The Importance of Timely Implementing Public Policies: The Case of NSSF Act
Category:
By: Fiona Okadia,
Introduction
Public policies are formulated to achieve specific societal outcomes, and when their implementation is delayed or falls short, it can lead to significant adverse consequences on the overall functioning of the system they are designed to govern. Implementation delays in government policies can occur for various reasons. These include intricate and protracted bureaucratic implementation procedures, resulting in delays that last longer periods before being addressed. Inadequate resources, both financial and human, can impede the swift and desirable execution of policies. Political instability and shifts in leadership priorities can also contribute to uncertainties that can cause reversals of policies already implemented. Resistance from stakeholders and a lack of coordination among various government agencies and departments often add extra layers of implementation complexity.
In previous articles, I addressed the uncertainties surrounding the upper limit for National Social Security Fund (NSSF) contributions (see here). I further outlined the effects that will follow the adoption of the NSSF 2013 rates (here). Among the effects highlighted then was the increase in individual savings promoted by the NSSF, especially the rise in personal savings.
This NSSF’s incentive to save raised the question as to what the size of a worker’s NSSF wallet would have looked like had the original 2013 implementation plan not been delayed by court proceedings until 2023. This analysis looks at the potential repercussions of delayed pension contributions for both individuals and the broader pension system. Pensions serve as long-term savings plans designed to ensure financial security in retirement. Delays or deviations from the planned contribution schedule may hinder individuals from accumulating sufficient funds, leading to financial strain in their later years.
Furthermore, delayed contributions can disrupt actuarial calculations and financial stability in pension funds, potentially resulting in fund deficits and difficulties in meeting future pension obligations. Timely contributions are crucial for the solvency of pension funds and the overall well-being of retirees, making any delays thereof a matter of concern.
Impacts of delayed implementation
To illustrate the above point, I make two crucial assumptions, namely, a constant income of Ksh 300,000 from 2013 onwards and the implementation of the NSSF 2013 Act without changes. Additionally, I consider a yearly adjustment to the lower limit from the fifth year onwards, while the upper limit remains four times the national average earnings. Furthermore, as an integral part of the methodology employed in this analysis, the latest average wage earnings are adopted. This decision was made to take into account the observed variations in earnings for the same year across different editions of Kenya Economic Surveys. In situations where discrepancies existed, such as the reporting by the 2018 survey was a figure of 3 while the reporting by the 2017 survey was a figure of 4. In such a situation, the latest available data on earnings was used (2018 in this example). This approach assumes that any discrepancies may be attributed to revisions made to the numbers published in the preceding year’s survey, thereby ensuring a more current and accurate representation of average wage earnings trends.
To begin with, the chart presented below provides a visual representation of the average monthly earnings per employee spanning the period, 2012 to 2022, as documented in various Kenya Economic Surveys. The data reveals a notable surge in the average monthly wage earnings, doubling from Ksh 36,944 in the fiscal year 2012 to Ksh 72,130 in the fiscal year 2022.
Chart 1: Average Monthly Wage Earnings Per Employee in Ksh (2012-2022)
The computation of both upper and lower limits from 2013 to 2022, as shown in Table 1 below, is predicated on distinct datasets. Specifically, the upper limits are derived solely from the average wage earnings data across the specified timeframe. Conversely, the lower limits are determined using the average statutory minimum monthly basic wages for the top urban centers, second-tier urban centers, and rural areas, beginning from year 5 onwards. In this case, I assume that the published lower limits will be for the previous year just like the upper limits.
This calculation adheres to the provisions stipulated in the NSSF Act. The national average earnings, as interpreted in this context, refer to the average wage earnings per employee for each financial year, as reported by the Kenya National Bureau of Statistics in the preceding year’s Economic Survey. Consequently, Table 1 serves as a representation of the various upper and lower earnings limits, following the prescribed schedule outlined in the Act. The table provides a structured overview of these limits, offering clarity on the range within which contributions to the National Social Security Fund are determined for each respective year.
Table 1: NSSF Lower and Upper Earnings Limit and Annual Contributions
From this table, one can deduce that the total contributions for the employee earning Ksh 300,000 would have been Ksh 2.989 million for the 11 years that ended in 2023 had the implementation of the NSSF Act not been delayed. This figure encompasses both the employer and employee contributions. However, because of the delay in implementation, it stood at Ksh 72,160 at the end of FY 2023. The percentage difference between these two figures is a disquieting 4,043%.
If we take into account the interest rates offered by NSSF to contributors in each respective year as shown in Table 2 below, the total amount in workers’ NSSF wallets would have been substantially higher than the contribution figures. Although the latest NSSF annual report and financial statements only provide declared interest rates up to the FY 2020/21, I have maintained a consistent interest rate of 10%, which was the last reported rate for the FY 2021/22 and 2022/23 for purposes of illustration. Under this assumption, the hypothetical average total in a contributor’s wallet over the study period would have been Ksh 4,219,814, a stark contrast to the current balance of about Ksh 102,904.2.
This analysis emphasizes the significant impact that interest rates can have on the overall accumulation in NSSF accounts. While the exact interest rates for each year may vary, maintaining a reasonable and competitive rate is crucial for ensuring that contributors’ funds experience steady growth over time. There should be regular assessments and adjustments to these rates to align them with prevailing economic conditions and provide contributors with fair returns on their investments.
Table 2: Comparison of NSSF Wallet Totals: Hypothetical vs. Current Amounts
Economic theory, especially concepts of opportunity cost and the time value of money (a discount rate that converts a sum of money in the future to a present sum or equivalently translates the current sum to a future sum) can provide a deeper understanding of this table. According to Table 2, Individuals in the case presented were deprived of the opportunity to contribute to their NSSF accounts, leading to a substantial loss in potential investment returns. This postponement not only leads to an immediate loss of potential investment gains but also diminishes the overall accumulation of NSSF accounts, negatively affecting the financial security of individuals during their retirement. Additionally, the government missed out on the chance to accumulate funds for social security purposes, and the economy lost the potential stimulus that could have increased savings and further lost investment that could have generated additional consumer and producer goods.
Concluding Remark
This analysis underscores the potential negative impact of the delayed implementation of the NSSF 2013 Act on individual contributions, offering insights into adverse financial consequences for contributors, the pension system, and the economy. The hypothetical scenario constructed here, which assumes timely adoption of the Act, reveals a significant disparity in total contributions that could have been accumulated, compared to the current situation, emphasizing the long-lasting repercussions of the delay in implementing the Fund’s Act.
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The Importance of Timely Implementing Public Policies: The Case of NSSF Act
| Post date: Mon, Feb 26, 2024 |
| Category: |
| By: Fiona Okadia, |
Introduction
Public policies are formulated to achieve specific societal outcomes, and when their implementation is delayed or falls short, it can lead to significant adverse consequences on the overall functioning of the system they are designed to govern. Implementation delays in government policies can occur for various reasons. These include intricate and protracted bureaucratic implementation procedures, resulting in delays that last longer periods before being addressed. Inadequate resources, both financial and human, can impede the swift and desirable execution of policies. Political instability and shifts in leadership priorities can also contribute to uncertainties that can cause reversals of policies already implemented. Resistance from stakeholders and a lack of coordination among various government agencies and departments often add extra layers of implementation complexity.
In previous articles, I addressed the uncertainties surrounding the upper limit for National Social Security Fund (NSSF) contributions (see here). I further outlined the effects that will follow the adoption of the NSSF 2013 rates (here). Among the effects highlighted then was the increase in individual savings promoted by the NSSF, especially the rise in personal savings.
This NSSF’s incentive to save raised the question as to what the size of a worker’s NSSF wallet would have looked like had the original 2013 implementation plan not been delayed by court proceedings until 2023. This analysis looks at the potential repercussions of delayed pension contributions for both individuals and the broader pension system. Pensions serve as long-term savings plans designed to ensure financial security in retirement. Delays or deviations from the planned contribution schedule may hinder individuals from accumulating sufficient funds, leading to financial strain in their later years.
Furthermore, delayed contributions can disrupt actuarial calculations and financial stability in pension funds, potentially resulting in fund deficits and difficulties in meeting future pension obligations. Timely contributions are crucial for the solvency of pension funds and the overall well-being of retirees, making any delays thereof a matter of concern.
Impacts of delayed implementation
To illustrate the above point, I make two crucial assumptions, namely, a constant income of Ksh 300,000 from 2013 onwards and the implementation of the NSSF 2013 Act without changes. Additionally, I consider a yearly adjustment to the lower limit from the fifth year onwards, while the upper limit remains four times the national average earnings. Furthermore, as an integral part of the methodology employed in this analysis, the latest average wage earnings are adopted. This decision was made to take into account the observed variations in earnings for the same year across different editions of Kenya Economic Surveys. In situations where discrepancies existed, such as the reporting by the 2018 survey was a figure of 3 while the reporting by the 2017 survey was a figure of 4. In such a situation, the latest available data on earnings was used (2018 in this example). This approach assumes that any discrepancies may be attributed to revisions made to the numbers published in the preceding year’s survey, thereby ensuring a more current and accurate representation of average wage earnings trends.
To begin with, the chart presented below provides a visual representation of the average monthly earnings per employee spanning the period, 2012 to 2022, as documented in various Kenya Economic Surveys. The data reveals a notable surge in the average monthly wage earnings, doubling from Ksh 36,944 in the fiscal year 2012 to Ksh 72,130 in the fiscal year 2022.
Chart 1: Average Monthly Wage Earnings Per Employee in Ksh (2012-2022)
The computation of both upper and lower limits from 2013 to 2022, as shown in Table 1 below, is predicated on distinct datasets. Specifically, the upper limits are derived solely from the average wage earnings data across the specified timeframe. Conversely, the lower limits are determined using the average statutory minimum monthly basic wages for the top urban centers, second-tier urban centers, and rural areas, beginning from year 5 onwards. In this case, I assume that the published lower limits will be for the previous year just like the upper limits.
This calculation adheres to the provisions stipulated in the NSSF Act. The national average earnings, as interpreted in this context, refer to the average wage earnings per employee for each financial year, as reported by the Kenya National Bureau of Statistics in the preceding year’s Economic Survey. Consequently, Table 1 serves as a representation of the various upper and lower earnings limits, following the prescribed schedule outlined in the Act. The table provides a structured overview of these limits, offering clarity on the range within which contributions to the National Social Security Fund are determined for each respective year.
Table 1: NSSF Lower and Upper Earnings Limit and Annual Contributions
From this table, one can deduce that the total contributions for the employee earning Ksh 300,000 would have been Ksh 2.989 million for the 11 years that ended in 2023 had the implementation of the NSSF Act not been delayed. This figure encompasses both the employer and employee contributions. However, because of the delay in implementation, it stood at Ksh 72,160 at the end of FY 2023. The percentage difference between these two figures is a disquieting 4,043%.
If we take into account the interest rates offered by NSSF to contributors in each respective year as shown in Table 2 below, the total amount in workers’ NSSF wallets would have been substantially higher than the contribution figures. Although the latest NSSF annual report and financial statements only provide declared interest rates up to the FY 2020/21, I have maintained a consistent interest rate of 10%, which was the last reported rate for the FY 2021/22 and 2022/23 for purposes of illustration. Under this assumption, the hypothetical average total in a contributor’s wallet over the study period would have been Ksh 4,219,814, a stark contrast to the current balance of about Ksh 102,904.2.
This analysis emphasizes the significant impact that interest rates can have on the overall accumulation in NSSF accounts. While the exact interest rates for each year may vary, maintaining a reasonable and competitive rate is crucial for ensuring that contributors’ funds experience steady growth over time. There should be regular assessments and adjustments to these rates to align them with prevailing economic conditions and provide contributors with fair returns on their investments.
Table 2: Comparison of NSSF Wallet Totals: Hypothetical vs. Current Amounts
Economic theory, especially concepts of opportunity cost and the time value of money (a discount rate that converts a sum of money in the future to a present sum or equivalently translates the current sum to a future sum) can provide a deeper understanding of this table. According to Table 2, Individuals in the case presented were deprived of the opportunity to contribute to their NSSF accounts, leading to a substantial loss in potential investment returns. This postponement not only leads to an immediate loss of potential investment gains but also diminishes the overall accumulation of NSSF accounts, negatively affecting the financial security of individuals during their retirement. Additionally, the government missed out on the chance to accumulate funds for social security purposes, and the economy lost the potential stimulus that could have increased savings and further lost investment that could have generated additional consumer and producer goods.
Concluding Remark
This analysis underscores the potential negative impact of the delayed implementation of the NSSF 2013 Act on individual contributions, offering insights into adverse financial consequences for contributors, the pension system, and the economy. The hypothetical scenario constructed here, which assumes timely adoption of the Act, reveals a significant disparity in total contributions that could have been accumulated, compared to the current situation, emphasizing the long-lasting repercussions of the delay in implementing the Fund’s Act.
More Blogs
Gen Z Collective Action on Taxation and Economic Policy.
Introduction The Finance Bill 2024 in Kenya sparked a wave of collective action primarily driven by Gen Z, marking a significant moment for youth engagement in Kenyan politics. This younger generation, known for their digital fluency and facing bleak economic prospects, utilised social media platforms to voice their discontent and mobilise protests against the proposed […]
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The credibility of Monetary Policy in Kenya is compromised at present by two factors: As we anticipated mid-year, inflation is headed below the target range for the first time; The 7-member Monetary Policy Committee (MPC) has four vacancies. In light of the former prospect, the MPC reduced the Central Bank of Kenya (CBK) Policy Rate, […]
Important dates and Citizen Concerns During Budget Planning Phase for Fiscal Year 2025/2026
The Budget formulation and preparation process in Kenya is guided by a budget calendar which indicates the timelines for key activities issued in accordance with Section 36 of the Public Finance Management Act, 2012.These provide guidelines on the procedures for preparing the subsequent financial year and the Medium-Term budget forecasts. The Launch of the budget […]
Adjusted IMF Program Demands on Kenya
In the IMF WEO published yesterday, the IMF elaborated its macroeconomic framework for the ongoing IMF program. The numbers clarify how the program, derailed by the mid-year Gen-Z protests, has been adjusted to make possible the Board meeting for the combined 7th and 8th Reviews scheduled for October 30. The adjustments, unfortunately, again raise profound […]
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Daron Acemoglu, Simon Johnson, and James A. Robinson won the 2024 Nobel Prize in Economics for their research on how a country’s institutions significantly impact its long-term economic success.[1] Their work emphasizes that it’s not just about a nation’s resources or technological advancements but rather the “rules of the game” that truly matter. Countries with […]