This is going to be, by far, the most unpopular article I have ever written.
I have heard an exciting proposal by some politicians that the National Social Security Fund (NSSF) should give its members at least 20 per cent of their money to use during this COVID-19 pandemic. In the view of those politicians, this money would be used by people to cope during this trying time.
Let us explore a few facts about how these pension funds work and why it is simply impossible for that to happen.
NSSF has about 1.5 million members who contribute to the fund every month. As of June 2019, NSSF had about Shs11.3 trillion ($3.05b) in total assets. This is quite huge given that our GDP is just about $28.5b (Shs105 trillion).
This means NSSF owns about 10.5 per cent of our economy.
Let us start with the possibilities, wild as they are. Assuming NSSF decides that the situation is so bad that they decide to give back people all their money, so it divides the Shs11.3 trillion which it has among its 1.5 million members, it would mean each member gets about Shs6.2m.
You know what would happen next? Because we are in a state of panic, we would all flock the market for panic buying. As a result of so many buyers chasing a few products, the prices would shoot up and hence spiralling inflation. You may end up buying a kilo of sugar at Shs30,000. Soon, your Shs6.2m would be gone.
The second problem with this is that this money won’t be kept in banks because people want cash to buy the essential stuff like food. Most traders in Uganda transact using cash. This means government would have to print more bank notes to ensure banks have sufficient cash to issue at counters or to dispense via ATMs.
This will create a very big problem. Cash is not supposed to be in plenty just like that. If you have a lot of money in circulation, it means demand increases and surpasses supply. Once demand is higher than supply, prices go up.
As a result, people will lose confidence in the currency since it has lost its first quality, scarcity. So people would now look for foreign currencies like the dollar. This then will make the value of a dollar to go up, thereby making our currency value to fall farther.
Imports will become more expensive since we buy those imported products in dollars.
The whole thing about money is understanding that balance. It must be trusted and scarce.
If NSSF decides to pay 20 per cent to each of its members as suggested by some politicians, it would mean that each member would get an average of about Shs1.24m. This would mean NSSF puts aside about Shs2.2 trillion to wire to its 1.5 million members.
Does NSSF have Shs2.2 trillion in cash? I doubt. Pension funds work in such a way that they collect money from members and invest it, mostly long term investments. Even if it wanted to, NSSF does not have that cash to give to its members.
In 2018, NSSF gave out Shs450b in benefits to its qualifying members. This means that an NSSF needs only about Shs40b each month to pay the members. The rest of the money is always invested elsewhere.
Here is the most interesting part. Because governments make budgets and plans to spend money they have not yet got, they float what they call treasury bills or bonds on the market. This is a way of telling the public to lend the government money on the promise that it will pay them after a specific period.
Government then waits for you and me to pay our taxes, it gets that money and pays back its loan principles and interest. That is hoe entities like NSSF make profits on your money to be able to give you interest on it.
In principle, the Fund cannot afford to give each of its members 20 per cent of their money because that money is not there seated idle on its bank accounts. NSSF has never anticipated that all its members may at one time need all or a certain percentage of their savings at once.
But even if all factors were held constant and NSSF found that money to pay its members, I would still not recommend it.
The COVID-19 pandemic is still unfolding, at least for the case of Uganda. We are not yet at our worst. We do not know how long this will go on.
If people were given this money, they would most likely spend the money on ‘useless’ items whose prices are being inflated by speculators. The effect this would have on our economy is simply enormous.
Not advisable. The leadership of National Social Security Fund on Tuesday said there is no legal basis for the Fund to release partial payments to savers to enable them cope with the burden of COVID-19 pandemic, as a sizeable number of Ugandans had requested via social media platforms.
Mr Richard Byarugaba, the Fund’s managing director said in a statement that NSSF is a social security scheme created to provide a safety net for members in case of old age, permanent incapacitation, or for dependents in the event of death of a member, and the current pandemic does not meet any of the above criteria.
According to Mr Byarugaba, partial payments, would be discriminatory.
“The Fund has 1.5 million members. If these were given relief from the Fund, the vast majority of the 19 million working population would be left out,” he said.
He said about 80 per cent of the Fund’s assets are invested in government treasury bonds which would require government buying back its bonds in order for NSSF to raise liquidity.
According to him, the move would leave government short of locally mobilised funds for its social and economic interventions which would negatively impact the economy in the long term.
Ms Pheonah Nabasa Wall, the vice president Uganda Law Society echoed NSSF’s concerns noting that while the legal fraternity empathises with Ugandans, the law does not provide for that kind of pull on the fund.
However, she said, it is paramount to ensure that the country does not make hasty decisions that may affect it in the long run.
Dr Kizza Besigye, an Opposition politician also joined the social media appeal to NSSF to release partial payments of savers funds to withstand the coronavirus storm.
“It is surprising that NSSF has not, as yet, rolled out a programme to pay out a portion of members’ savings to afford them vital support through the COVID19 crisis. Isn’t this what “Social Security”, a safety net, is about? This is members’ money; it is not charity! They can pay only 10 to 20 per cent of a member’s savings. If there’s any legal impediment for them to do so, Parliament can sit tomorrow and sort it out. This is a world crisis of unprecedented proportions!” Dr Besigye posted on his Facebook page.
By Christine Kasemiire
Mr Mutebe is a social programmer - Deep Sky Solutions.