ADDRESSING THE PENSION NEEDS OF THE INFORMAL SECTOR WORKER: THE CASE OF GHANA

Abstract

The informal sector in Ghana has been steadily expanding since the colonial era, currently encompassing approximately 90 percent of the country’s workforce. Despite its substantial labor force, this sector grapples with numerous challenges. Foremost among these challenges is the absence of a pension system for its workers. In this study, we propose an inclusive pension scheme designed not only to be appealing to those in the informal sector but also to encompass all its workers. The core concept of this model hinges on the cooperative contributions of both the government and the sector’s workforce. Government involvement is envisioned to serve as both an incentive and a means to ensure robust participation from the sector employees. Additionally, our proposal advocates for the engagement of religious institutions, given the deeply ingrained religiosity of Ghanaians. This approach capitalizes on the likelihood that people are more inclined to heed the counsel of their religious leaders than directives from the government or its agencies. Under the framework we’ve put forward, our calculations indicate that the annual cost to the government for implementing this scheme, assuming that workers in the sector are compensated at the minimum wage, would be GHS17, 323,713,655.92 ($1,506,409,883.12) . Alternatively, if we assume that all workers in the informal sector receive the average wage, the projected cost would be GHS17, 999,536,054.12 ($1,565,177,048.18). These financial figures should not place an insurmountable burden on the government’s finances, especially when considering the vital role that a pension system plays in alleviating old-age poverty. Furthermore, our findings reveal that older workers require larger contributions to adequately fund their retirement benefits due to the shorter period available for accruing savings. Additionally, the study identifies a positive correlation between interest rates and retirement benefits. While an inverse relationship between retirement benefits and mortality rates was detected, its important to note that this influence is relatively weak, with mortality having a less significant impact on retirement benefits.