Parliament must reject tax on pension

The idea of taxing the income and pensions of retirees is a poignant illustration of the arrogance of power by mandarins who design and craft tax policy. Arrogance and bureaucratic hubris is why amendments to the tax code can be introduced without considering public views even when independent experts and media raise the red flag and complain that the proposed tax changes point to manifest disaster. It is why representations by stakeholders complaining about tax amendments are often summarily dismissed by self-absorbed mandarins who are inclined to treat every suggestion that they don’t’ agree with as ranting by vested interests.

I make these general remarks as an entry point to a discussion on the manner in which the Treasury has handled the tax exempt status of retirees’ incomes.

In April, the Treasury introduced amendments in which it sought to remove tax exemption status on the following: First, investment income of retirement schemes; second, investment income of the National Social Security Fund (NSSF); and thirdly, pension benefits for citizens above 65 years.

As it turned out, these proposals were shot down by the National Assembly’s Finance Committee after receiving cogent arguments and representations by stakeholders in the retirement benefits industry, including the Retirement Benefits Authority. But the unelected mandarins at the Treasury had other plans. In a telling display of arrogance, they decided to hit back by publishing the same maddening amendments in the just published Finance Bill 2020. The proposals in the new Bill are as follows: First, remove the tax exemption status of the NSSF; secondly, remove tax exemptions on retirees above 65 years of age; and thirdly, remove exemptions on overtime and retirement benefits for Kenyans earning the minimum wage.

Why would someone want to introduce changes that are blatantly discriminatory to the NSSF, which is the most important retirement scheme with the largest number of members in the country? The NSSF is owned by contributors who expect a return on their investment in the fund when they retire. Why does the taxman want to breach expectations of members in such a brazen manner? And, why bring back the amendments even after they were struck out byMPs? We have clearly reached the danger point when tax changes are entirely made by bureaucrats.

I think that these annoying amendments were reintroduced in the Finance Bill 2020 because the bureaucrats are counting on exploiting the party whip system in the National Assembly, especially following realignments that have created a huge majority for the government in the House.

Parliament must kill these amendments in the name of protecting the interests of pensioners and retirees in this country. Workers who retire in Kenya are condemned to abject poverty because the pensions paid to the majority are woefully small to provide for their livelihoods.

Why is the taxman attempting to add insult to injury? We live in a society where the majority of retirees are without a secure and reliable source of retirement income, where contributions to pension schemes are not aligned and have no bearing on old-age income and where pensions are not indexed to inflation.

Most pension schemes are unable to guarantee a retiree even one tenth of the income that they used to earn when he was in employment. The worst affected by the misery of low pension benefits are public service retirees, former civil servants and teachers.

In terms of ability to provide adequate old-age income, the NSSF which is a mandatory scheme performs very poorly. The lump sums it pays to retiring workers can hardly replace pre-retirement income. Why is this so? Low ceilings on monthly contributions is a big factor.

The high cost of administration of the fund is also a major contributing factor. The dismally low returns the fund earns on its investment portfolio causes a situation whereby very little is apportioned to members’ accounts.

What a worker gets from the NSSF as retirement income is a lump sum that can hardly last 12 months if one is to retain their pre-retirement standard of living.Clearly, the majority of Kenyan retirees are doomed to poverty. That the government would want to saddle them with more taxes is indeed baffling.

You are taxed for all those years you have been working only for the government to insist in the eleventh hour that you must pay taxes on what you have been saving all those years.

What the government is proposing amounts to double taxation. Parliament must move quickly to jettison the amendments.