Effect of inflation on adequacy of pension benefits in Rwanda

Abstract

The broad objective of this study was to examine the effect of inflation on adequacy of pension benefits in Rwanda and recommend suitable measures that could be taken to improve pension scheme in Rwanda. The study employed the data sourced from Rwanda social security Board (RSSB). Data were for pensioners retired in 2002 and reported to receive pension benefits till 2016/2017. Additional data on inflation covering the period 2002-2016 were sourced from Rwanda National Bank publications. Fixed effect model was used to analyse panel data. Future value was applied to assess the value of pension benefits each year for fifteen years in retirement and the adequacy was measured using replacement rate which is the pension benefits expressed as percentage of income in active period. The results indicate that the inflation declines the value of pension benefits progressively hence affects its adequacy. Consequently, as the period in retirement increases, the value of pension benefits deteriorates and this leads to poverty during retirement. The findings also show that income before retirement is an important and major factor that determines the income in retirement. The pension benefits at the entry point in retirement respond to the international standard as given by ILO, however benefits are insufficient as they are calculated based on low salaries. As per results, the study recommends the indexation of pension benefits based on inflation rate or shortening the period for the ad hoc adjustments to every five years. Moreover, the study recommends the employers to increase the salaries of their employees to guarantee sufficient income in retirement