Social Security Fund investments to drive Rwanda out of poverty

Before venturing into the intricacies of Social Security Fund of Rwanda (SSFR) investments and associated economic implications, it is necessary at this stage to highlight the mandate of the Pension Fund.

Before venturing into the intricacies of Social Security Fund of Rwanda (SSFR) investments and associated economic implications, it is necessary at this stage to highlight the mandate of the Pension Fund.

The three principle functions of the fund include collecting social security contributions, paying benefits to retirees and productively investing any excess funds.

There are a number of factors that have to be observed when investing social security funds but for SSFR, before effecting any investment, the question that is considered first is ‘what value does the planned investment project add to the socio-economic life of Rwandans?’

This article seeks to expound on the rationale of using the above-stated question as an important investment selection criterion.  The theoretical underpinnings of this rationale are purely macroeconomic and are empirically tested using econometric principles.

Before statistically illustrating the reason why SSFR is currently giving a lot of attention to the socio-economic projects, it is important to briefly highlight the macroeconomics involved.

According to the macro-economic theory, increase in incomes results into increase in demand, increase in demand in turn leads to increase in investment and production and this translates into general economic progress.

The increase in investment and production culminates into creation of employment opportunities and more incomes.

A number of interpretations can be made but what is clear is that when there is economic growth, represented by GDP which is the godfather of indicator world, there is increase in the level of economic activities, this generates incomes and the level of aggregate demand goes up attracting investments which further boosts economic growth.

The major reason why SSFR has directed attention to investments in socio-economic projects is to fundamentally contribute to the realisation of the vision of the Ministry of Finance and Economic Planning of developing Rwanda into a country free of poverty.

In light of this noble goal of rendering a visible hand in the economic transformation of our country, SSFR in its investment agenda targets projects that are value adding, hence directly promoting economic growth.

Economically speaking, by contributing to economic growth, SSFR does not only expect an increase in the standards of living manifested by the general increase in the volume of goods and services but is also interested in improving contribution collection, one of its primary functions.

One may be puzzled by the question how economic growth leads to increase in social security contributions. The answer is the statistical presentation of the relationship between economic growth and social security contributions shown hereunder.

The statistical relationship between economic growth and contributions to SSFR

As highlighted earlier, SSFR is now focusing on projects with socio-economic character. This new approach has emanated from the empirically tested positive relationship between economic growth and contributions to the Fund.

After running a simple linear regression model, it was proved beyond any doubt that economic growth strongly influences contributions.

 

The model specification:
1)  CTt = a0 + a1GDPt + εt
Where;
CTt is the contributions received at time‘t’,  a0 is the constant value implying that SSFR will receive contributions equivalent to ‘a0’ assuming other factors are kept at zero,
GDPt stands for Gross Domestic Product at time‘t’,
a1 is the coefficient showing increase in  contributions that  result from a unit change in  GDP.

After running the model using the Econometric E-views software, the results are shown below

2)  RESULTS OF THE MODEL

3) Estimating the model
Based on the model results,
CT= -1. 48 + 0.008 GDP
R2 = 95.2%,   R-2 =94.9%,  a0 = -1.14 and   a1= 0.008.

4) Interpretation of results

i) R2 = 95%: In Econometrics, R2 is the coefficient of determination which represents the variability in the dependent variable (CT) that is explained by the independent variable (GDP). In econometric parlance, it is the ratio of the explained variability to the total variability in the dependent variable. It is one of the indicators on which statisticians rely to establish whether the model is good for forecasting purposes. Based on this indicator, the model is good as 95 per cent of the variation in the social security contributions is brought about by the variation in GDP, an indicator of economic growth.

From this coefficient of determination, it can also be noted that ONLY 5 per cent of the variation in the dependent variable (social security contributions) is explained by other qualitative factors like employer compliance.

ii) a1 = 0.008: The value of this regression coefficient means that when GDP increases by one unit, contributions increase by 0.008 units. It is now possible to forecast the value of CT (contributions) if we know the projected values of GDP. For instance, the projected GDP for 2008 is Frw 2 160 bn, the forecast for SSFR contribution collection is computed as shown below:

CT= -1.48 + 0.008 * 2 160 = 15.8 bn Frw.
This simple linear regression model can be used by SSFR in making projections for the contributions to be collected basing on the GDP projections computed by the Ministry of Finance and Economic Planning.

iii) a0 = - 1.48:  literally, this is interpreted to mean that estimated contributions are -1.48 bn when GDP is zero.

This represents an extrapolated value that has no practical meaning in this particular model.

Based on our model, there is enough evidence to justify why SSFR is currently targeting socio-economic projects.

The reasoning is simple, when the Fund invests in value adding projects, it promotes economic growth and as shown above, when GDP increases, the social security contributions also increase.

In labour economics, economic growth can influence social security contributions in two major ways:

i) Firstly, increase in economic growth, in most cases, results into adjustments in wages hence increasing the social security contributions. However this practice is not common in developing countries.

ii) The second and probably the most important concerns the expansion of firms and the creation of new ones emanating from economic growth.

The creation of jobs results into more salaried workers hence increasing social security contributions. This is the reason why SSFR is prioritising socio-economic projects in its investment plan.

In summary, SSFR contributes to economic growth through investing in socio-economic projects and in turn this boosts the performance of the Fund by creating jobs that result into an increase in Social Security Contributions.

This is one way how Social Security Fund of Rwanda is contributing to the realisation of the vision of the Ministry of Finance and Economic Planning of developing Rwanda into a country free of poverty.

Source, Department of Planning, Research and Statistics, SSFR

 

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