Saving For Retirement And The Focus On National Social Security Fund

The Gross Savings Rate in Kenya stands at a meager 5.4% according to the Kenya National Bureau of Statistics which only serves to explain the poor savings culture we have in our country.

Nigeria and South Africa had savings rates of 20.6% and 14.6% respectively. According to the 2019 FinAccess Household Survey, the top reasons why Kenyans are poor savers are lack of a regular income and low levels of income.

While these reasons are in actuality good reasons, we as a nation ought to create and sustain a savings culture despite our level of income. It is important to know that there is no absolute way of saving for future needs- everything is relative as everyone has different incomes, different hobbies, and different obligations such as family, loans, and other commitments.

However, ratios such as the 50-20-30 rule act as well as financial planning guidelines. This rule proposes that despite your income level, 50% of your income should go towards necessities, 30% towards discretionary items and one should save 20%.

One common reason why people save is for retirement or old age. Retirement savings not only ensure that you live comfortably in retirement but also help you avoid being a burden to your relatives in old age. The aim is to not go through one’s golden years without the gold.

However, in Kenya, figures by the Retirement Benefits Authority show only 21% of the working population is part of pension schemes. This leaves at least 12 million people with no sort of retirement or social security fund to rely on when they retire.

As we talk about saving for your retirement, think of your finances as a tree. The income you earn is the roots and the lifestyle you lead including bills is the rest of the tree above the soil. If you cut the tree but still have the roots then you can slowly regain your lifestyle over time. If your roots increase in size over time then your tree size also increases.

However, should you cut the roots no matter how big the tree is, it will wither; if you are lucky enough and have been saving in your productive years, then your retirement benefits will replace the previous income and you may be able to maintain the same living standards without too much hustle.

The truth is, we cannot talk about saving for retirement and developing a savings culture as a nation without talking about a social security fund. Social security is defined as any program of social protection established by legislation, or any other mandatory arrangement, that provides individuals with a degree of income security when faced with the contingencies of old age, survivorship, incapacity, disability, or unemployment.

In Kenya, the National Social Security Fund (NSSF) offers social protection to all Kenyan workers in the formal and informal sectors by providing a platform to make contributions during their productive years to cater to their livelihoods in old age and the other consequences resulting from unprecedented occurrences such as death or invalidity among others.

The National Social Security Fund (NSSF) has evolved over time having been established in 1965 through an Act of Parliament Cap 258 of the Laws of Kenya. The Fund initially operated as a Department of the Ministry of Labor until 1987 when the NSSF Act was amended transforming the Fund into a State Corporation under the Management of a Board of Trustees. The Act was established as a mandatory national scheme whose main objective was to provide basic financial security benefits to Kenyans upon retirement. The Fund was set up as a Provident Fund providing benefits in the form of a lump sum. Thereafter, the National Social Security Fund (NSSF) Act, No.45 of 2013 was assented to on 24th December 2013 and commenced on 10th January 2014 thereby transforming NSSF from a Provident Fund to a Pension Scheme.

Every Kenyan with an income was required to contribute a percentage of his/her gross earnings so as to be guaranteed basic compensation in case of permanent disability, basic assistance to needy dependents in case of death, and a monthly life pension upon retirement.

The Act establishes two Funds namely;

• Pension Fund
• Provident Fund

It is important to mention that, despite the efforts and benefits, NSSF has not gained enough traction overtime attracting a cumulative registered membership of 2.6 million equivalent to 10.8% of a total labor force of 24.1 million persons as of FY’2019/2020 with the members’ contributions growing at a 5-year CAGR of 2.4% to Kshs 14.5 bn in FY’2020/2021 from Kshs 12.9 bn recorded in FY’2015/2016.

The slow traction on membership and contribution is mainly attributable to slow economic growth and the high level of unemployment in Kenya making it hard for people to register and make regular contributions to NSSF.

Similarly, payment of claims after retirement has evolved over time growing at a 5-year CAGR of 13.6% to Kshs 5.9 bn in FY’2020/2021 from Kshs 3.1 bn recorded in FY’2015/2016. The graph below shows the benefits payout over the last five financial years.

Despite the government making NSSF mandatory, Kenya’s saving culture still lags behind in comparison to other more developed countries partly attributable to low disposable income with 35.7% of the Kenyan population as of 2020 living below the poverty line coupled with a lack of sufficient knowledge on the importance of saving for retirement.

One of the main objectives of the National Social Security fund is to provide a source of income to retirees and improve the adequacy of benefits paid out to the beneficiaries. However, according to the Retirement Benefits Authority, Kenya has an Income replacement ratio of 43.0% compared to the recommended ratio of 75.0%, indicating that most retirees in Kenya are likely to remain financially dependent after retiring.

Generally, one needs about 70.0% of what they make at the peak of their career to maintain the same standard of living in retirement. But if we look at what individuals save with NSSF, that is, 200 shillings per month, having a better and peaceful retirement from that amount is a pipe dream.

Despite the various incentives that have been put in place, the national social security fund has not gained enough traction to achieve its required objectives.

Some of the factors hindering the growth of NSSF include:

Slow economic growth – The Kenyan economy has continued to record slow growth with the average GDP growth rate coming in at 4.4% over the last ten years resulting in low-income levels. Further, economic disruptions caused by the COVID-19 lockdown negatively affected disposable income as businesses were closed and many employees were laid off which is evidenced by a 2.4% decline in member’s contribution to Kshs 14.7 bn in FY’2019/2020 from Kshs 15.1 bn in FY’2018/2019.

The high Unemployment rate in Kenya – The unemployment rate in Kenya stood at 5.7% at the end of 2021 mainly as a result of the challenges facing the county’s economic development coupled with the rising youth population in Kenya, whose unemployment rate stood at 13.8% in 2021. This consequently raises the dependency ratio of the working population making it extremely difficult for them to commit to social security contributions towards their retirement.

Government Regulations – Given that NSSF is a government-owned institution, it directly receives the full impact of the laws, especially that of increased taxation which has negative implications for the growth and operations of the NSSF. Increasing taxation also reduces disposable income for both employers and employees leaving a small fraction for saving.

As the government talks about reforming NSSF and having Kenyans save through it, there is a need for all the stakeholders to be involved.

Related Content: Will My NSSF Savings Be Enough For Me When I Retire?