Empirical Analysis of the Adequacy of the Pension System in Mainland Tanzania

Abstract

This study assesses the adequacy of the pension system in Tanzania by using membership data of pension schemes. The analysis, which is based on the life cycle hypothesis, includes an assessment of pension system adequacy by using replacement rate, coverage rate, catchment rate, and demographic rates. The results of the study reveal several things. First, replacement rate is 29 percent, far below the international minimum standards of 40 percent due to generous commutation factors, and commutation being inversely related to monthly pension. Second, the lack of indexation diminishes adequacy of benefits. Third, actual contribution rate is 15 percent, lower than the statutory contribution rate of 20 percent of salary, which could lead to low density of contribution and cause depletion of assets by 2022 if no action is taken. Fourth, inadequacy of benefits was found to be caused by low catchment rate, which was found to be positively correlated with benefits payment. Fifth, the analysis establishes that the demographic structure would support increase in coverage of membership should the government institute appropriate policies.