Analysis: MAXWELL PHIRI
ACCORDING to the Organisation for Economic Co-operation and Development (OECD), the urgent issue for pension reforms in
Africa is not only the need to introduce social protection systems – to help alleviate demographic pressures, poverty amongst the elderly and provide support for households headed by grandparents following the HIV/AIDS pandemic and regional conflicts, but also a vital need for reform of existing pension systems in the region, the cost of which is often crowding out spending on other key areas (such as health and education).
Coverage of these systems is low (under 10 or often under 5 percent of the population) and usually only for civil servants or a minority of relatively highly paid workers in formal sector employment, making for highly regressive systems, with cross-subsidies required from indirect taxes (usually VAT) as pension payments from these systems frequently exceed contributions.
The need for efficient pension arrangements in the region is undoubted – though the challenges for introducing them remain great (notably the large informal sector of workers).
Though less of an issue currently than for other regions of the world, Africa too will age. The United Nations estimates that by the year 2050 there will be almost 2 billion people over 60 years of age worldwide, close to 80 percent of who will be living in developing countries).
Elsewhere, the over 60s – and particularly the over 80s – represent the fastest-growing population group on the African continent, with the numbers of older people increasing by 50 percent between 2000 and 2015 and nearly fivefold by 2050 (Help Age International, 2006a).
Even now, one in five (an estimated over 100 million) of the world‘s poorest people – living on less than a dollar a day – are over 60 (Van Dullen, 2007).
As in other regions of the world, social pressures from urbanisation and declining family size will make it harder for elderly Africans to rely on family support.
Global experience shows that issues surrounding aging populations – including pensions – cannot be addressed too early and developing countries should try to use their demographic sweet spot, when dependency ratios are falling and before the impact of aging hits, to address these challenges.
From the above OECD findings, it is indeed true that Africa needs a facelift in terms of coming up with viable pension schemes and avoid dependency on the state pension scheme which might not be sustainable to cover the 2 billion people aged over 60 years worldwide, close to 80 percent of whom will be living in developing countries by the year 2050.
What is a pension scheme?
In simple terms, a pension scheme is just a type of savings plan to help you save money for later life. It also has favourable tax treatment compared to other forms of savings.
It makes sense to put some money away because when you are older, that is when you need pension schemes to come in and help you. You save a little of your income regularly during your working life so you can have an income in later life, when you want to work less or retire.
There are several types of pension schemes. Some may be run by your employer; others you can set up by yourself. Saving into one scheme does not mean you cannot save into another scheme.
When the time comes for you to start enjoying your pension, there will be several options available to you. These may include being able to take a tax-free cash sum and the added security of being able to receive a regular income.
The next article will look at the benefits of pension schemes in Africa.
Till next week, meet me at the top where potential pensioners like me soar like an eagle. Remember, you need to retire healthy and rich.
The author is a human resources practitioner and pension advisor.