RSSB Contribution Hike: A Labor Economist's Perspective on Implications for Employees

In January 2025, the Rwanda Social Security Board (RSSB) plans to increase pension contributions from 6% to 12%, with an ultimate goal of 20% by 2030. While this is a significant step towards enhancing the national pension system, it has raised concerns among employees, particularly due to the low salary levels that many Rwandans currently face.

As of 2024, the average salary in Rwanda is around 225,000 Rwandan Francs per month, or approximately $ 200. However, many employees earn much less, with the minimum wage set at just 100 Rwandan Francs per day (about $0.10). This disparity is a critical factor when considering the implications of increasing pension contributions. For example, if a worker’s salary is low, the increased deduction could significantly affect their disposable income, further deepening the financial strain on families and limiting their ability to save or invest.

Moreover, the basic salary law in Rwanda, which still refers to the 1974 guidelines, has not been updated to match the rising costs of living or inflation. This has resulted in a situation where salary increases do not keep up with real-world economic conditions, exacerbating the financial burden that employees may face as pension contributions rise.

This blog critically analyzes these changes using a labor economics framework, highlighting their potential impact on employees’ welfare and the broader labor market.

Understanding the Proposed Change in Contributions

Currently, the 6% contribution is equally split between employers and employees, with each contributing 3% of the gross salary. By January 2025, employees will see their share double to 6%, with the same increase for employers. By 2030, the share will rise further to 10% each.

While this change may enhance future pensions, it directly reduces employees' disposable income today, creating short-term financial stress in an environment where wage growth has been sluggish.

A Practical Example: Impact on a Worker Earning RWF 200,000

Current Scenario (6%):

• Employee’s contribution: 3% of RWF 200,000 = RWF 6,000
• Take-home salary: RWF 194,000

2025 Scenario (12%)

• Employee’s contribution: 6% of RWF 200,000 = RWF 12,000
• Take-home salary: RWF 188,000

2030 Scenario (20%):

• Employee’s contribution: 10% of RWF 200,000 = RWF 20,000
• Take-home salary: RWF 180,000

The reduction in take-home pay amounts to RWF 14,000 per month by 2030, representing a 7% decrease in disposable income, assuming no salary increase. For low- and middle-income earners, this cut could significantly affect their ability to meet basic needs, save, or invest in personal development.

Economic Implications for Workers

1. Decreased Disposable Income

Reducing take-home pay without adjusting wages erodes purchasing power. In an economy where inflation is already a concern, employees may struggle to maintain their standard of living, leading to higher financial stress.

2. Labor Market Distortions

From a labor economics perspective, increased mandatory contributions act as a form of taxation on labor. Employers may respond by:

• Reducing hiring to manage higher payroll costs.
• Shifting toward temporary or contract-based employment to avoid long-term liabilities.

3. Disincentive for Workforce Participation

For low-income earners, especially those near the outdated RWF 100 basic salary threshold, the increased deductions may discourage formal employment. This could push more workers into the informal sector, where social security contributions are often neglected.

Policy Gaps: The 1974 Basic Salary Law

The basic salary threshold of RWF 100, established under the 1974 labor law, is anachronistic in today’s economic context. A law intended to protect workers now undermines them by failing to adapt to inflation and economic growth.

Comparison with Current Realities:

• In 1974, RWF 100 might have represented a meaningful amount. Today, it is negligible and irrelevant in determining wage policies or contributions.
• Other countries regularly adjust minimum wages or basic salary thresholds to ensure they remain aligned with living standards. Rwanda’s failure to do so exacerbates wage stagnation.

The Way Forward: Balancing Social Security and Employee Welfare

To ensure the success of RSSB’s reforms without harming workers, several actions must be prioritized:

1. Revise the Basic Salary Threshold

The government must update the 1974 law to reflect modern realities, setting a realistic minimum salary benchmark to protect employees from disproportionate deductions.

2. Implement Gradual Contribution Increases

Instead of doubling contributions overnight, a phased approach could ease the financial burden on employees and employers. For example:

• Increase to 8% in 2025, 10% in 2027, and 12% by 2030.

3. Encourage Wage Growth

Social security contributions should be paired with efforts to increase wages, either through legislation (minimum wage adjustment) or incentives for employers to offer competitive salaries.

4. Provide Financial Education

RSSB and employers should educate workers about the long-term benefits of increased contributions to mitigate resistance and ensure compliance.

5. Strengthen Informal Sector Coverage

Given the risk of workers moving to the informal sector, efforts should be made to extend social security coverage to informal workers through innovative schemes like micro-pension plans.

Conclusion: A Call for Equitable Reform

The increase in pension contributions by RSSB is a necessary step toward securing the future of Rwanda’s retirees. However, reforms must be balanced with immediate employee welfare. Without addressing stagnant wages and outdated salary thresholds, these changes risk overburdening workers and destabilizing the labor market.

It is imperative for policymakers to adopt a holistic approach that aligns social security contributions with broader labor market reforms. By doing so, Rwanda can achieve its goals of enhanced social protection without compromising the livelihoods of its workforce.

By Donald Masimbi