January is the most important time of the year for pensioners and their dependents, primarily because it is when the Social Security Administration announces the new rates by which monthly pensions of existing retirees will be increased.
The import of indexation is to restore the purchasing power lost by pensioners in the previous year. Pensions in payment are therefore reviewed by applying an inflation-adjusted index.
It is therefore expected that SSNIT in consultation with the National Pensions Regulatory Authority (NPRA) will soon announce the new pension indexation rate for 2023.
How is the Pension Indexation Provision Applied by SSNIT?
Pension indexation (as provided in section 80 of Act 766), as a means of restoring the purchasing power lost by pensioners in the previous year, is largely dependent on the price inflation index.
In practice, SSNIT uses consumer price inflation as the main variable for increasing pensions. The Trust, in consultation with the Board of the National Pensions Regulatory Authority, agrees on what is termed as the ‘Overall Rate’ by which pensions will increase for the coming year.
The overall indexation rate is based on the analysis of several variables which include in particular the projected increase in the cost of benefits for a given rate, and the resulting impact of the proposed indexation rate on the fund (fund ratios).
Given the Agreed ‘Overall Indexation Rate’, the ‘Fixed Rate’, which is equivalent to the Annual Average Price Inflation Rate of the previous year, and the ‘Flat Amount’ are determined.
Expected Indexation Rate of 2023
Likely Fixed Rate of Increase
As required by the Social Security Act, the Trust awards a fixed rate of increase for each pensioner based on average price inflation. In 2021, the consumer price inflation averaged 9.68% and therefore pensions were increased by a fixed rate of 9.68% in January 2022. In 2022, global economic challenges have eroded the purchasing power of pensioners due to rising prices of goods and services as measured by inflation. The consumer price inflation averaged 29.40%. If SSNIT sticks to the provisions and practice (spanning from 1992), each pensioner on the pension payroll as at 31st December 2022 could see a commensurate monthly increase rate of 29%.
This level of indexation (29% fixed rate) could however expose the scheme to serious financial sustainability challenges (high inflationary risk). The Trust may apply a scheme sustainability adjustment factor (SSAF) in this year’s indexation. The scheme sustainability adjustment factor essentially ensures that the awarded Fixed Rate of increment is lower than the actual average inflation rate of the previous year. It is there expected that SSNIT might increase pensions by a fixed rate ranging between 20% to 25% in January 2023.
In 2023, and from a policy perspective, if pensions would be increased at a rate lower than the annual average price inflation (29%), it is expected that the Trust will clearly explain or communicate the reasons for changes in the basis of indexation to stakeholders, especially contributors and pensioners.
The Minimum Pension Amount Must be Reviewed Upward in 2023
Both the Social Security Law, 1991, (PNDCL 247) and the National Pension Act, 2008, Act 766 have provided for the payment of minimum pension to poor pensioners (poverty relief).
To practically sustain the economic welfare of pensioners, the minimum pension, which has stayed at GH300.00 for four successive years (2019, 2020, 2021, and 2022) needs to be reviewed significantly upward in 2023.
Note that the minimum pension of GHS300.00 represents 30 dollars (using the current exchange rate) per month. This pension amount represents 50% of the value of the national poverty line.
Trend analysis shows that the minimum pension had consistently increased each year since 2000, and in some cases doubled (2013 and 2014). For the period 2016 to 2021, the minimum pension grew by only 9% whilst the minimum salary of active contributors increased by 47.75% within the period.
If the level of benefits provided by social protection systems is insufficient in terms of minimum living standards, or are not deliberately designed to protect the poor, and to minimize the social and economic inequalities between the rich and the poor the effort to reduce old age poverty will be jeopardized.
The author, Abdallah Mashud is the Executive Director, Africa Centre for Retirement Research (ACRR)