contributors’ salaries (15.82%) and the effective indexation rate (9%) year on year reinforces the fact that salaries grow faster than pensions, and that standard of living of pensioners erodes over time as compared to the working population.

Given that the average annual price inflation is projected to experience a downward trend from 6% by 2020 to 5% by 2040, there is the need for an actuarially informed basis that considers wage inflation as the central policy variable (in accordance with the Act) as we strive to improve the economic well being of retirees through prudent social security
administration and governance.

Finally, Whist both the National Pension Act, 2008 (Act 766) and Actuarial Valuation Report published in 2018 have mentioned the annual average wage inflation rate as the primary indexation policy variable, indexing pensions on a different variable will create a discrepancy that will question the reliability or accuracy of solvency valuations and
projections (inaccurate actuarial surpluses or deficits).

MINIMUM PENSION GROWTH RATE HAS BEEN SLOW
The minimum pension is usually awarded to members whose monthly pension after computing is below a predetermined floor.

It is important to note that Not all Contributors who earn minimum pension are sinners’ and therefore must face economic-hell for their sins. The growth rate of the minimum pension has rather been slow for the period 2016 to
2021, despite the high inflation regimes in 2015 and 2016 at 17.15% and 17.50% respectively. The minimum pension doubled in 2013 and 2014 but has assumed stunted growth since 2015. It increased from GH¢230 in 2015 to GH¢276 in 2016 (20% increase).

For the period 2016 to 2021, the minimum pension has grown by only 9% (and has remained at GH¢300 for the year 2019, 2020 and 2021) whilst minimum salary of active contributors has grown each year and by 47.75% within the period.

A significant proportion of those on minimum pension joined and started contributing to the scheme at early ages, they stopped contributing earlier at ages (say age 48) due to reasons relating to heath, job losses, mobility or relocating abroad, change in jobs resulting in pension scheme switches, and they mostly retire before age 60, (say age 57).

The computed Best Three Years Average Salaries (BTYAS) for such members are usually insignificant and incapable of yielding any substantial effect on the benefit.

Besides these factors, the practice by SSNIT is that for a member whose last contribution was received at an age lower than 55 years, the Trust accumulates the computed BTYAS as at the last contribution period (at say age 46) using half the minimum wage growth rate until member attains age 55.

Simulations using interest rate models prove that the combined effect of accumulating at half the minimum wage growth rate and up to age 55 on the ultimate BTYAS for this category of members is negligible.

Secondly, the basis of using half of the minimum wage growth rate as accumulation factor, and the fact that accumulation ceases when member attains age 55 (when he is actually retiring at 58 or even 60) are not entirely justifiable.

We recommend that;
 Stakeholders should consider reviewing the minimum pension upward, and in line with rate of growth of minimum wage each year (as projected by the last actuarial valuation report). This will close the growing gap in standards of living between new and old retirees.


 The Trust in consultation with the NPRA should consider reviewing the current accumulation rate (half of minimum wage growth rate) based on further actuarial assessments by the Scheme’s Actuary. The accumulation should start from the point of last contribution up to the point of retirement (instead of up to age 55).

CONCLUSION
Research has established that rate of post-retirement mortality of members of a pension scheme (usually measured by pensioners’ modal age at death) has a strong correlation with pensioners’ quality of life after retirement. Based on pensioner post-retirement mortality data from SSNIT, the age at which most pensioners die in Ghana is 63, i.e. 3 years after retirement, despite the generally assumed improvement in life expectancy (which is projected at 76.6 years from birth as at 2016, per the SSNIT 2014 Actuarial Valuation Report).

This and several other measures do not bode well for the well being of the old gallant Ghanaian workforce. Social security provisions and policies have major roles to play in order to improve the post-retirement mortality of the Ghanaian Pensioner!

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Author, Raymond K. Odah is the Head of Research Communication – Africa Centre for Retirement Research.