The Social Security and National Insurance Trust (SSNIT) faces a significant challenge as projections indicate that its reserves may be depleted by 2036, according to a recent report by the International Labour Organisation (ILO). SSNIT, which transitioned from a Provident Fund to a Social Insurance Pension Scheme in 1991, has been a vital source of financial security for retirees in Ghana, covering accidents, old age, disability, and death.
However, the sustainability of the scheme is under threat due to several factors outlined in the report. One key concern is the rising administrative expenses of managing pension funds, which have been steadily increasing as a percentage of member contributions. This trend raises questions about the efficient utilization of funds intended for beneficiaries.
Moreover, despite an average return on total assets of 12.2 percent from 2008 to 2020, adjusting for inflation reveals a real average return of only 0.9 percent. This contrasts with the higher average return of 17.5 percent offered by the 91-Day Treasury Bills (T-Bills) over the same period. As a result, the fund’s return has averaged only 70 percent of the average yield of T-bills.
The report highlights several key findings from the actuarial valuation, including the insufficiency of annual contributions to cover all annual expenditures and the eventual depletion of reserves by 2036. This depletion underscores the urgent need for action to prevent a shortfall in funding for retirees.
The highlights from the actuarial valuation are as follows:
1. Annual contributions, on an accrual basis, are insufficient to pay for all annual expenditures (benefits and administrative expenditures) throughout the projection period.
2. Investment income must be used to pay for annual expenditures. The reserve will grow until 2028.
3. Starting in 2029, total income (contributions, investment income, and other income) is no longer sufficient to pay for annual expenditures. The reserve starts to decrease.
4. During the year 2036, the reserve drops to zero.
5. Starting in 2036, the required annual contribution rate to pay for all expenditures becomes the PAYG rate. As an illustration, this rate is 12.4 percent in 2036 and 29.5 percent in 2095.
To address these challenges and ensure the sustainability of the pension scheme for future generations, the report recommends increasing the contribution rate. Actuarial projections indicate that the Pay-As-You-Go (PAYG) rate, representing the contribution rate required to cover all scheme expenditures in the absence of reserves, will rise significantly from 11.5 percent in 2020 to 29.5 percent in 2095.
The International Labour Organization suggests that the government should increase its contributions to the scheme promptly to mitigate the risk of running out of reserves. It recommends raising the contribution rate based on specific financing and funding objectives set by SSNIT to ensure the long-term sustainability of the pension scheme.
Addressing the challenges facing SSNIT requires concerted efforts to increase contributions, optimize investment returns, and ensure efficient management of pension funds. Failure to take timely action could jeopardize the financial security of retirees and undermine the objectives of the pension scheme.
