Dar es Salaam. An expert has recommended reforms to the country’s social security protection for it to prosper and bring stability to Tanzania, warning that otherwise any news related to financial difficulties will lead to a loss of confidence in the whole system .
Mr. Ibrahim Muhanna, managing director of Muhanna & Co (actuaries and consultants), told The Citizen in an exclusive interview that not only would the system suffer, but people would also lose hope.
“Reform is crucial to ensure the success of the social protection system. The current one is partially financed, with a pooling of risks and resources, based on the principle of social solidarity which is normally financed by contributions from workers and employers,” he said.
According to him, “a need for reform is generally taken into account either by periodic actuarial evaluations or by pressures on the labor market. And that the longer it takes to meet said needs (reforms), the more difficult it will be, which in turn causes intergenerational inequalities.
Mr. Muhanna noted: “With current regulations, a lump sum payment is calculated based on the average of the highest salaries over three years towards retirement. For me, it shouldn’t work like that, there shouldn’t be a lump sum payment at all. “In the private sector, the monthly contribution must be less than the current 20% of an employee’s salary. 10-15% would be desirable and should be contributed by both employee and employer, each contributing 50%.
His argument is based on the fact that no employer operates a business on a charitable basis. Therefore, an employer should not be placed on a huge burden as some workers may leave and seek green pastures elsewhere.
The expert said: “The story behind Social Security was to create loyal workers and so if there is a need for more Social Security benefits, it’s up to the employer and the employee. to decide and not to the government.”
Although Mr Muhanna thinks there is a need for more social funds, a paper titled “Analysis of a reform option for the Tanzanian pension system” by Dr Andongwisye Mwakisisile, a professor at the University of Dar es Salaam, suggested that a complete overhaul of the system was needed.
For him, the said reform should transform the current pay-as-you-go system (PAYG) into a notional defined contribution system (NDC).
PAYG is defined as a retirement system where current contributions from active members are used to pay benefits to retirees.
Yet, although the NDC is still a pay-as-you-go arrangement but with an individual notional account, which appears to be more resilient in terms of financial balance and sustainability.
According to him, with pay-as-you-go, contributions can exceed benefit payments, but as the system matures, benefits increase relative to contributions, which can lead to financial hardship. But the NDC system meets the fiscal, political, social and economic needs of reform while keeping the financial burden low, and the benefit is a lifetime pension that can be claimed at any time from the minimum retirement age.
According to Dr. Mwakisisile, the proposed reform should start in 2026, although a transition period of ten years is suggested, i.e. until 2035. He added: “We have chosen the year 1975 as starting point of the analysis. This means that members born from 1975 will be moved to the NDC system in 2026.”
The Tanzanian pension system has seen various changes such as in 2008 the government established the dissolved Social Security Regulatory Authority (SSRA) with the aim of regulating social security activities.
And because of the competition to attract members among social funds, some funds paid higher benefits, which exposed them to the risk of insolvency. In 2014, the SSRA published the pension benefit harmonization rules to be applied for all mandatory defined benefit pension schemes.
The rules described two benefit formulas, a lump sum payment to be paid on retirement and a monthly benefit to be paid after retirement until the retiree’s death. The harmonization rules have reduced the benefits of certain funds and abolished early retirement pensions such as termination indemnities.