Impact of basic salary on pension benefit
Undoubtedly, one of the key sources of income for a retired individual is a pension.
It is a deferred income of workers invested by a recognised institution to be paid during retirement or under certain contingencies to the worker.
For many workers in Ghana, pension is the only income they would be depending on to support themselves on retirement, yet we do not give the attention it deserves until we are about to retire.
We are all witnesses to the many workers who complain of paltry sums of money offered them as pensions on retirement.
They become agitated when they observe how much they receive as their pension, whether a lump sum benefit or monthly pension, sometimes after working for a long period of time, for example, 25 to 30 or sometimes 40 years and over.
Much as it is true that pension benefits in Ghana are generally low, it cannot be said in isolation of other factors that form the key component of determining pension benefits.
The quantum of benefits one receives on retirement is chiefly determined by the basic salary and contributions paid into the pension scheme, among other elements.
For instance, in a defined benefits scheme such as the Tier 1 Scheme, the quantum of benefits a worker receives on retirement depends on the average of the best three years of the basic salary, the number of years of contributions and the age at retirement.
The quantum of benefits in a defined contribution such as Tier 2 also depends on the contributions and investment returns.
Someone might work for a typical career life of 30 to 35 years, retires at 60, and yet receives a meagre pension.
The reason is simple.
It might be that the person was receiving a low basic salary from which the pension contributions were paid.
Many of us do not pay attention to how much is being paid as our social security contributions.
The interest of most workers is to get a bigger monthly salary home than to think of what he or she will be earning in 20 to 30 years to come when on retirement.
Sadly, some employees conspire with their employers to rather allocate more of their earnings as allowances, thus making them contribute little to their pension, taking the larger portion of the monthly earnings now.
This leads to a higher net monthly salary which makes us happy, but the pension contributions will be low, because the allowances do not form part of the basic salary from which the contributions are paid.
Therefore, if the basic salary is low, the pension contributions will definitely be low and that will lead to a low pension benefit to the worker on retirement.
The many years of work will not have a major impact on the worker’s pension if the salaries are very low.
Employees must work towards having a higher basic salary than the allowances to stand the chance of earning a higher pension benefit on retirement.
The interesting part of the salary-related contributions under the National Pensions Act, 2008 Act 766 is that the law pegged the minimum pension contributions to the national minimum wage level.
This means that even though a contributor may be earning a salary lower