Pension Reforms Must Go Beyond COLA: The Question of Fairness in Pension Computation

One question pensioners frequently ask in discussions about pension reforms is both simple and profound: “If my pension is calculated based on my best three years, what happens to the contributions I made during the other thirty or forty years of my working life?” This question goes to the heart of fairness, sustainability, and integrity in pension administration.

In recent years, pension reform debates in Ghana have largely focused on inflation, delayed indexation, inadequate pension payments, and calls for Cost of Living Allowances (COLA). While these concerns are legitimate, there is another important issue that deserves national discussion: whether the pension computation formula itself is fair to contributors.

The “Best Three Years” Debate

Under traditional pension computation models, pension benefits are heavily influenced by a worker’s highest earning years, often referred to as the “best three years.” The rationale behind this system is understandable. Pension schemes are expected to help retirees maintain a standard of living similar to what they enjoyed before retirement. Consequently, higher final salaries tend to produce higher pension benefits. However, this system also creates questions of equity.

Consider the following scenarios.

• Scenario One: Ms. Atsu worked for 20 years. For 17 years, she earned GH¢1,000 monthly while improving herself academically and professionally. In her final 3 years, she secured a higher-paying position earning GH¢3,500 monthly. Over the 20-year period, her estimated total pension contributions amount to approximately GH¢330,000.
• Scenario Two: Mr. Kala also worked for 20 years. Throughout the entire period, he consistently earned GH¢2,500 monthly. His estimated total pension contributions amount to approximately GH¢600,000.

Yet, because pension calculations may emphasize the “best three years,” Ms. Atsu could end up receiving a pension similar to, or even higher than Mr. Kala’s. This naturally raises concerns. How does someone who contributed substantially less over a lifetime receive nearly the same retirement benefit as someone who contributed far more consistently? Where then lies the fairness?

Understanding the Philosophy behind Pension Schemes

To understand the issue, one must appreciate that most public pension schemes are not ordinary savings accounts. They operate largely as social insurance systems. Under social insurance current workers help fund current retirees. Benefits are determined by formulas rather than exact individual balances. Redistribution and social protection are built into the system. This means pension benefits are not always directly proportional to lifetime contributions.

Supporters of this approach argue that pensions should prevent poverty among retirees, workers deserve retirement dignity, and higher salaries toward retirement often reflect greater responsibility and experience. These arguments have merit. However, pension systems must also maintain public confidence. Contributors must feel the system rewards fairness, consistency, and long-term sacrifice.

The Risk of Manipulation
One major criticism of “best three years” systems worldwide is that they can encourage manipulation. Employees nearing retirement may lobby for politically motivated promotions, seek inflated salary adjustments, negotiate special allowances, or be strategically repositioned into high-paying roles shortly before retirement. In some countries, this practice became so widespread that pension systems experienced severe financial strain. The result is that pension liabilities rise rapidly, contributors lose trust, and younger workers begin questioning the value of long-term contributions. A pension system should never create incentives for short-term salary engineering at the expense of lifetime contributors.

What Happens in Other Countries?
Many countries have already recognized these challenges and reformed their pension computation systems.

• Career-Average Earnings Systems: Countries such as Sweden and parts of Canada use career-average earnings models. Under this system pensions are based on average earnings over the worker’s entire career, and adjusted for inflation and economic changes. This ensures consistent contributors are rewarded fairly, manipulation becomes difficult, and pensions better reflect total contribution history.
• Lifetime Contribution Models: Some European countries use contribution-based point systems or notional defined contribution systems. In these systems every year of contribution counts, every contribution matters, and pension benefits are more directly linked to total lifetime contributions. This improves transparency and public confidence.
• Hybrid Systems: Other countries combine minimum social protection guarantees with contribution-sensitive pension calculations. This helps protect low-income workers while maintaining fairness to those who contribute more over time.

Ghana Must Pursue Holistic Pension Reforms

The current pension reform conversation in Ghana must therefore go beyond demands for pension increases and COLA. It must examine pension computation formulas, sustainability, fairness, transparency, and incentives within the system.

A holistic reform agenda could include using career-average salaries instead of only the best three years, extending the averaging period to the best 10 or 15 years, introducing stronger actuarial balancing mechanisms, preventing politically induced salary distortions, and improving transparency in pension calculations. Such reforms would ensure that contributors who pay more over decades are treated fairly, manipulation opportunities are reduced, and the pension system remains financially sustainable.

Balancing Social Justice and Fairness

It is important to acknowledge that pension systems are not purely mathematical exercises. They are also instruments of social protection. A fair pension system must balance protection for low-income retirees, dignity in old age, sustainability, and equity among contributors. But fairness must remain central.

A worker who contributes consistently for forty years should not feel disadvantaged compared to someone whose salary spikes only at the end of service. When contributors begin to perceive injustice, trust in the pension system weakens.

My Thoughts: Pension Reforms Must Address Structural Fairness

As pensioners continue advocating reforms, the national conversation must evolve from temporary relief measures to structural reforms. The real issue is not merely whether pensions are increased periodically. The deeper issue is whether the computation system itself reflects fairness, transparency, and long-term contribution realities.

Ghana must therefore ask difficult but necessary questions:

1. Should pensions reward lifetime contributions more strongly?
2. Should short-term salary spikes determine retirement income?
3. How do we protect the pension fund from manipulation?
4. How do we ensure sustainability for future generations?

These are the questions policymakers, SSNIT, labour unions, pension experts, and contributors themselves must confront honestly. Pension reform must not only be compassionate. It must also be fair.

NOTE: My writing on pension issues is fueled by a steady stream of questions from pensioners themselves. Their lived experiences form the core themes of my work. While I am glad to champion their concerns for now, what they truly need is formal institutional support. When a Pensions Ombudsman is finally appointed, or when SSNIT establishes an effective operational helpline, these pensioners will have the official recourse they deserve, and I will gladly let them off my hook. For now, I remain committed to writing on their behalf and amplifying their concerns.

FUSEINI ABDULAI BRAIMAH
+233550558008 / +233208282575
afusb55@gmail.com

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