How to fund pension, reduce old-age dependency
If Nigeria is unable to properly fund pension liabilities and provide social security to the aged, the country will grapple with increased old-age poverty and dependency in future.
A recent report released by the International Monetary Fund (IMF) indicates that global old-age dependency ratio is rising largely due to skyrocketing aging population in some countries.
Nigeria is still within the safe zone with a youthful population and old-age dependency ratio of 6.4 per cent in 2015, unchanged from the previous year.
The IMF defined old-age dependency ratio as “a measure of the burden that those over 65 years of age place on working-age generations.”
Nigeria’s low dependency provides immediate protection against retirement crisis but danger lies ahead if Nigeria fails to plan now.
IMF proffers two solutions: reduction in early retirement and increased public and private savings.
“Encouraging higher private saving for retirement and attenuating long-term fiscal vulnerabilities will require further public pension reforms in many emerging market and advanced economies, but reforms must be carefully calibrated to avoid undercutting the welfare of future retirees or fuelling old-age poverty,” the report stated.
In Nigeria, the Contributory Pension Scheme (CPS) was designed to encourage private savings for retirement but low adoption at the sub-national levels and the noncoverage of the informal sector means future old-age dependency crisis is not unlikely.
Despite abysmal pension savings in Nigeria, IMF is projecting decline in public saving globally as under current policies, public pension outlays in advanced and emerging market economies will increase by an average 1 and 2½ per centage points of Gross Domestic Product (GDP), respectively, by 2050.
“Younger people will have to save significantly more and postpone retirement by a number of years to enjoy pension benefits similar to those of today’s retirees,” the report said.
Bismarck Rewane’s Financial Derivatives Company (FDC) observed that pension saving is a huge challenge in Nigeria.
“While saving for one’s future may seem like a necessary activity, a lack of confidence in the Nigerian system - due to issues of governance and corruption, employers’ inability to contribute to pensions, and poor performance on pension returns - significantly constrains pension penetration in Nigeria,” the FDC reported.
There is also a concern that most pension account holders in the country are aged between 30 and 49 in a country where over half the population is below 30, contrary to the expectation that the age group to account for a considerable proportion of pension accounts.
In contrast, the US pensioned population accounts for more than 50 per cent of its working age population and the number is over 70 per cent in the United Kingdom.
The IMF recommended that financial sector and labour market policies should be considered as part of a pension reform package.
“The ability of households to save for retirement and to diversify retirement-related risks will depend on the availability of a wide array of relevant financial products. Labour market policies should be geared toward encouraging participation by older workers, attenuating gender gaps, and tackling informality,” the report said.
Speaking on reducing old-age dependency, the IMF First Deputy Managing Director David Lipton said that the cost of public pensions will increase by over 2 percentage points of GDP by 2050 globally but the increase will be particularly pronounced in emerging markets and low-income countries such as Nigeria.
Lipton urging countries to think through the most effective pension and social safety net systems-and then put in place necessary reforms.
On improving savings for retirement, Lipton said, “They need to consider steps like curtailing early retirement that would reduce long-term fiscal vulnerabilities.” he said.
On reducing old-age dependency, he said there is need to “have room to provide more generous pension benefits. That would reduce the need for households to maintain high levels of saving as a precaution against old-age poverty. It would also reduce inequality.”
Meanwhile, the IMF report also made a case for “complementing the public pension scheme with a funded defined contribution scheme. This would provide a vehicle to encourage private saving. More ambitious reform to the pension system architecture, including shifting from a pay-as-you-go to a funded system, should be carefully weighed against transition costs to the budget.”