SSFR contribution to Rwandan economy and economic impact of proposed social security reforms

BY GODFREY NTAGUNGIRA Social security development is one of the measures that have been adopted by developing countries including Rwanda to overcome poverty related challenges. The relevancy of social security in promoting economic growth and poverty reduction stems from its roles in saving mobilization, capital market development and income redistribution. According to monetary studies reveal that if social security is considered in socio-economic and poverty reduction programs, significant progress can be made in improving standards of living in the developing world. Owing to this noble role in poverty reduction and economic development, social security reforms are being undertaken in different parts of the world to align social security systems and programs to economic growth and development. The ultimate objective is to develop a social security system that responds to country needs and priorities. For the last 15 years, Rwanda’s economic development has been a success story to many in the region with tremendous developments in all sectors of the economy. Though this rapid economic transformation can be attributed to many factors, the Social Security Fund of Rwanda (SSFR) played a significant role. It is this central place of social security in the country’s socio-economic progress that has prompted the government to improve social security administration and systems by conducting reforms. The administrative reform introduced the merging of existing social security institutions into one national body while social security system reform introduced the provident fund. While there is a general appreciation of the role of Rwanda’s social security scheme in the country’s on-going economic transformation, no study has been conducted to quantitatively illustrate the contributions of the scheme to Rwandan economy. This article is therefore intended to demonstrate how the Social Security Fund of Rwanda has contributed to the development of Rwanda’s economy, hence justifying the aforementioned attempt by developing countries to develop social security as a strategy of achieving accelerated socio-economic progress. Before discussing the aforesaid roles, it is important at this stage to briefly describe the Social Security Fund of Rwanda. The Social Security Fund of Rwanda, hereinafter referred to as the Fund is a public institution created in 1962 to administer two branches of pension and occupational risks. Its principle functions are; to collect contributions from members, pay benefits to qualifying members and productively invest the surplus. The contribution rates, according to existing legislation are 6% for pension branch and 2% for occupational risks. These employee savings constitute a pool of resources the Fund has used to significantly contribute to Rwanda’s economic recovery as expounded in the section that follows. Contributions of SSFR to the Rwandan economy The Social Security Fund of Rwanda is one of the institutions in the country that have played a fundamental role in rejuvenating the economy that had been shuttered during war and Genocide. For clarity purposes the roles played by the Fund can be put in four categories: • Saving mobilization and investments• Job creation• increasing aggregate demand• Contribution to fiscal collections Saving mobilization and Investments According to the existing literature on social security, social security schemes have been cited as the major savings mobilization vehicles in developing countries. It is in this perspective that many countries including Rwanda have embarked on social security reforms and restructuring of social security institutions. With meager savings from 8% contribution rate, the Fund has managed to make investments that have highly contributed to economic growth. From 2006, over 30.4% of financial assets in the country have been owned by CSR. It is important to note that social security schemes are the major sources of long term finance, a crucial aspect of capital market development. Besides investments in the financial sector, CSR has used the accumulated reserves in other productive sectors of the economy. Some of these sectors include real estate, manufacturing, service and other sectors. In the area of investments, CSR contribution to the economy is both direct and indirect. Direct participation is where CSR engages in economic activities without partnering with other investors. Indirect participation is where CSR uses the savings to undertake big investment projects in partnership with other investors. SSFR direct economic contribution As highlighted earlier, there are some projects undertaken by the Fund without involvement of other investors like Real estate. According to statistics, SSFR is one of the active agents in the real estate market. SSFR’s real estate development has greatly contributed to economic growth and development through capital formation. Real estate projects have created jobs for many people who in turn pay taxes and social security contributions. SSFR’s indirect economic contribution In order to have a visible impact in the economy, SSFR uses the savings collected to attract other investors, hence initiating very big projects with huge economic potential that SSFR alone could not undertake. This is the main strategy SSFR uses to fundamentally contribute to economic growth and development. The total value of SSFR shareholding as at 31st May 2009 is Rwf 28.4bn. The participation of SSFR in these companies indirectly contributes to economic growth through taxes, employment and aggregate demand. Job Creation From the economic theory, investment goes with employment creation, increase in aggregate demand, increase in production hence economic growth. SSFR investments as already highlighted above are in two forms, direct and indirect investments. The jobs created by direct investments are mainly those from real estates. Jobs from indirect investments are those created as a result of shareholding in companies in table 3 above. Considering other planned projects like the shopping mall and Gacuriro project of 234 houses, the employment levels resulting from SSFR investments will increase by a significant percentage. Associated with job creation is income replacement accorded to the retired population. As one of the principle functions, the Fund pays benefits to all qualifying members as required by law. These benefits serve as incomes to beneficiaries during their post retirement life. Though these benefits are tax exempt, they contribute to economic growth through increasing aggregate demand which in turn increases production. Contribution to Government Revenue From what has been presented above, it is clear that SSFR contributes to government revenue through tax payments. The fund invests in some taxable businesses like fixed deposits in banks and pays tax. The contractors in various real estate projects pay VAT on receipts from services rendered. The companies where SSFR holds shares pay different types of taxes like VAT, TPR and profit tax. The table below shows the details of taxes paid. Economic impact of social security reforms Recently the government adopted a social security policy with various reform proposals. Some of the major reforms proposed include; introducing the provident fund pillar and parametric adjustments like changes in contribution rates. At this stage, it may not be possible to quantitatively illustrate the economic gains from proposed social security reforms. What can be presented mathematically is the economic gain in terms of taxes expected from investment of mobilized savings. It’s assumed 75% utilization in investment and 25% reserves accumulation. 75% utilization implies investment of Rwf 69 billion per year. When investment funds are leveraged the benefits delivered from economic development and job creation are much greater. In particular, the available funds can be leveraged to get at least twice the amount. With this assumption, the investment would be about Rwf 207 billion per year with associated net tax revenues of at least Rwf 69.3 billion (since as per the above table investing Rwf 69 billion brings in tax revenues of Rwf 23.1 billion. From the presentation and considering the RRA targets for 2009 for the tax heads in table 7, total tax collections would increase by 29%. In this case, it can be noticed that conducting the reforms is a good strategy of widening the tax base. Another tangible benefit expected from the reforms is the alleviation of the chronic problem of poor housing. Conclusion Based on the information presented above, the Social Security Fund of Rwanda has immensely contributed to the country’s positive trends in economic performance. Social security in Rwanda and other developing countries should be given a lot of attention because it is the only viable source of long term finance. However, the role of social security in economic development depends on how the system is designed and investment planning and regulation. The ongoing social security reforms in the country are aimed at putting in place a social security system that adequately contributes to economic growth and development without compromising people’s welfare. The merging of SSFR and RAMA and implementation of the social security reforms will accelerate economic growth and development if the functioning and administration of the new body is meticulously planned. Ends

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SSFR contribution to Rwandan economy and economic impact of proposed social security reforms