Pension systems, whether contributory or non-contributory, provide pension benefits that replace income lost during the transition from active service to retirement.
The percentage or proportion of pre-retirement income replaced at retirement is referred to as the income replacement rate.
It measures how much a worker's pre-retirement income is replaced at retirement.
For instance, if a worker earns GH¢8,000.00 a month before retirement and is now paid GH¢4,000, it means 50 per cent of his income is replaced.
If he still receives GH¢8,000.00 a month upon retirement, then 100 per cent of pre-retirement income is replaced.
Having a replacement rate far lower than the pre-retirement income means that the retiree will be forced to eliminate certain kinds of expenditure he is used to.
Unfortunately, this is the reality for most workers, as pension systems are generally designed to replace only a portion of pre-retirement income.
According to the International Labour Organisation (ILO), international social security standards recommend a minimum pension benefit equivalent to about 40 per cent of previous earnings.
The Organisation for Economic Co-operation and Development (OECD) also reports a global average replacement rate of 63 per cent as of 2025.
However, there are countries with rates below the threshold, and others with a high replacement rate of about 90 per cent or more.
Why retirement income is lower than pre-retirement income
Globally, it is assumed that expenses decline when transitioning from an active to an inactive period.
For instance, expenses on work clothing, food at work, transportation, education, social security contributions, rent or mortgage expenses, income taxes, and other deductions are assumed to be reduced or cease entirely at retirement.
This presupposes that the workers do not need 100 per cent of their pre-retirement income to maintain their standard of living.
Also, pension benefits are expected to be paid for life, between 20 to 30 or 40 years, whether through a defined benefit scheme or a purchased annuity product, and cannot be fixed at 100 per cent of final salary at retirement.
Therefore, a single scheme that pays 100 per cent or more is seen as unsustainable and may face challenges in the future as retired members increase.
The Case of Ghana
Ghana operates a three-tier pension scheme with 1st- and 2nd-tier mandatory schemes and a 3rd-tier voluntary scheme, which provides a comprehensive framework for better retirement income in old age.
The 1st-tier Basic National Social Security Scheme, managed by SSNIT, receives a maximum of 11 per cent contribution (i.e., 13.5%, out of which 2.5% is paid to the NHIS) and guarantees a maximum income replacement of 60 per cent, with a minimum of 37.5 per cent.
This is subject to contributing to the scheme for at least 35 years (420 months) for the maximum and 15 years (180 months) for the minimum replacement rates. In both cases, the workers should retire at age 60.
For workers who retire from the basic scheme before age 60 (55 – 59), there is a discount factor applied to the pension amount, which reduces the benefit received, in some cases as low as 23 per cent.
Nonetheless, the 2nd-tier with five per cent contributions is expected to replace about 20 to 25 per cent of the final basic salary before retirement, subject to good investment performance and stable inflation.
Therefore, assuming a worker has the maximum 60 per cent replacement rate from the basic scheme and between 20 and 25 per cent from the 2nd tier, that worker should have about 80 to 85 per cent of his income replaced.
Even with the minimum rate of 37.5 per cent and 20 per cent, we can achieve 57.5 per cent
This is comparable to the global standard of between 40 and 63 per cent.
While this is generally considered sufficient to support a comfortable retirement, it is based on the assumption that retirees will require less than 100 per cent of their pre-retirement income.
However, within Ghana's socio-economic context, this assumption may not hold.
Rising medical expenses due to old age, increased family visits, religious activities, community leadership, elderly responsibilities, and recreational and other social engagement expenses suggest that many retirees may require an income equal to, or even exceeding, their pre-retirement earnings to maintain their socio-economic realities during retirement.
To achieve 100 per cent or more of replacement income, the worker has the opportunity of participating in the 3rd tier voluntary scheme through a Provident Fund Scheme, Personal Pension Scheme, or both.
For instance, if one can contribute between 5 and 10 per cent of their salary to a 3rd tier scheme, the worker may accrue between 25 and 30 per cent additional income should the accrued benefits be untouched till retirement.
Therefore, a worker with 80 to 85 per cent of pre-retirement income replaced by the 1st and 2nd tiers can achieve between 105 and 115 per cent income replaced by participating in all 3 tiers.
Even at the minimum income replacement of 57.5 per cent from the 1st and 2nd tier schemes, and an additional 25 per cent from the 3rd tier, the worker should achieve around an 85.5 per cent replacement rate.
This demonstrates that workers can get more than 100 per cent of their pre-retirement income on retirement, far above the global average of 63 per cent, even with minimum replacement rates under the 3-tier pension scheme, subject to good investment performance and general economic outlook.
In conclusion, Ghanaian workers are in an excellent position to accumulate more income to enable them to maintain their lifestyle in retirement.
The more intentional workers are about their pension, the greater the likelihood of achieving their desired income for a comfortable and dignified standard of living throughout retirement.
The writer is a
Corporate Affairs Manager, NPRA
