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Pensions, informality, and the emerging middle class

Getting the incentives right for firms and workers should be the priority in the labor formalization agenda

OECD Development Centre, France

Elevator pitch

A large share of the population in emerging market economies has no pension coverage, exposing them to the economic risks arising from socio-economic and individual shocks. This problem, which arises from having large informal (unregulated) sectors, affects not only poor workers, but as many as half the newly or nearly middle class in some emerging market economies. With very little social protection coverage today, these workers will also be vulnerable in the future unless tax, labor, and social policies change to encourage formalization. While formalization would require substantial resources in the short-term, it seems financially sustainable.

informal sector retirement plan

Key findings

Formality can be fostered with stronger monetary and non-monetary incentives, backed with new technologies.

Substantial resources would be needed in the short-term, but formalization seems financially sustainable and could avoid future financial pressures arising if reforms are ignored.

Increasing formality through pension contribution subsidies and new savings channels would increase saving, notably among the middle class, and boost growth and equity.

Involving the emerging middle class in pension reform might ease the challenging political-economy obstacles.

If subsidies fail to move a substantial share of low- and middle-income workers into the formal economy, they would be regressive.

With multiple competing uses for scarce public resources and the high visibility of other pro-poor programs, there might not be adequate support for formalization policies.

Some pension reforms risk creating parallel schemes that can discourage formalization.

Too little is known about the effectiveness of monetary and non-monetary instruments in emerging market economies, so reforms should embed evaluation mechanisms.

Author's main message

Pension systems in emerging market economies are inadequate, with large gaps in coverage of low- and middle-income workers. Stop-gap measures, such as targeted benefits from non-contributory or parallel pension schemes, are the wrong approach for encouraging formalization. Instead, a combination of traditional and innovative social, tax, and labor tools should be used to improve the incentives for businesses and workers to become formal. Progressive pension contribution subsidies for formal jobs, along with a social pension, diversified savings channels, and better enforcement, are promising ways to spur formality.

An important achievement of the recent economic expansion in Latin America has been the substantial reduction in poverty and the surge in the ranks of the emerging middle class. Many new middle-class workers remain vulnerable to loss of employment and income. A considerable part of their vulnerability stems from working in the large informal sector, which substantially limits their pension coverage. In Latin America, only five in ten middle-income workers contribute to social insurance [1] . Findings are similar for other measures of middle class and informality (such as contributions to health insurance plans, workers without a written contract, occupation, and sector) [2] , [3] , [4] . Improving the labor status and savings of this emerging middle class is a key social challenge. This paper argues that a promising approach is to combine pension contribution subsidies to formal jobs (universal subsidies for workers and firms) and innovative savings channels, paired with stronger enforcement. These policies should be part of an overall social insurance and protection system, taking into account the functioning of the labor market and the economy as a whole. Latin America is used to analyze these challenges because of its heterogeneity, its innovations in social policies, and the remarkable increase in the middle class in the region.

Discussion of pros and cons

The precarious position of the emerging middle class.

Some 29% of the population in Latin America lives on less than $4 a day (in purchasing power parity terms, which adjusts for cost of living), a level considered to be moderate poverty, and another 68% lives on $4–$50 a day [5] . Many in this second group are the new emerging 
 middle class , whose situation is still very fragile in many cases. The middle class includes vulnerable workers, who make up 39% of the population and live on $4–$10 a day, and a slightly more secure group of workers, who make up 30% of the population and live on $10–$50 a day. It is this large 30% share of the population—the emerging middle class—who, while not poor, are at risk of losing their job, developing health problems, and suffering a large income decline after retirement, and thereby slipping into poverty.

One of the greatest vulnerabilities of this emerging middle class arises from widespread informality in the labor market. Often thought of as a problem only of low-income workers, informality is also a problem of the emerging middle class, whose members frequently transition into and out of informal-sector work. This insecurity of work sets them apart from other members of the middle class whose economic position is more stable [6] .

Strengthening the labor status and savings of this emerging middle class is a key social challenge. In Latin America, countries such as Brazil, Colombia, Chile, Peru, and Mexico have recently established policies to expand the reach of social protection programs by increasing formality and fostering savings. Too often, however, these programs are narrowly targeted in a way that excludes the emerging middle class or are not integrated into the general social protection system. By contrast, a notable activism is observed in more than a dozen countries that recently relaxed eligibility conditions for minimum pensions or implemented social pensions [7] .

If unchanged, low pension coverage will have social, economic, and political costs in coming decades

The deficient scope of pension coverage in emerging market economies is striking. In Latin America, less than half of the 38 million workers aged 65 and older are receiving a pension that is based on their contributions during their working lives (contributory pension). Recently, some countries have expanded pension coverage through social payments that are not based on workers’ contributions (non-contributory pensions). However, a majority of contributory and non-contributory pensions pay less than $10 a day. Therefore, most pension systems are not fulfilling their goals of eliminating poverty in old age and maintaining an adequate standard of living for workers after they stop working.

Without further reforms, this low coverage will have substantial social, economic, political, and fiscal costs. And the situation is expected to worsen due to the rapid aging of the population and widespread informality. Some projections suggest that by 2050 as many as half of the 140 million elderly in the region will not be eligible for an adequate pension [1] . People aged 65 and older will make up 20–30% of the electorate in the region, setting the stage for potential political unrest. In fiscal terms, the lack of coverage is a latent, mounting unaccounted-for liability that governments in the region will eventually have to meet.

The emerging middle class shows savings capacity but remains largely informal

Gaps in pension coverage in Latin America reflect a pattern of low and irregular worker contributions. Less than half contributed to any pension scheme in 2010 [1] . Informality among workers averaged 55% for the region as a whole, ranging from around 30% in Chile, Costa Rica and Uruguay to more than 80% in Bolivia, Peru, and Central America ( Figure 1 ).

informal sector retirement plan

Informality is widespread among middle-income workers, defined here as workers in the middle six deciles of the income distribution (middle 60%). On average for the region, 49% of workers in this emerging middle-income working class do not have a job in the formal sector: 60–70% in Colombia, Ecuador, El Salvador and Mexico and near or above 80% in Bolivia, Paraguay, Peru and most countries in Central America.

These high levels of informality among the emerging middle-income working class reflect their occupations. In Chile, Colombia, Mexico, and Peru combined, for example, 21 million middle-class urban workers (incomes of 50–150% of the median) are self-employed or lack a written contract—almost twice as many as have a written contract ( Figure 2 ). Only in Chile do workers with formal salaried work constitute the largest group, and even there, approximately a third of middle-income workers do not have a signed contract. That share rises to two-thirds in Colombia, Mexico, and Peru. As a consequence, less than 10% of middle-class workers in Peru, 28% in Mexico, and 39% in Colombia contribute to a pension plan [3] , [4] .

informal sector retirement plan

The income of these middle-class workers in the informal sector is well above national poverty lines (two times higher in Peru, three times higher in Colombia and Mexico, and five times higher in Chile), which suggests that they have some savings capacity. However, their earnings are close to the legal minimum wage in Colombia and Peru, suggesting that this labor institution might be creating an additional hurdle.

Expanding contributory pension coverage is a work in progress

Latin American countries have followed different paths in expanding the number of workers who contribute to a pension system. Reducing required contributions to social pension systems seems to be effective in generating formal employment, especially for young people, non-wage earners, and workers in small businesses, as selective implementation in Brazil, Chile, and Costa Rica has shown. In a similar vein, Colombia and Peru are implementing matching contribution programs , which increase workers’ returns to savings or subsidize contributions. These programs are too recent for rigorous evaluation, but preliminary evidence is positive. One concern is that targeting the self-employed or small business employees could discourage firms from growing or encourage self-employment in low-quality jobs. In this regard, Colombia’s recent tax reform, which greatly reduced hiring costs in labor-intensive sectors, seems a promising complement to pension system expansion.

Many countries have been experimenting with non-contributory pension systems [7] . Non-contributory pensions are effective in increasing the number of people with access to income in old age, as shown by experience in Bolivia and Chile, two countries with different income levels and distributions and extent of informality. However, such non-contributory pensions could discourage participation in the formal labor market and adversely affect fiscal sustainability [2] . Hence instruments need to be designed carefully and should be viewed as complementary to more general pension reform.

Making broader reform happen: Starting with the fundamentals

The analysis thus far suggests that decisions taken by government, workers, and firms created an imbalance in pension system contributions and eligibility, in which only a small share of middle-income workers regularly contribute to the pension system, despite having the savings capacity to do so. Recent reform measures only partly address this problem. While no single pension system reform is appropriate for all countries, a set of key principles does apply: universality (understand the interaction of the pension system with the labor market and the tax system); integrality (connect all contributory and non-contributory provisions of the social protection system, including retirement, disability, survivors’ pensions, and health and unemployment insurance); efficiency (create good incentives for pension saving and formal employment); transparency (simplify the rules so they are easily understood by workers and firms); and innovation (experiment with pension contribution subsidy mechanisms and with savings channels).

Getting the monetary incentives right in the formal economy

In many emerging economies, the balance of costs and benefits between formality and informality seems in favor of informality. To achieve universal pension coverage, it is crucial to increase the benefits or reduce the costs of complying with formality for workers and employers. For policymakers, this rebalancing requires evaluating not only contributions to the pension system but also the costs and procedures associated with labor legislation (health insurance, termination costs, minimum wage, and registration costs).

Monetary subsidies are among the most popular options. By reducing required contributions for wage and non-wage earners alike, subsidies can nudge low- and middle-income workers toward formality. Such financial incentives could be complemented by non-contributory pensions to reduce old-age poverty. Non-contributory pensions need solid financing and strict eligibility criteria related to age (adjusted to life expectancy) and residence. So as not to discourage formality, non-contributory pensions should be available to everyone who meets the criteria, whether formal- or informal-sector workers, and should be set at a level sufficient to reduce poverty in old age [8] .

Beyond money: Design, enforcement, and innovation

Beyond monetary incentives, efforts should be made to improve the design and implementation of pension policies, notably by phasing non-wage earners into social security. One approach that shows promise is to establish an obligation to contribute for all workers, whether formal or informal, offering flexible savings channels and means of fulfilment.

The empirical literature also suggests that moving from informality to formality (especially for small firms) requires not only greater supervision, but also an increase in the perceived benefits of formality for firms and workers, including short-term benefits (such as subsidies for professional insurance fees). Stricter monitoring will expand the number of formal jobs, but it can also destroy jobs that cannot survive regularization, whether because of low productivity or because the firms and workers do not value pension plans. Governments can improve the chances for positive outcomes by looking for inexpensive, innovative ways to expand pension coverage. Relying more on modern information technologies could improve supervision, information, and financial education while also offering greater flexibility in how workers and firms can contribute to pension plans.

An illustration of a pro-formality reform in Latin America: Benefits and costs

A simple way to implement a progressive subsidy for pension contributions that encourages formality is to grant a fixed subsidy to all workers who contribute. Since no one making less than the minimum wage could afford to contribute to a pension plan and thus would not be eligible for the subsidy, this incentive would benefit mainly the middle class. A stylized simulation of the impact of such a reform in Latin America, which assumes that the minimum wage is equal to the income of those in the second decile of the income distribution, finds that the subsidy is equivalent to 50% of the income of workers in the second decile and falls to less than 10% for workers in the wealthiest decile [1] .

In a no-reform scenario, the proportion of all contributors in the working population is assumed to grow 10 percentage points when GDP per capita doubles. In the reform scenario, this proportion rises to 40 percentage points for low-income workers, thanks to the introduction of a 50% subsidy, which is in line with the empirical literature [9] . According to the simulation, these monetary incentives would raise formality rates by around 10 percentage points in 2050, mostly among low-middle and middle-income workers ( Figure 3 ).

informal sector retirement plan

Funding pension reforms along these lines would cost 0.5–1% of GDP a year, at least in the short term, a substantial increase in budget allocations to pension systems That would make reforms a considerable technical and political challenge. To improve the chances of success, efforts should be made to avoid placing additional burdens on the formal sector. In some emerging market economies, such as Colombia, Mexico, and Peru, tax collections are low despite the high non-wage costs imposed on formal firms and workers. The funding challenge is compounded by the political challenges. According to the 2010 Latin American Public Opinion Project, pensions are not among the top 20 concerns of people in Latin America. However, respondents express some aspirations intrinsically related to pension reforms, such as lower poverty and unemployment.

One way to finance the pension subsidies and also compensate workers in the poorest deciles through direct cash transfers includes reforming consumption taxes, by eliminating the numerous tax deductions [10] . Another financing option is tax and non-tax revenues from commodities (like royalties on oil and metals), which could be less distortive and increase intergenerational equity.

The labor market is at the core of the solution: A dynamic view of progressivity

Most informal-sector workers sometimes work at formal-sector jobs, but usually only temporarily. This means that the formal and informal sectors are not segmented but rather that the boundaries are porous, with workers, both poor and middle class, moving back and forth. If pension contribution subsidies (and other policies) increase the rate at which workers become and remain formal, resources will increasingly be allocated more progressively in relative terms—that is, giving everyone the same amount of subsidies would decrease inequality by raising the income of low-earning workers proportionally more than the income of higher earners. Going a step further and giving larger subsidies to workers earning the minimum wage and raising income taxes for top earners would reduce inequality even more.

Limitations and gaps

Most of the studies considered in this paper are constrained by data limitations. The analyses and simulations are based on cross-section data from household and labor force surveys. The results would be sounder if they were based on longitudinal or panel data linked to administrative records. In addition, little is known about the actual impact of monetary and non-monetary incentives on informality. More rigorous impact evaluations are needed. More insights on the political economy of pension reforms are also needed to learn how to bring together the agents—retirees, formal and informal workers, firms and government—needed to support the reforms.

These limitations are on top of the usual caveat that policy recommendations need to account for different conditions and circumstances in each country, including institutional capabilities and fiscal capacity. Countries need to weigh all these factors and choose their own path.

Summary and policy advice

Informality, which is widespread in Latin America and other developing country regions, even among middle-income groups, is an outcome of the original design of social welfare systems, labor market incentives, and the low value workers and firms assign to formality. All these factors, which discourage formality, can be improved. In coming decades, key priorities in most developing countries are eradicating poverty, increasing savings, and expanding labor formality. Promising policies focusing on the middle-income segments of the population in Latin America include a combination of pension contribution subsidies to encourage formalization of jobs (by reducing the cost of pension contributions) and innovations in savings channels. All such policies should be integrated in the general pension scheme and coordinated with social pensions. The new middle class in Latin America is still largely informal and vulnerable to economic and personal shocks. Therefore, it would be advisable to focus on a series of ambitious pension changes that could contribute to growth and equity while reinforcing the weak social contract in most countries. Creating more formal jobs is the only sustainable strategy for ensuring adequate pensions in the long term.

Acknowledgments

The author thanks an anonymous referee and the IZA World of Labor editors for many helpful suggestions on earlier drafts.

Competing interests

The IZA World of Labor project is committed to the IZA Guiding Principles of Research Integrity . The author declares to have observed these principles. The analysis and conclusions expressed in this article are those of the author and not necessarily those of the OECD Development Centre.

© Angel Melguizo

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Published on Africa Can End Poverty

Planning for the future: behavioral insights to help informal workers save, jonathan karver, ana maria munoz-boudet, jaclyn lefkowitz, this page in:.

Photo: Arne Hoel/World Bank

If you are reading this blog, you are probably an average formal sector wage earner; like Marina, a human resources specialist in a small country that we’ll call Frictionlesslandia. Marina works for a small firm that, like all firms in her country, reports its activity to the authorities and complies with all regulations regarding its employees. Marina and her employer pay into contributory social protection systems like unemployment insurance and public pensions. She’s also automatically enrolled in her company’s long-term savings program, which deducts a small amount of money from each paycheck to be put into a secure account she can access in the future. Marina is on cruise control, global pandemic notwithstanding, to build a strong safety “cushion.”

The thing is, Marina might be real, but (surprise!) Frictionlesslandia is not. Her situation is the exception, not the norm, in most low- and middle-income countries. While many workers are formally employed, others are employed in the informal sector, are self-employed, or have other types of informal economic activity (ILO estimates that before the COVID-19 pandemic, around 2 billion workers were in informal employment worldwide ). In Africa, it is estimated that 86% of employment is informal. These workers are not as protected as Marina. Their work is unregulated by labor laws and highly unlikely to have access to the type of instruments that prepare the Marinas of the world for expected and unexpected shocks to income and employment. Their ability to save regularly and consistently using formal, reliable instruments linked to employment income is limited by a multitude of structural barriers; they may face liquidity constraints, low financial literacy, transaction costs, a lack of information, bureaucratic hassles, time costs, and more. They live in Frictionlandia.

Governments should address these structural challenges, but it can’t stop there. Providing access to and information about beneficial savings schemes does not guarantee uptake or use as policymakers intended. Saving for future economic shocks requires individuals to make a series of decisions and actions, each with its own set of challenges. Behavioral science — the study of how people make decisions and behave — provides a complementary lens to help policymakers uncover those additional bottlenecks and design effective policies that address them, so saving schemes to strengthen resilience (i.e., preparation and protection from economic shocks) can better respond to the needs and realities of their intended users. In a region like Africa, with high informality and limited fiscal capacity to support unprotected workers, low-cost solutions informed by behavioral science are invaluable.

A journey-based approach to improving saving among informal economy workers

Achieving resilience to financial shocks is a journey with many roadblocks for anyone, more so for informal sector workers who cannot benefit from schemes built for formal sector workers like Marina, leaving them more vulnerable than they already are.

A journey-based approach to improving saving among informal economy workers

The long journey to resilience (shown above) begins with a decision to save, which requires forming an intention, identifying and absorbing information about (multiple) savings instruments and ultimately deciding on one (or more); followed by enrollment in an instrument, which requires identifying how and where to enroll, accessing, completing and submitting paperwork, and ultimately getting approved. Only then can contributory saving occur, requiring first an evaluation of the contribution amount options, committing to an amount, and making an initial contribution. The journey continues even after saving has started; individuals must repeat their contributions until ultimately forming a persistent saving habit. Exhausted yet?

Applying a behavioral science lens can help us see the many potential bottlenecks in the journey to resilience that individuals might experience at each stage. And in particular, to zoom-in on less visible barriers that might impact whether a person saves or not: From the mental burden of handling complex information, especially amid a very demanding “today” that makes hard to think about tomorrow ( scarcity ), to the lack of a social norm around saving (e.g. “nobody around me does it, everyone distrusts banks ” ) and preferences for smaller, immediate rewards over larger ones in the future ( present bias ) during the decision stage; the tendency to delay actions that feel difficult ( procrastination ), being deterred by seemingly small hassles (for us) and a lack of trust in key actors during the enrollment stage; and the difficulty in starting and sticking to new habits during contribution stages, whether due to status quo or aversion to losing liquidity in the short term.

Studies have demonstrated that innovative tools and strategies informed by the behavioral sciences — many of which harness digital platforms that are expanding rapidly in the COVID-19 world — can be used by policymakers to address these barriers:

  • Alter the way information is presented (framed) to make relevant elements more salient, reduce over-information, and simplify it. This includes when and how information is given to people and how it is distributed. When and how choices are given needs to help individuals weigh the costs and benefits of the available options;
  • Remove friction in the enrollment process by eliminating unnecessary steps, simplifying paperwork, or automating steps when possible, and adjusting where and how to enroll;
  • Redesign the product to strengthen intentions to contribute and facilitate follow-through via tools like visualizing one's future self , behaviorally informed gamification (showing promise in South Africa ), smart contribution defaults , and commitments now to gradual increases in contributions during higher cash flow periods; and
  • Keep savings goals top of mind with strategies such as timely reminders (proven effective in Kenya ) or partitioning accounts to align with personal goals.

These solutions can be tested with small populations, refined, and scaled. If we want governments to give their citizens more opportunities to live as securely as Marina does, programs and policies must adapt and respond to the realities and diversity of workers in the informal sector, even if this means keeping the myth of Frictionlesslandia alive.

Jonathan Karver's picture

Economist, World Bank

Ana Maria Munoz-Boudet's picture

Senior Social Scientist, World Bank

Jaclyn Lefkowitz

Senior Behavioral Scientist

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I wish to join the conversation as I am tasked to develop an informal sector retirement plan for my organization. I seek to see what other people in this field are doing.

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From Social Protection to Personal Protection: Implications for an Integrated Framework of Retirement Planning for Informal Workers in Ghana

Samuel a. oteng.

1 School of Graduate Studies, Lingnan University, Tuen Mun, SAR Hong Kong

Esmeranda Manful

2 Department of Sociology and Social Work, Kwame Nkrumah University of Science & Technology, PMB – University Post Office, Kumasi, Ghana

Kofi Osei Akuoko

Without a mandatory retirement age, many informal workers are exploring diverse ways of ensuring their well-being as they age. This exploratory study focuses on the retirement plans of workers in Ghana’s informal sector to inform interventions to ensure their well-being. Findings from 35 in-depth interviews among self-employed informal workers in Adum-Kumasi, the largest hub of Ghana’s informal work, highlight that retirement planning is centred on self-protection through investment in economic and non-economic activities. The study contributes to the discourse on extending social protection coverage to informal work settings. It further recommends an integrated policy framework for social protection to cover a broad range of domains that are important for the well-being of informal workers in later life.

Introduction

The advent of modernization and social change has necessitated most African states to consider the implementation of social protection measures to substitute traditional roles of supporting the family (Abdulai et al., 2019 ). Globally, all societies recognize the need to ensure that their citizens are protected against loss of income in the event of social risks (Mokomane, 2013 ). Particularly in Africa, social protection issues have gained critical attention in policy discourse (Govindjee, 2019 ). This is reflected in response to finding alternative measures for extended family support which has over the years been the basis for the sustenance of society, in times of need and crisis (Doh et al., 2014a ). In fact, the most common type of social protection that pertains to the labour force is pensions. These are contributory pension schemes, managed by the state, which generally aim to facilitate the retirement planning of the workforce and to provide a substantial level of income security in old age (Arza, 2015 ).

Owing to this, retirement planning has emerged as a main global priority in social protection, and as one of the fulfilling phases of one’s lifetime, not desultory except through planning and continual evaluation (Onduko et al., 2015 ). A vital policy concern in this region is how to get persons to plan for retirement (Guven, 2019 ). This is because existing literature on retirement in both developed and developing countries underscores two distinct views on how older informal workers adjust or cope in later life (Devereux & Getu, 2013 ; Mumtaz, 2022 ; Wang & Shi, 2014 ). While some retirees adjust constructively by maintaining good social networks, others prefer to engage in other socio-economic activities (Dovie, 2017 ). Retirees who have difficulty adjusting in later life face financial hardship as well as social contempt (Musila et al., 2019 ). Social protection has consequently become a crucial component of social policy to address poverty and ensure the well-being of vulnerable workers in later life (Gerard et al., 2020 ). Yet in Africa, the coverage of pension systems is more structured for those working in the public sector, where age is the main determining factor for retirement (Getu & Devereux, 2013 ; Miti et al., 2021 ). Though considerable disparities within the region persist, only 11.6% of older persons contribute to pension schemes, implying a substantial gap in coverage among this cohort (Guven, 2019 ). This is more complicated in regions such as Ghana where significantly informal workers dominate the economy (Lund, 2012 ).

In Ghana, there is a surging interest to extend social protection coverage to people working in the informal economy (Adzawla et al., 2015 ). This interest has risen through the realization that the right to social protection is not yet a reality for the 80% majority in the informal sector of Ghana’s working population (Collins-Sowah et al., 2013 ). As a result of this, the Social Security and National Insurance Trust Fund (SSNIT) introduced the Informal Sector Social Security Scheme in 2005 (Kubuga et al., 2021 ). However, the participation of workers in this sector was very minimal (Osei-Boateng & Ampratwum, 2011 ). To address this policy gap, in 2009, a third-tier pension system, merging mandatory with voluntary retirement plans, was introduced by The National Pensions Act, Act 766 to address declining investment returns and especially improve access to informal sectors (Nunoo, 2013 ; SSNIT, 2015 ). The third-tier pension scheme has been in place for over a decade; unfortunately, its goal to offer a comprehensive and organized retirement plan has remained challenging. This is acknowledged by the incessant low patronage and awareness of the new pension system among informal sector workers (Anku-Tsede, 2019 ; Anku-Tsede et al., 2015 ; Boyetey et al., 2021 ).

Given that informal workers at present are not shielded by any retirement plan, are there opportunities for exploring other forms of social protection to ensure their well-being in their later life? This study with the aid of an exploratory design discusses the retirement plans of informal sector workers in Ghana and offers a re-think of the social protection measures to safeguard informal workers who are at risk of poverty in their old age.

Theoretical Framework

A plethora of theoretical arguments, for instance, disengagement theory, the life course perspective, and role theory, has been proposed as models for offering a comprehensive perspective on retirement decision making, retirement transition, and retirement satisfaction of employees (Lytle et al., 2015 ; Wang et al., 2008 ). Although the retirement process has been widely studied, theoretical postulations on the retirement process of informal workers who have no mandatory or statutory retirement procedures, are yet to receive attention. However, considering the unique characteristics of informal workers and their understanding of retirement (Oteng et al., 2021 ), it is apparent that the continuity theory could offer a new perspective on the retirement decisions of informal workers. According to the theory of continuity (Atchley, 1989 ), retirement is not considered as a stressful event of disengagement from active work life; however, it is an opportunity for older adults to maintain their work life, a lifestyle which offers higher levels of psychological well-being (Von Bonsdorff et al., 2009 ). Individuals who are strongly engaged in their employment, according to the theory, are more prone to seek continuity through several forms of participation in work life (Atchley, 1989 ). Specifically, retiring in the informal economy is conceived as a partial withdrawal from work, not an event, indicative that working in the informal sector allows a level of flexibility into retirement transition juxtaposed to jobs in formal organizations.

In contrast to the abrupt transition of formal jobs associated with disengagement theory, the retirement transition and decisions of informal workers corroborate the basic tenets of continuity theory in that individuals who enjoy their work, continue to work until their health declines, and therefore tend to plan for retirement by engaging in other business ventures that are flexible and less straining to their health. The reason for staying away from work momentarily is strongly contingent on having a financial haven and not necessarily a state pension policy in old age. Therefore, the desire to continue working is a result of fear of the financial insecurity retirement would bring to their remaining years. Moreover, complete retirement for informal workers is a function of poor health; however, mandatory retirement is perceived more as a health benefit during old age (Oteng et al., 2021 ). Atchley’s continuity theory recognizes the disadvantages of a retirement plan that considers a complete cessation from work without having other work aspirations. Therefore, this model addresses retirement as a stage of life and recognizes that retirement planning is connected to balancing work and well-being in later life. The theory of continuity offers a nuanced perspective of how the retirement plans of older workers influence their well-being. Although this theory does not consider minority status issues or vulnerable groups within the working population (for example informal workers) and considers older workers as homogenous, it has the flexibility to do so. The study, therefore, applies the continuity theory as a useful perspective in understanding the retirement plans of informal workers in Ghana.

Study Design

The study aimed at gathering an in-depth perspective of informal sector workers in Ghana on their retirement planning and, therefore, adopted an exploratory design. This is to glean new topics that have received little or no prior investigation (Creswell, 2013 ).

Study Setting and Population

The research setting was the Central Business District (CBD) of Kumasi, the biggest informal economic hub in Ghana. In addition, family ownership of informal businesses predominates the CBD, because the family provides an economical source of the workforce (Chen, 2020 ). Moreover, the lack of trust on the part of individuals in the informal sector discourages the establishment of joint ventures and partnerships (Osei-Boateng & Ampratwum, 2011 ). The study population, therefore, consisted of all informal workers engaged in family enterprises. This study, therefore, conceptualizes family-owned enterprises to comprise any enterprise or firm owned and managed by Ghanaian individuals in which two or more family members are involved.

Selection of Participants

Participants who could provide in-depth information by their status and experience as informal sector workers were selected for inclusion with the aid of an expert purposive sampling technique. Expert sampling is a type of purposive sampling technique that is employed to study individuals with a high degree of knowledge about a subject and the study area. This is required in qualitative research, when a study needs the opinions or assessment of people with specific expertise, highlighting potential new areas of interest or opening doors to other participants (Etikan et al., 2016 ). Accordingly, in this study, individuals aged 50 years and above and working in the informal sector were eligible to partake in the study. The study also included only participants who were owners of family enterprises at the time of the study. Previous studies have shown that people should start planning for retirement at least ten years before their expected retirement date (Manoli & Weber, 2016 ; Sundström et al., 2020 ). Therefore, family business owners who were less than 50 years at the time of the study were in the exclusion criteria.

Data Collection Process

Data were collected from 35 participants through in-depth interviews with the aid of a semi-structured interview guide. The data analysis was done concurrently with the data collection; hence, saturation was reached after the 35th interview. Following previous studies (Vandecasteele et al., 2015 ; Saunders et al., 2018 ), three more interviews were conducted to confirm that there were no new emerging themes. The interview guide had questions that explored participants’ perceptions and accounts of their retirement planning. With the eligibility criteria as a guide, one of the researchers made initial contact with participants to arrange for the interview dates. All interviews were scheduled before the actual interview time and generally conducted in the place of work of participants and their preferred time of 1 pm to 4 pm. From November 2017 to January 2018, face-to-face in-depth interviews were conducted with each participant to collect the data. The interviews were audio-recorded with the permission of participants and later transcribed verbatim.

Data Analysis

All the audio interviews were analysed with the aid of Attride-Stirling’s ( 2001 ) thematic network analysis. Thematic network analysis reveals the embedded meanings in the text at different stages where a systematic method is followed. The study consequently employed a step-by-step process in the analysis of the data. Open code, an aspect of NVivo software that facilitates the coding of raw data, was used. The entire set of data went through four stages of analysis. These included coding, generating basic themes from the codes, categorizing the basic themes into organizing themes, and deducing an overall theme from each, respectively.

Ethical Considerations

Before data collection, the study obtained ethical approval from the Ethics Committee in KNUST. The purpose of the research was elucidated to participants who were allowed to decide their participation in the study. Subsequently, participation was entirely voluntary and not mandatory. To maintain anonymity and confidentiality, the indicators identifying specific respondents were avoided in the study. As a result, names mentioned in reporting the findings were pseudonyms to help protect the identity of the participants. In all, participants’ rights to privacy and protection from personal harm were carefully observed.

The socio-demographic characteristics of participants and the thematic findings of the study are presented in this section.

Socio-Demographic and Business Characteristics

Concerning socio-demographic characteristics, most participants were males and between the ages of 50 and 54 years. In terms of educational attainment, most participants had the secondary school level of education. In addition to participants’ characteristics, questions related to the type of work, work experience, and how the business started were asked. Participants had varied informal economic activities but were dominated by the sale of clothing and fashion items. Most participants in the study started their business with their own capital and had at least 10 years of business experience at the time of the study. Table ​ Table1 1 displays some of the personal and business characteristics of the research participants.

Participants’ socio-demographic and business characteristics

Thematic Findings

At the time of the study, all participants had not been registered with the state’s pension plan. Participants were therefore asked to share their specific retirement strategies. Emerging themes from the interview data revealed five retirement strategies (see Fig. ​ Fig.1): 1 ): housing plans, senior entrepreneurship, spiritual investment, portfolio investment, and investing in children.

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Thematic Findings on Retirement Plans of Informal Workers

Housing Plans

The first form of retirement strategy was housing plans. From the interviews, participants stressed the importance of housing arrangements by indicating that it was very uncomfortable renting when you could afford a small apartment on your own. One participant summed up the shared opinion by stating:

“A place of residence is of importance to me. I am currently in a rented apartment and the kind of abuse and maltreatment I receive as a tenant is disheartening. I should have my place when I attain age 65. I started making this plan even when my husband was alive”. (Pauli, 55 years)

Similar to housing plans, participants emphasized the lucrativeness of investing in estates. This was what one of them indicated:

“I would also invest in lands and houses because these appreciate as the years go by but businesses such as transport is not a good investment because it depreciates with time”. (Kwame, 57 years)

Senior Entrepreneurship

For most participants, once retirement is not mandatory, they would want to be economically active by investing in businesses that required less physical effort.

“I would want to make a monthly contribution so that if I can no longer work, I could stay in the house and engage myself in other ventures like farming especially raising farm animals like rabbits which do not require using a lot of energy.” (Baah, 51 years).

It is also worth mentioning that research participants highlighted the importance of having adequate financial resources in the execution of this strategy.

Spiritual Investment

Others preferred to engage in spiritual activities than economic ones. This response reflects the shared view;

“For me, I am not doing this business again when I age. I need to spend time with my Supreme being and pray for my children and grandchildren. They need to know that the essence of life cannot be maximised without God. I will dedicate my life to the things of God and train my grandchildren, especially in the things of God” (Eben, 52 years)

Participants asserted that focusing on the work of God, allows them to have adequate time for their spiritual life, which has been overlooked over the years because of their involvement in economic activities. Participants explained that it was also a time to ensure the spiritual well-being of their families.

Investing in Children

Another key finding that emerged from the interview data was the reference to investing in children as a strategy to ensure social protection. One of the research participants argued:

“Because we don’t benefit from any insurance package but when your children take over, they will take care of you. Investing in my children by giving them proper education and grooming them to take over the business is my greatest plan” (Kwabena, 56 years)

Grooming children as successors of the business was therefore one of the retirement strategies of family business owners in this study.

Portfolio Investment

In the study, participants mentioned portfolio investment as one of their retirement plans. The specific portfolio investment encompassed investment savings in banks, stocks, and insurance companies.

“If one intends to retire, I think you should have a portfolio, something aside from your business that earns you money. For me, I have some investments in the Ghana Stock exchange, at the Data bank; Mutual fund and some in treasury bills. I started this quite early. I would not have any problems in case of contingencies” (Ivy, 53 years)

However, participants argued that investing in these banks and insurance companies was sometimes risky because they were not trustworthy. Sharing their experience, one of the participants explained that:

“Yes, I have started preparations but I have stopped because the financial institutions cannot be trusted. I started saving with some mobile bankers, not knowing they were not legally permitted to operate.” (Ama, 51 years).

For others, the decision to change or have additional plans was contingent on the financial resources available.

“For now, I cannot just be dreaming of doing something which may be impossible. It all depends on money. Once I have adequate income, I would include other plans. But per my finances now, what I have told you is what I am holding on to” (Abena, 54 years).

This highlights the importance of a high level of income in the execution of retirement strategies. Although there are some non-financial plans, the indispensable role of financial resources in ensuring the feasibility of these plans cannot be underestimated.

Findings from this study revealed five retirement plans of informal workers encompassing portfolio investment, housing plans, spiritual investment, investing in children, and senior entrepreneurship. The study concludes that the retirement plans for most informal workers are flagged on personal insurance and self-protection rather than on social protection. Studies have characterized retirement planning according to three domains: self-insurance, self-protection, and public protection (Denton et al., 2004 ; Muratore & Earl, 2010 ). First, self-insurance includes personal financial plans made by individuals to improve wealth in later life (savings accounts, investments, and private insurance policies for assets and health care). Second, self-protection includes personal non-financial preparations made by individuals to maintain health and well-being in later life (these may include healthy lifestyle choices, engagement in social support networks [including family], and seeking a safe physical environment). Third, public protection includes benefits provided by the Government to promote health, wealth, and well-being in later life; these may include pensions, public health programs, health services, or housing programs. It is very apparent from the above typologies that there is a paradigm shift of social protection where governments provide social security for all workers to a model of personal protection where workers initiate and plan for their well-being in later life. This is challenging especially for informal workers who do not have enough financial resources but would have to continue working despite poorer health and working conditions until they have enough to secure these plans. Also, significantly, the economic challenges triggered by the Covid-19 pandemic have had serious implications for older informal workers’ economic participation and security in later life. Relying on self-issuance schemes in this post-pandemic era may not be adequate considering the meagre financial resources of informal sector workers in Ghana. Extending social protection schemes sustainable and relevant to social needs in conjunction with the personal protection plans may liquidate poverty and the vulnerability of the informal sector workforce in Ghana.

The study further supports the continuity theory by demonstrating that older adults engaged in informal work maintained a continual level of participation in enjoyable activities in the attempt of ensuring increased levels of work engagement. The retirement plans of informal workers in the study corroborate the basic tenets of continuity theory as it is geared towards enhancing psychological well-being through finding meaning in later life activities.

Retirement planning in this study did not only encompass financial plans; savings, insurance, and investment but also non-financial plans such as spiritual investment. Informal workers were interested in their spiritual well-being after they transitioned from work. At the personal and organizational level, spirituality plays a significant role in the retirement planning process (Earl, 2010 ). It is clear from the study the interplay between spirituality and work in the retirement planning process, as well as the value of spirituality in the personal lives of informal workers as they transit into retirement. Spirituality, according to Dik and Duffy ( 2009 ), serves as a caveat for an avocation after retirement. Many family business owners in this study who were notably Christians were prepared to explore religious work as a form of economic activity after their retirement. Akin to spiritual investment, children were conceived as part of the retirement plans in terms of business succession. Substantial studies have established that children are a source of traditional social support for older persons (Dovie, 2018 ; Kpessa-Whyte & Tsekpo, 2020 ). Premising on the findings of the study, informal workers consider children as success legacy and source of wealth in later life. Notably, family business owners in the informal sector would endeavour to ensure the survivability of the business up till the next generation and precisely build up the social capital of the business (Gedajlovic & Carney, 2010 ). Family business owners would always encourage the transition of the business to the next generation. For most of them, since they had been socialized into their current kind of business, they were also more willing to socialize their children into the business. This encompassed knowledge concerning retirement planning through mentorship, sharing of important tacit knowledge, and having positive role models from co-workers within the business. Parallel to this, informal workers who are not likely to plan for their retirement would do so for cultural reasons. The reality is that people are not likely to spend time planning about retirement because thinking about retirement could mean closely thinking about one’s death (Houlding, 2018 ; Valentish, 2021 ). This is a critical source of concern in the retirement process considering that the planning for retirement and the expectations of death are important stages individuals must go through in their lives. Retirement planning consequentially can be viewed as a cultural norm passed on from one generation to the other through the process of socialization. Therefore, succession, socialization, and religion were socio-cultural elements embedded in the retirement planning process of informal workers in this study. Although these factors are invaluable in the retirement planning of informal workers, these are under-studied in the extant literature, particularly in developing countries (Lytle et al., 2015 ). Nonetheless, this present study highlights that culture, family, and succession constitute a broader influence in the retirement planning of workers. These factors with little reliance on any social protection measure formed the bedrock of the personal protection plans of informal workers in Ghana.

Implications for Policy and Practice

The discourse on social protection makes a case for an extension of coverage to enable informal workers to access the contributory pension scheme during their working lives. Policy responses particularly in Ghana in the past decade have extended coverage through the third tier of the state’s pension scheme to provide income support and access to health care for informal workers and other vulnerable groups. However, informal workers presently face the risk of economic insecurity on their own. This study has revealed that social protection for informal workers such as pension schemes is not exhaustive to ensure the well-being of older workers and workers approaching old ages in the informal sector. To supplement the existing policy programmes, investment strategies, specifically housing, portfolio, children, and spirituality are expedient for the active and productive ageing of informal workers.

To promote decent work and enhance the health and well-being of informal workers as encapsulated in the third and eighth goals of the UN Sustainable Development Goals, the state must provide a comprehensive and integrated model of social protection. This should encompass diverse domains and be custom-tailored to the needs of informal workers in Ghana. Further, efforts should be taken by the state and civil society to ensure quality education and health care to induce the informal sector workers’ enrolment in this new all-inclusive social protection scheme.

Declarations

The authors declare no competing interests.

Publisher's Note

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Contributor Information

Samuel A. Oteng, Email: kh.nl@gnetoudapmaleumas .

Esmeranda Manful, Email: [email protected] .

Kofi Osei Akuoko, Email: [email protected] .

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From Social Protection to Personal Protection: Implications for an Integrated Framework of Retirement Planning for Informal Workers in Ghana

  • Published: 18 August 2022
  • Samuel A. Oteng 1 ,
  • Esmeranda Manful   ORCID: orcid.org/0000-0002-6346-289X 2 &
  • Kofi Osei Akuoko 2  

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Without a mandatory retirement age, many informal workers are exploring diverse ways of ensuring their well-being as they age. This exploratory study focuses on the retirement plans of workers in Ghana’s informal sector to inform interventions to ensure their well-being. Findings from 35 in-depth interviews among self-employed informal workers in Adum-Kumasi, the largest hub of Ghana’s informal work, highlight that retirement planning is centred on self-protection through investment in economic and non-economic activities. The study contributes to the discourse on extending social protection coverage to informal work settings. It further recommends an integrated policy framework for social protection to cover a broad range of domains that are important for the well-being of informal workers in later life.

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Introduction

The advent of modernization and social change has necessitated most African states to consider the implementation of social protection measures to substitute traditional roles of supporting the family (Abdulai et al., 2019 ). Globally, all societies recognize the need to ensure that their citizens are protected against loss of income in the event of social risks (Mokomane, 2013 ). Particularly in Africa, social protection issues have gained critical attention in policy discourse (Govindjee, 2019 ). This is reflected in response to finding alternative measures for extended family support which has over the years been the basis for the sustenance of society, in times of need and crisis (Doh et al., 2014a ). In fact, the most common type of social protection that pertains to the labour force is pensions. These are contributory pension schemes, managed by the state, which generally aim to facilitate the retirement planning of the workforce and to provide a substantial level of income security in old age (Arza, 2015 ).

Owing to this, retirement planning has emerged as a main global priority in social protection, and as one of the fulfilling phases of one’s lifetime, not desultory except through planning and continual evaluation (Onduko et al., 2015 ). A vital policy concern in this region is how to get persons to plan for retirement (Guven, 2019 ). This is because existing literature on retirement in both developed and developing countries underscores two distinct views on how older informal workers adjust or cope in later life (Devereux & Getu, 2013 ; Mumtaz, 2022 ; Wang & Shi, 2014 ). While some retirees adjust constructively by maintaining good social networks, others prefer to engage in other socio-economic activities (Dovie, 2017 ). Retirees who have difficulty adjusting in later life face financial hardship as well as social contempt (Musila et al., 2019 ). Social protection has consequently become a crucial component of social policy to address poverty and ensure the well-being of vulnerable workers in later life (Gerard et al., 2020 ). Yet in Africa, the coverage of pension systems is more structured for those working in the public sector, where age is the main determining factor for retirement (Getu & Devereux, 2013 ; Miti et al., 2021 ). Though considerable disparities within the region persist, only 11.6% of older persons contribute to pension schemes, implying a substantial gap in coverage among this cohort (Guven, 2019 ). This is more complicated in regions such as Ghana where significantly informal workers dominate the economy (Lund, 2012 ).

In Ghana, there is a surging interest to extend social protection coverage to people working in the informal economy (Adzawla et al., 2015 ). This interest has risen through the realization that the right to social protection is not yet a reality for the 80% majority in the informal sector of Ghana’s working population (Collins-Sowah et al., 2013 ). As a result of this, the Social Security and National Insurance Trust Fund (SSNIT) introduced the Informal Sector Social Security Scheme in 2005 (Kubuga et al., 2021 ). However, the participation of workers in this sector was very minimal (Osei-Boateng & Ampratwum, 2011 ). To address this policy gap, in 2009, a third-tier pension system, merging mandatory with voluntary retirement plans, was introduced by The National Pensions Act, Act 766 to address declining investment returns and especially improve access to informal sectors (Nunoo, 2013 ; SSNIT, 2015 ). The third-tier pension scheme has been in place for over a decade; unfortunately, its goal to offer a comprehensive and organized retirement plan has remained challenging. This is acknowledged by the incessant low patronage and awareness of the new pension system among informal sector workers (Anku-Tsede, 2019 ; Anku-Tsede et al., 2015 ; Boyetey et al., 2021 ).

Given that informal workers at present are not shielded by any retirement plan, are there opportunities for exploring other forms of social protection to ensure their well-being in their later life? This study with the aid of an exploratory design discusses the retirement plans of informal sector workers in Ghana and offers a re-think of the social protection measures to safeguard informal workers who are at risk of poverty in their old age.

Theoretical Framework

A plethora of theoretical arguments, for instance, disengagement theory, the life course perspective, and role theory, has been proposed as models for offering a comprehensive perspective on retirement decision making, retirement transition, and retirement satisfaction of employees (Lytle et al., 2015 ; Wang et al., 2008 ). Although the retirement process has been widely studied, theoretical postulations on the retirement process of informal workers who have no mandatory or statutory retirement procedures, are yet to receive attention. However, considering the unique characteristics of informal workers and their understanding of retirement (Oteng et al., 2021 ), it is apparent that the continuity theory could offer a new perspective on the retirement decisions of informal workers. According to the theory of continuity (Atchley, 1989 ), retirement is not considered as a stressful event of disengagement from active work life; however, it is an opportunity for older adults to maintain their work life, a lifestyle which offers higher levels of psychological well-being (Von Bonsdorff et al., 2009 ). Individuals who are strongly engaged in their employment, according to the theory, are more prone to seek continuity through several forms of participation in work life (Atchley, 1989 ). Specifically, retiring in the informal economy is conceived as a partial withdrawal from work, not an event, indicative that working in the informal sector allows a level of flexibility into retirement transition juxtaposed to jobs in formal organizations.

In contrast to the abrupt transition of formal jobs associated with disengagement theory, the retirement transition and decisions of informal workers corroborate the basic tenets of continuity theory in that individuals who enjoy their work, continue to work until their health declines, and therefore tend to plan for retirement by engaging in other business ventures that are flexible and less straining to their health. The reason for staying away from work momentarily is strongly contingent on having a financial haven and not necessarily a state pension policy in old age. Therefore, the desire to continue working is a result of fear of the financial insecurity retirement would bring to their remaining years. Moreover, complete retirement for informal workers is a function of poor health; however, mandatory retirement is perceived more as a health benefit during old age (Oteng et al., 2021 ). Atchley’s continuity theory recognizes the disadvantages of a retirement plan that considers a complete cessation from work without having other work aspirations. Therefore, this model addresses retirement as a stage of life and recognizes that retirement planning is connected to balancing work and well-being in later life. The theory of continuity offers a nuanced perspective of how the retirement plans of older workers influence their well-being. Although this theory does not consider minority status issues or vulnerable groups within the working population (for example informal workers) and considers older workers as homogenous, it has the flexibility to do so. The study, therefore, applies the continuity theory as a useful perspective in understanding the retirement plans of informal workers in Ghana.

Study Design

The study aimed at gathering an in-depth perspective of informal sector workers in Ghana on their retirement planning and, therefore, adopted an exploratory design. This is to glean new topics that have received little or no prior investigation (Creswell, 2013 ).

Study Setting and Population

The research setting was the Central Business District (CBD) of Kumasi, the biggest informal economic hub in Ghana. In addition, family ownership of informal businesses predominates the CBD, because the family provides an economical source of the workforce (Chen, 2020 ). Moreover, the lack of trust on the part of individuals in the informal sector discourages the establishment of joint ventures and partnerships (Osei-Boateng & Ampratwum, 2011 ). The study population, therefore, consisted of all informal workers engaged in family enterprises. This study, therefore, conceptualizes family-owned enterprises to comprise any enterprise or firm owned and managed by Ghanaian individuals in which two or more family members are involved.

Selection of Participants

Participants who could provide in-depth information by their status and experience as informal sector workers were selected for inclusion with the aid of an expert purposive sampling technique. Expert sampling is a type of purposive sampling technique that is employed to study individuals with a high degree of knowledge about a subject and the study area. This is required in qualitative research, when a study needs the opinions or assessment of people with specific expertise, highlighting potential new areas of interest or opening doors to other participants (Etikan et al., 2016 ). Accordingly, in this study, individuals aged 50 years and above and working in the informal sector were eligible to partake in the study. The study also included only participants who were owners of family enterprises at the time of the study. Previous studies have shown that people should start planning for retirement at least ten years before their expected retirement date (Manoli & Weber, 2016 ; Sundström et al., 2020 ). Therefore, family business owners who were less than 50 years at the time of the study were in the exclusion criteria.

Data Collection Process

Data were collected from 35 participants through in-depth interviews with the aid of a semi-structured interview guide. The data analysis was done concurrently with the data collection; hence, saturation was reached after the 35th interview. Following previous studies (Vandecasteele et al., 2015 ; Saunders et al., 2018 ), three more interviews were conducted to confirm that there were no new emerging themes. The interview guide had questions that explored participants’ perceptions and accounts of their retirement planning. With the eligibility criteria as a guide, one of the researchers made initial contact with participants to arrange for the interview dates. All interviews were scheduled before the actual interview time and generally conducted in the place of work of participants and their preferred time of 1 pm to 4 pm. From November 2017 to January 2018, face-to-face in-depth interviews were conducted with each participant to collect the data. The interviews were audio-recorded with the permission of participants and later transcribed verbatim.

Data Analysis

All the audio interviews were analysed with the aid of Attride-Stirling’s ( 2001 ) thematic network analysis. Thematic network analysis reveals the embedded meanings in the text at different stages where a systematic method is followed. The study consequently employed a step-by-step process in the analysis of the data. Open code, an aspect of NVivo software that facilitates the coding of raw data, was used. The entire set of data went through four stages of analysis. These included coding, generating basic themes from the codes, categorizing the basic themes into organizing themes, and deducing an overall theme from each, respectively.

Ethical Considerations

Before data collection, the study obtained ethical approval from the Ethics Committee in KNUST. The purpose of the research was elucidated to participants who were allowed to decide their participation in the study. Subsequently, participation was entirely voluntary and not mandatory. To maintain anonymity and confidentiality, the indicators identifying specific respondents were avoided in the study. As a result, names mentioned in reporting the findings were pseudonyms to help protect the identity of the participants. In all, participants’ rights to privacy and protection from personal harm were carefully observed.

The socio-demographic characteristics of participants and the thematic findings of the study are presented in this section.

Socio-Demographic and Business Characteristics

Concerning socio-demographic characteristics, most participants were males and between the ages of 50 and 54 years. In terms of educational attainment, most participants had the secondary school level of education. In addition to participants’ characteristics, questions related to the type of work, work experience, and how the business started were asked. Participants had varied informal economic activities but were dominated by the sale of clothing and fashion items. Most participants in the study started their business with their own capital and had at least 10 years of business experience at the time of the study. Table 1 displays some of the personal and business characteristics of the research participants.

Thematic Findings

At the time of the study, all participants had not been registered with the state’s pension plan. Participants were therefore asked to share their specific retirement strategies. Emerging themes from the interview data revealed five retirement strategies (see Fig. 1 ): housing plans, senior entrepreneurship, spiritual investment, portfolio investment, and investing in children.

figure 1

Thematic Findings on Retirement Plans of Informal Workers

Housing Plans

The first form of retirement strategy was housing plans. From the interviews, participants stressed the importance of housing arrangements by indicating that it was very uncomfortable renting when you could afford a small apartment on your own. One participant summed up the shared opinion by stating:

“A place of residence is of importance to me. I am currently in a rented apartment and the kind of abuse and maltreatment I receive as a tenant is disheartening. I should have my place when I attain age 65. I started making this plan even when my husband was alive”. (Pauli, 55 years)

Similar to housing plans, participants emphasized the lucrativeness of investing in estates. This was what one of them indicated:

“I would also invest in lands and houses because these appreciate as the years go by but businesses such as transport is not a good investment because it depreciates with time”. (Kwame, 57 years)

Senior Entrepreneurship

For most participants, once retirement is not mandatory, they would want to be economically active by investing in businesses that required less physical effort.

“I would want to make a monthly contribution so that if I can no longer work, I could stay in the house and engage myself in other ventures like farming especially raising farm animals like rabbits which do not require using a lot of energy.” (Baah, 51 years).

It is also worth mentioning that research participants highlighted the importance of having adequate financial resources in the execution of this strategy.

Spiritual Investment

Others preferred to engage in spiritual activities than economic ones. This response reflects the shared view;

“For me, I am not doing this business again when I age. I need to spend time with my Supreme being and pray for my children and grandchildren. They need to know that the essence of life cannot be maximised without God. I will dedicate my life to the things of God and train my grandchildren, especially in the things of God” (Eben, 52 years)

Participants asserted that focusing on the work of God, allows them to have adequate time for their spiritual life, which has been overlooked over the years because of their involvement in economic activities. Participants explained that it was also a time to ensure the spiritual well-being of their families.

Investing in Children

Another key finding that emerged from the interview data was the reference to investing in children as a strategy to ensure social protection. One of the research participants argued:

“Because we don’t benefit from any insurance package but when your children take over, they will take care of you. Investing in my children by giving them proper education and grooming them to take over the business is my greatest plan” (Kwabena, 56 years)

Grooming children as successors of the business was therefore one of the retirement strategies of family business owners in this study.

Portfolio Investment

In the study, participants mentioned portfolio investment as one of their retirement plans. The specific portfolio investment encompassed investment savings in banks, stocks, and insurance companies.

“If one intends to retire, I think you should have a portfolio, something aside from your business that earns you money. For me, I have some investments in the Ghana Stock exchange, at the Data bank; Mutual fund and some in treasury bills. I started this quite early. I would not have any problems in case of contingencies” (Ivy, 53 years)

However, participants argued that investing in these banks and insurance companies was sometimes risky because they were not trustworthy. Sharing their experience, one of the participants explained that:

“Yes, I have started preparations but I have stopped because the financial institutions cannot be trusted. I started saving with some mobile bankers, not knowing they were not legally permitted to operate.” (Ama, 51 years).

For others, the decision to change or have additional plans was contingent on the financial resources available.

“For now, I cannot just be dreaming of doing something which may be impossible. It all depends on money. Once I have adequate income, I would include other plans. But per my finances now, what I have told you is what I am holding on to” (Abena, 54 years).

This highlights the importance of a high level of income in the execution of retirement strategies. Although there are some non-financial plans, the indispensable role of financial resources in ensuring the feasibility of these plans cannot be underestimated.

Findings from this study revealed five retirement plans of informal workers encompassing portfolio investment, housing plans, spiritual investment, investing in children, and senior entrepreneurship. The study concludes that the retirement plans for most informal workers are flagged on personal insurance and self-protection rather than on social protection. Studies have characterized retirement planning according to three domains: self-insurance, self-protection, and public protection (Denton et al., 2004 ; Muratore & Earl, 2010 ). First, self-insurance includes personal financial plans made by individuals to improve wealth in later life (savings accounts, investments, and private insurance policies for assets and health care). Second, self-protection includes personal non-financial preparations made by individuals to maintain health and well-being in later life (these may include healthy lifestyle choices, engagement in social support networks [including family], and seeking a safe physical environment). Third, public protection includes benefits provided by the Government to promote health, wealth, and well-being in later life; these may include pensions, public health programs, health services, or housing programs. It is very apparent from the above typologies that there is a paradigm shift of social protection where governments provide social security for all workers to a model of personal protection where workers initiate and plan for their well-being in later life. This is challenging especially for informal workers who do not have enough financial resources but would have to continue working despite poorer health and working conditions until they have enough to secure these plans. Also, significantly, the economic challenges triggered by the Covid-19 pandemic have had serious implications for older informal workers’ economic participation and security in later life. Relying on self-issuance schemes in this post-pandemic era may not be adequate considering the meagre financial resources of informal sector workers in Ghana. Extending social protection schemes sustainable and relevant to social needs in conjunction with the personal protection plans may liquidate poverty and the vulnerability of the informal sector workforce in Ghana.

The study further supports the continuity theory by demonstrating that older adults engaged in informal work maintained a continual level of participation in enjoyable activities in the attempt of ensuring increased levels of work engagement. The retirement plans of informal workers in the study corroborate the basic tenets of continuity theory as it is geared towards enhancing psychological well-being through finding meaning in later life activities.

Retirement planning in this study did not only encompass financial plans; savings, insurance, and investment but also non-financial plans such as spiritual investment. Informal workers were interested in their spiritual well-being after they transitioned from work. At the personal and organizational level, spirituality plays a significant role in the retirement planning process (Earl, 2010 ). It is clear from the study the interplay between spirituality and work in the retirement planning process, as well as the value of spirituality in the personal lives of informal workers as they transit into retirement. Spirituality, according to Dik and Duffy ( 2009 ), serves as a caveat for an avocation after retirement. Many family business owners in this study who were notably Christians were prepared to explore religious work as a form of economic activity after their retirement. Akin to spiritual investment, children were conceived as part of the retirement plans in terms of business succession. Substantial studies have established that children are a source of traditional social support for older persons (Dovie, 2018 ; Kpessa-Whyte & Tsekpo, 2020 ). Premising on the findings of the study, informal workers consider children as success legacy and source of wealth in later life. Notably, family business owners in the informal sector would endeavour to ensure the survivability of the business up till the next generation and precisely build up the social capital of the business (Gedajlovic & Carney, 2010 ). Family business owners would always encourage the transition of the business to the next generation. For most of them, since they had been socialized into their current kind of business, they were also more willing to socialize their children into the business. This encompassed knowledge concerning retirement planning through mentorship, sharing of important tacit knowledge, and having positive role models from co-workers within the business. Parallel to this, informal workers who are not likely to plan for their retirement would do so for cultural reasons. The reality is that people are not likely to spend time planning about retirement because thinking about retirement could mean closely thinking about one’s death (Houlding, 2018 ; Valentish, 2021 ). This is a critical source of concern in the retirement process considering that the planning for retirement and the expectations of death are important stages individuals must go through in their lives. Retirement planning consequentially can be viewed as a cultural norm passed on from one generation to the other through the process of socialization. Therefore, succession, socialization, and religion were socio-cultural elements embedded in the retirement planning process of informal workers in this study. Although these factors are invaluable in the retirement planning of informal workers, these are under-studied in the extant literature, particularly in developing countries (Lytle et al., 2015 ). Nonetheless, this present study highlights that culture, family, and succession constitute a broader influence in the retirement planning of workers. These factors with little reliance on any social protection measure formed the bedrock of the personal protection plans of informal workers in Ghana.

Implications for Policy and Practice

The discourse on social protection makes a case for an extension of coverage to enable informal workers to access the contributory pension scheme during their working lives. Policy responses particularly in Ghana in the past decade have extended coverage through the third tier of the state’s pension scheme to provide income support and access to health care for informal workers and other vulnerable groups. However, informal workers presently face the risk of economic insecurity on their own. This study has revealed that social protection for informal workers such as pension schemes is not exhaustive to ensure the well-being of older workers and workers approaching old ages in the informal sector. To supplement the existing policy programmes, investment strategies, specifically housing, portfolio, children, and spirituality are expedient for the active and productive ageing of informal workers.

To promote decent work and enhance the health and well-being of informal workers as encapsulated in the third and eighth goals of the UN Sustainable Development Goals, the state must provide a comprehensive and integrated model of social protection. This should encompass diverse domains and be custom-tailored to the needs of informal workers in Ghana. Further, efforts should be taken by the state and civil society to ensure quality education and health care to induce the informal sector workers’ enrolment in this new all-inclusive social protection scheme.

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Oteng, S.A., Manful, E. & Akuoko, K.O. From Social Protection to Personal Protection: Implications for an Integrated Framework of Retirement Planning for Informal Workers in Ghana. Glob Soc Welf (2022). https://doi.org/10.1007/s40609-022-00235-w

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Extending Pension Coverage to Informal Sector Workers in Africa

May 29-31, 2019, cotonou, benin.

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The World Bank, in collaboration with the ARCH coordination unit in Benin is organizing a workshop on « Extending Pension Coverage to Informal Sector Workers in Africa » in Cotonou during May 29-31, 2019.  The coverage of pension systems in the region continues to be limited to the small segment of people in the formal sector who can afford to pay contributions to the existing pension systems to save for retirement. As a result, extending pension coverage to the large informal sector remains a challenge in Africa. Informality poses some distinctive issues in providing retirement income that cannot be addressed merely by extending conventional pension systems to these workers. Different solutions are needed to tackle the unique characteristics of this group.

An increasing number of governments in the region are examining initiatives to extend pension coverage to informal sector workers. The objective of this workshop is to bring together government stakeholders and regional institutions to promote an open discussion about extending pension coverage to the informal sector.

The workshop will bring together government officials from pension institutions, ministries and supervisory agencies from fourteen countries (Benin, Côte d'Ivoire, Ghana, Ethiopia, India, Kenya, Liberia, Namibia, Nigeria, Rwanda, Senegal, Sierra Leone, South Africa and Uganda) as well as representatives of regional supervisory organizations in West Africa, (CIPRES: Inter-African Confederation of Social Welfare, and CREPMF: Regional Council of Public Savings and Financial Markets).

The Social Protection and Jobs team of the World Bank wishes to recognize the generous award of a grant from the World Bank’s Rapid Social Response Trust Fund Program, which is supported by the Russian Federation, United Kingdom, Norway, Sweden, Australia, and Denmark, without which this event would not have been possible.

The coverage of pension systems in the Africa region continues to be limited to the small segment of people in the formal sector who can afford to pay contributions to the existing pension systems to save for retirement. As a result, extending pension coverage to the large informal sector remains a challenge in Africa. Expanding coverage to a larger group of workers is especially important because the elderly is now often cared for by their children. As the children move to cities, their ties to the elderly and home villages weaken. As a result, the elderly will be  left behind with fewer resources.

Informality poses some distinctive issues in providing retirement income that cannot be addressed merely by extending conventional pension systems to these workers. Different solutions are needed to tackle the unique characteristics of this group. Informal sector is heterogenous. While some workers may have the potential to save for old age, others may not have the means to defer consumption without significant subsidies.  Even when they can save, their incomes are not sufficient and regular to participate in traditional contributory schemes. To respond to the distinctive characteristics of informal sector workers, different solutions supported by modern technology are needed.

The workshop will bring together government officials from pension institutions, ministries and supervisory agencies from twelve countries and two regional institutions (Benin, Côte d'Ivoire, Ghana, Ethiopia, Kenya, Liberia, Namibia, Nigeria, Rwanda, Senegal, Sierra Leone and Uganda) as well as representatives of regional the supervisory organizations in West Africa (CIPRES: Inter-African Confederation of Social Welfare, and CREPMF: Regional Council of Public Savings and Financial Markets).

Presentations can be accessed by clicking the speaker’s name. 

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Micro Pension Scheme: Ideal retirement plan for Nigeria’s informal sector workers

For every Nigerian in an employed or self-employed establishment, having accrued savings and pension contribution intact after retirement is their dream. But unfortunately, many have had their hopes and aspirations of living in comfort after working years dashed away.

The undeserving life after retirement has caused many to live in financial distress leading to depression, illness, hypertension and untimely death.

But to create succour for workers in the informal sector of high, low and middle-income, the government provided a Micro Pension Scheme that guarantees workers financial independence and quality life after retirement.

“We will ensure all hard working Nigerians in the private sector, both formal and informal, can retire without fear,” President Muhammadu Buhari said at the launch of Micro Pension Scheme in March 2019.

“We have already started on this journey. We must all come together to ensure these reforms are fully implemented and their positive impact is felt by the rightful beneficiaries.’’

Micro Pension Plan was established in accordance with the Provisions of Section 2(3), Pension Reform Act (PRA) 2014 of the National Pension Commission (PenCom). The pension plan is aimed at ensuring that members of the informal sector save towards old age as similarly done in India, Kenya and Ghana.

The pension plan is designed to expand the coverage of pension contributors by an estimated 30 million people by the year 2024. This category of workers constitutes a large percentage of the working population in the country.

To implement this initiative, PenCom segmented informal sector into three broad categories of low-income earners, high-income earners and the small and medium scale enterprises (SMEs).

Each of these categories will be targeted with appropriate pension products and sensitization programmes that meet their various peculiarities.

Since its launch, the plan has proven to be an indication that the Nigerin Government is committed to ensuring that Informal sector workers are also covered under the Contributory Pension Scheme (CPS).

Implementation of this plan is projected to reduce old age poverty drastically because the informal sector worker would have saved for retirement while active at work. This will aid economic development and macro-economic stability through investment in infrastructure and financial markets.

It will also enhance pension coverage and improve the Gross Domestic Product. And in case of contributor’s death, contributions will be passed to the next of kin.

PenCom expects that the implementation of the Micro Pension Plan will yield positive results for Nigerians and the Nigerian Pension Industry.

Without a doubt, the Micro Pension Plan, would improve the standard of living of the informal sector worker at retirement and reduce dependence on extended family for support after active work life.

informal sector retirement plan

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  • Regulations

Pay & Benefits

Federal employees cleared for 5.2% pay raise in 2024, biden signed the executive order on thursday..

informal sector retirement plan

Millions of federal employees will receive an average 5.2% pay raise effective January, thanks to an executive order issued by the President on Thursday.

It’s the largest base pay increase since the Carter administration nearly 40 years ago. The order finalized on Dec. 21 matches the pay proposal Joe Biden made in late August.

The across-the-board pay increase will be 4.7% and locality pay will average an additional 0.5%. Last year’s raise averaged 4.6%.

“This welcomed pay raise demonstrates an understanding of the value of these hard-working civil servants and the jobs they do, as well as displays the administration’s ongoing commitment to recruitment and retention of talented federal employees,” said William Shackelford, president of the National Active and Retired Federal Employees Association, in a statement.

Service members are also on track for a 5.2% pay raise in the 2024 National Defense Authorization Act, Military Times previously reported.

Despite the fact that federal agencies are still operating without a full budget, Biden’s order cements the pay raise for 2024. Unless Congress quibbles with Biden’s figure in another CR or in the Financial Services and General Government bill, the pay raise defers to the President’s authority.

However, if Congress misses its funding deadlines in January and February, the government again risks facing a shutdown, during which pay altogether could be halted for certain employees.

informal sector retirement plan

How do government shutdowns affect federal employee pay raises?

President biden’s proposed pay raise included an across-the-board base pay increase of 4.1% and a locality pay average increase of 0.5%..

The president has authority to circumvent the rate set by the Pay Agent, which includes the directors of the White House Office of Management and Budget and Office of Personnel Management, as well as the secretary of labor.

It has become routine for the President to propose annual pay raises for the 2.2 million federal civilian employees who work across hundreds of offices and agencies. Technically, if the president does nothing, automatic pay raises would kick in under the Federal Employees Pay Comparability Act of 1990 .

However, FEPCA has never fully been been adopted as it was intended 1994, meaning increases have typically been less than recommended, according to the Government Accountability Office.

That’s become a sticking point for employee advocates and unions, who say the pay gap between the public and private sector has worsened. Civil servants earned an average of 27% less than their private sector counterparts in similar occupations this year.

informal sector retirement plan

Why do federal pay raises lag the private sector?

The federal budget proposal unveiled by the white house in march included an average pay increase of 4.6% for civilian federal workers, matching a planned military pay raise. historically, with pay lagging in the federal sector, other factors including steady opportunities, competitive benefits and hybrid work to retain talent..

Legislation was also proposed this year to bring the total pay raise up to 8.7% to counteract lingering impacts of inflation, but it has not passed.

In the meantime, the next step is for OPM to issue updated pay tables. The 2024 pay tables have been published on OPM’s website, and can be viewed here.

Because the pay bump is an average, some employees might see slightly higher or lower raises depending on their locality. There are more than 50 localities, according to OPM.

Additionally, OPM established four new locality pay areas for 2024 and expands certain others, meaning some employees may see larger increases under those new regulations.

Molly Weisner is a staff reporter for Federal Times where she covers labor, policy and contracting pertaining to the government workforce. She made previous stops at USA Today and McClatchy as a digital producer, and worked at The New York Times as a copy editor. Molly majored in journalism at the University of North Carolina at Chapel Hill.

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social security | informal sector | poverty | retirement plan | social insurance | social assistance

Social Security Fund Explained! - Part I

The social security fund (ssf) schemes were finally introduced with a bang in 2018, despite a chequered progress on its implementation, with initial focus on covering private sector workers but participation in the fund has remained low so far. the fund now covers 389,258 workers and is set to be expanded to informal sector and migrant workers, including self-employed. but what does the concept of social security mean and what will the fund do.

Imagine that around 83% of Nepalis don’t have any old-age protection and can’t afford increasing costs of health bills. When incidences of unemployment occur (remember the times of Covid or the earthquake), there is no security to fall back upon. What if work injury leaves workers to lose jobs, or even out of profession. What about the dependent family members? How will the vulnerable groups cope when things go wrong?

For working-class Nepalis, socio-economic uncertainties have remained a reality due to recurring economic shocks and prolonged political turmoil against the backdrop of weak economic capacity of the state. With a well-thought out and a comprehensive social security system in place, many Nepalis can breathe a sigh of relief about the future.

A brief history The idea that weaker and vulnerable sections of the society need support has existed since time immemorial, with all religions promoting and mandating charity works. For instance, the Hindu and Buddhist religions practised basic social services by providing alms and philanthropic health and education services.

The modern social security scheme has roots in Germany which introduced an old-age social insurance program in 1889, designed by Otto Von Bismarck. In 1935, the US President Roosevelt passed the Social Security Act while the British Prime Minister Churchill introduced the policy for social security for all in the 1940s, based on Beveridge Plan to provide security for all classes for all purposes from the cradle to the grave. 

In Nepal, the Nepal Army introduced ‘ Sainik Drabya Kosh ’ in 1934 — considered as the first recorded social security initiative — which was a contribution-based provident fund scheme for its retired soldiers. 

A similar scheme was introduced in 1944 for Kathmandu-based civil servants known as ‘ Nijamati Sanchaya Kosh ’ (Civil Provident Fund), which was extended to civil employees throughout the country in 1948. 

All schemes were consolidated through reforms in 1962 after the enactment of ‘Employees Provident Fund Act’ which led to the formation of an autonomous body to manage the provident fund known as Employees Provident Fund (the EPF) — which started catering to the retirement needs of the formal sector workers based on employee-employer contribution model.

In 1991, a new autonomous pension body was set up — Citizens Investment Trust (CIT), which was modelled on employee contribution.

In 1994, Prime Minister Man Mohan Adhikari introduced a provision of Rs 100 as allowances for elderly (above 75 years of age), single women and disabled persons — considered as Nepal's first social assistance program, which was later expanded to disadvantaged tribes in 2009.

So what is social security... By definition , social security is any form of policies, regulations, and programs that provide a citizen with a safety net when they are faced with unforeseen financial circumstances such as old-age, survivorship, incapacity, unemployment, and childrearing.

For simplification, it is different forms of support intervention, usually financial, that protects against socio-economic risks and uncertainties, and mainly encompass the following two type of interventions:

i) social insurance programs implemented through mandatory and/or voluntary employment-related social security contributory schemes that provide financial support only to contributors (for instance, the recently introduced contribution-based Social Security Fund (SSF) schemes or most pension systems), and 

ii) social assistance programs  funded through taxation that provide need-based support in the form of cash, kind, subsidies or free services to the most vulnerable individuals without any dependable income source (for instance, senior citizen/old age allowances, single women allowance, disability allowance, unemployment benefits, free primary healthcare and basic education, scholarships for targeted groups, cash transfers to disaster and conflict victims etc).

Understanding the contribution-based Social Security Fund (SSF) Mandated by the 1990 Constitution as a state responsibility, social security was ensured as a fundamental right by the 2006 Interim Constitution, and then by the 2015 constitution through Article 43. 

In line with these mandates, the government started the collection of 1% social security tax in 2009 with plans to develop a contributory-based social security fund, developed regulations for it in 2010, and established the Social Security Fund (SSF), a dedicated autonomous government agency in 2011 to formulate and implement contribution-based social security schemes for the working class — formal sector workers at first and the rest of the working class in due course.

But it failed to design benefit schemes until 2018 leaving the 1% tax as a general revenue stream for the government. 

The contribution-based Social Security Act was enacted in 2017 and the SSF finally came into effect in November 2018 during the prime ministership of KP Sharma Oli, who very well knew its political importance if not economic as full page ads ran in newspapers along with street sign boards clad with the prime minister’s photo. 

When introduced, the fund rolled out four schemes under its umbrella — i) medical treatment, health protection and maternity plan; ii) accidents and disability plan; iii) dependent family plan; and iv) old-age security plan (see chart below).

Four social security schemes rolled out by the government under the SSF

The fund has registered 389,258 contributors and 17,612 employers, collecting a fund of Rs 28.58 billion so far (by mid-Jan 2023). It has made a claim payment of Rs 3.24 billion, around 11.5% of the collected fund. 

11.4% of the total payments of the total compensation are made for claims relating to scheme 1; 1.4% for claims relating to scheme 2; 1.8% for scheme 3 and 85.4% for scheme 4.

How is the SSF financed and what benefits does it cover The SSF is an entirely contribution-based scheme for formal sector workers. 

31% of the employee's basic salary, where workers contribute 11% and their employer contributes 20%, is deposited at their respective SSF accounts. The contributed money is absorbed by different four schemes at different proportions where the retirement plan covers the largest chunk (28.33%).

Table 1: Scheme-wise distribution of contribution fund

Old Age Protection Plan The old-age protection scheme helps workers secure a post-retirement life through its two sub-schemes, (a) Pension and (b) Retirement (Gratuity) allowing contributors to get a monthly pension as well as the accumulated gratuity savings at any time.

Under the pension sub-scheme, contributors will have to contribute to the fund for at least 15 years and shall receive a monthly pension after the completion of 60 years of age. In case of death of the pensioner, the spouse will get 50% of the pension amount.

Under the retirement sub-scheme, the contributor will receive accumulated savings plus returns and interest thereon, payable in one lump sum.

Medical Treatment, Health and Maternity Plan This scheme reimburses a maximum claim amount of Rs 25,000 for OPD treatment and Rs 100,000 for IPD treatment. 

Within the maternity scheme, it provides a maximum claim amount of Rs 100,000 for medical expenses incurred during pregnancy for up to six weeks of childbirth and one month minimum salary as ‘Newly born child care allowance’ for every child born. There are also provisions of maternity leave allowance and sick leave allowance. 

To benefit from this scheme, three months of contribution is required. For the maternity sub-scheme, the required contributory period is 12 months within a period of 18 months.

Accident and Disability Plan Contributors can benefit from unlimited treatment coverage against employment related accidents (medical expenses) from the first day of contribution while at least two years contribution is required for treatment coverage against occupational diseases, which will also cover all the expenses. For accidents outside the workplace, the maximum amount of coverage is Rs 700,000.

In the event of disability in any case, the contributors shall receive:

  • monthly allowance of 60% of last basic salary till return to work for temporary disability
  • lifetime monthly allowance of 60% of their last basic salary times the % disability (based on disability category) for permanent disability
  • lifetime monthly allowance of 60% of their last basic salary for permanent total disability

Dependent Family Plan In case of the worker’s death, the dependent/family shall be entitled to (a) allowance for dependent spouse (b) education allowance for the dependent children and (c) allowance for dependent parents and (d) funeral expenses.

The spouse will receive a lifetime monthly allowance equivalent to 60% of the contributor's last basic salary while the deceased worker’s children will receive 40% of the basic salary (for up to 2 children on pro rata basis) as educational support until the age of 18. For deceased workers who do not have any spouse or children, their dependent parents will get 60% of their monthly salary as pension on prorata basis.

The family will also get lumpsum amount of Rs 25,000 as funeral expenses.

What loan facilities exist with the SSF Through SSF, contributors can avail different loans at nominal interest rates for i) housing, ii) education iii) social functions and iv) special borrowing.

Under the credit facilities, a contributor can access a total credit facility of up to (a) salary of 15 years, or (b) salary for the period until the contributor completes the age of 60, or (c) up to Rs 10 million whichever is less, but they will have to present collateral.

Without collateral, contributors can borrow up to 80% of their deposits.

However, there are limits to borrowing — Rs 3.5 million for education (for contributors themselves or family members); Rs 7.5 million for housing (purchase residential building or renovation) and Rs 500,000 for social functions such as weddings.

Eligibility requires at least 36 months of regular contribution to the fund and at least two years before retiring based on the maximum age for service. 36 months of regular contribution is not applicable for loans swapped from another approved retirement fund.

As for the nature and scope of the special borrowing, the SSF is yet to provide clarity.

How will the SSF mobilise the pooled fund While the primary objective of social security programs like SSF is to achieve desirable social goals, the pooled fund can also serve as a source for development financing in the future. 

So far, Nepal lacks large institutional funds, and SSF can fill that gap with the inclusion of compulsory savings from informal sector and migrant workers. The SSF has already pooled a fund of Rs 28.58 billion, and is growing. The pooled funds can be mobilised to fund financially feasible large-scale development and infrastructure projects to financing SMEs.

For the moment, the government has designed a guideline identifying areas for fund mobilisation.

First, loans to contributors which will provide different loans to contributors based on their needs (as explained above). Second, deposits into fixed deposits and long-term deposit schemes of commercial banks. Third, investment into debentures issued by the government and banks. Fourth, investment in equities, stock market and mutual funds. Fifth, investment into fixed assets.

What about the security of informal workers, self-employed and migrant workers? In a laudable step towards expanding the social safety net — SSF has now introduced two guidelines covering the informal sector workers, self-employed and migrant workers, which until now only covers the private sector workers. 

Informal sector accounts for around 62% of the total employment in the country, according to the Nepal Labor Force Survey 2018 and employment in foreign countries constitute the largest source of employment for the country.

The guidelines have set down different contribution rates for different employment and will come into effect from 10th March for migrant workers, and 14th April for the informal sector workers.

Table 2: Contribution plan of the informal sector workers and migrant workers, inlcuding the self-employed, along with scheme-wise distribution of the contribution fund | *21.33% of the basic salary fixed by the Nepal government for domestic industrial workers. Migrant workers and self-employed workers abroad aren’t eligible for the scheme 1 |  **N/A=Not Applicable

For informal sector workers, the government will chip in a 9.37% contribution of the basic salary, while migrant workers and self-employed abroad can contribute three times their basic salary. 

When compared to the formal sector workers and even within the worker’s category under the new guidelines, there are certain differences in the extent of coverage. 

For instance, in case of accident and injury, the fund will cover up to Rs 700,000 of the medical expenses for informal sector workers and self-employed individuals in the country which is capped at Rs 100,000 for the migrant workers and self-employed individuals abroad.

Similarly, the dependent spouse will receive a lifetime monthly allowance equivalent to 40% of the contributor's last basic salary applicable for all the workers category under the new guidelines. This is 60% in the case of the formal sector.

-----------------------------------------------------------------------------------------------

To our readers : In our next part, we will analyse the challenges to implementing the SSF

Rima Sah is a researcher/writer at the_farsight. She is a graduate in Sociology from South Asian University.

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    In such a context, Joubert wanted to know whether a voluntary pension scheme targeted to the informal sector might meet the needs of an aging population—particularly the non-poor households in the informal sector. Drawing on data from eight surveys conducted over 18 years, Joubert found that Pakistani households are already accumulating ...

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  17. Pensions regulator plans retirement scheme for informal sector workers

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  18. Pension Insight: The micro pension plan's impact on Nigeria's informal

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  19. Pension coverage: Micro pension's impact on informal sector (Part 1

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  20. Extending Pension Coverage to Informal Sector Workers in Africa

    Informality poses some distinctive issues in providing retirement income that cannot be addressed merely by extending conventional pension systems to these workers. Different solutions are needed to tackle the unique characteristics of this group. Informal sector is heterogenous.

  21. Micro Pension Scheme: Ideal retirement plan for Nigeria's informal

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  24. Social Security Fund Explained!

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  25. Pension Insight: The micro pension plan's impact on Nigeria's informal

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