A typical Ugandan woman gives birth to an average of seven children, far higher than for other countries, including neighboring Kenya and Tanzania. There are many factors that push Ugandan woman to give birth to many children. For instance, low levels of schooling of women in Uganda often result in early marriage and early pregnancy. Inadequate access to family planning services, as well as cultural pressures that reward women for having many children, also contribute to Uganda’s high fertility rates. However, another important reason for Uganda’s high prolificacy is that children are a way of ensuring parents are taken care of after when they retire from active employment and can no longer fend for their livelihood. This incentive is particularly acute due to the fact that the Uganda pension system does not reach the majority of the country’s population. Today, although the elderly are still few in numbers (i.e., less than 5 percent of the population), only 2 percent of them are receiving a pension. Children are therefore perceived as a form of pension to many Ugandans because the majority of the population is not covered by any other system of protection.
How can Ugandans be more secure in their old age without relying on a large number of children? Many have argued that with a per capita income of US $510, the majority of Ugandans are too poor to save. But didn’t South East Asian countries like Korea and Thailand start building savings back in the sixties, when their incomes were low, at the same level as Uganda now? Increasing incomes may help, but more importantly, the availability of systems that encourage people to save has to improve. In this respect, a better functioning pension system would be useful. Currently, Uganda has a multi-tiered pension system. The national social security fund mandated with ensuring that the workers within the private sector have a pension currently covers about 450,000 people out of the possible 2.5 million. NSSF has also suffered management problems, fraud and corruption, leading to only limited returns for savers. Indeed, many have no confidence in the pension system.
The government of Uganda has its work cut out to ensure that the series of reforms to the pension sector it has initiated indeed improve the coverage, adequacy, security, sustainability and efficiency of the pension system. It has established a regulator to oversee the operations of the sector, proposed the liberalization of the private pension system to allow more competition and choice by workers, and also proposed reforms to the public pension system to improve its efficiency and to ensure its sustainability.
Going forward, there are still a number of challenges to be addressed. The newly established Uganda Retirement Benefits Regulatory Authority (URBRA) will, among other things, have to manage the risks related to fraud and corruption and the rise in costs that would further reduce return on pension savings. Even though competition is expected to lower costs, the reverse could arise as many pension operators incur costs of marketing, among others. This has been a problem in many countries, and hence needs to be addressed with appropriate transparency, regulation and managed competition, such as through cost caps.
In addition, limited development of the financial market may restrict the benefits from a liberalized pension system, while informality of the labour markets and the high cost of universal pension systems may constrain extending coverage.
Finally, transition costs could triple fiscal spending on public pensions before it would eventually decline, as the public sector scheme is converted into a contributory system. These transitional costs will occur as the government will be paying the existing pensioners' benefits while starting to contribute to the new public service pension fund. This cost will have to be properly planned for within the national budget.
Experience from other countries, including those in the African region, shows that, although never easy and often controversial, successful reforms can be implemented to build efficient pension systems. For Uganda, it would make good economic sense to do this while the population is still young. Waiting will only cause the costs to increase. And there is no doubt that a well-functioning pension system can support other interventions, such as formal education and provision of family planning education and facilities, to reduce the fertility rate in Uganda.
In depth discussion of these issues can be found in the World Bank’s Fourth Uganda Economic Update, entitled “Reducing Old Age and Economic Vulnerabilities – Why Uganda Should Improve its Pension System.”
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