Workers' shrinking payslips add to pain of cost of living

Real earnings (purchasing power) have been declining since 2020. [iStockphoto]

Kenyan employees find themselves grappling with a multitude of financial challenges as the country's inflation rate has risen by a significant 8.5 per cent in the past year.

This surge in inflation has driven up the cost of living, causing distress across all sectors of society. The 2023 Economic Survey shows that real earnings (purchasing power) have been declining since 2020.

As individuals attempt to stretch their income to meet the increasing cost of basic commodities, there is a looming concern that increasing government deductions are thwarting these efforts and driving many employees into financial ruin.

One deduction that has already taken effect is the National Social Security Fund (NSSF) deduction of six per cent, which will significantly employees' take-home pay.

The NSSF contributions have changed, with the deductions now being based on lower and higher earning limits.

The lower earnings limit is prescribed as the average minimum monthly basic wage while the upper earnings limit is the level of earnings equal to four times the national average earnings.

The pension contribution is currently set at 12 per cent of pensionable wages, divided equally between the employee and employer. However, for those earning above Sh18,000, there is an upper limit of Sh2,160 for monthly deductions.

The NSSF contribution has two tiers of contribution. Tier I fund for pensionable earnings up to the lower earnings limit and tier II fund for earnings above the lower earnings limit.

Employers are allowed to opt out of the tier II contributions and channel their contributions to private pension schemes but must retain tier I contributions with NSSF.

It is important to note that the NSSF deduction is subject to annual changes based on alterations in the lower and higher earning limits.

Over time, the prescribed limits are expected to increase until the fourth year of implementation when the Labour Cabinet Secretary will determine the lower limit, while the upper limit will be fixed at four times the national average earnings. In addition to the increased NSSF deduction, the proposed National Housing Development Fund (NHDF) introduced through the Finance Bill, 2023 poses further challenges.

This proposal suggests a three per cent deduction from employees' basic pay to fund the construction of low-cost homes. The employer and employee will share the contribution equally, with a cap of Sh5,000 per month.

Another change is the government plan to replace the existing National Hospital Insurance Fund (NHIF) contribution system, which currently varies based on monthly income, with a standard rate of 2.75 per cent of the gross monthly salary.

Under this proposal, there is no cap on the employee's contribution. All individuals will experience higher deductions except those earning below Sh30,000 per month.

The impact of these changes on the quality of healthcare coverage offered by NHIF remains unclear as some private hospitals refuse NHIF payments due to delays, while some public hospitals do not offer the full spectrum of services, forcing patients to seek services at private facilities.

The cumulative effects of the increased NSSF deduction, proposed NHDF contributions, increased Pay As You Earn (PAYE) rates for those earning above Sh500,000 per month and the NHIF changes will heavily burden employees and employers.

Employers may be reluctant to increase salaries or hire additional staff, leading to potential job cuts and outsourcing of skilled workers to avoid the mounting contributions.

It is worth noting that many individuals already face additional deductions such as student loans or bank loans, while the rising house rents and utilities add further strain, particularly for urban dwellers.

These financial challenges may force many low- and middle-income individuals into informal settlements, exacerbating the acute housing crisis.

Increased deductions and rising living expenses create an increasingly challenging environment for Kenyan employees.

The introduction of the NHDF and the increased NHIF and NSSF deductions, which are all coming at the same time, will exacerbate the economic hardships facing low- and middle-income earners.

The government should carefully consider the long-term implications of these policies and work towards alleviating the burden on Kenyan workers by ensuring that their financial well-being is safeguarded as they attempt to survive the immediate economic hardships in the hope of a better tomorrow.

The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG. [e-mail].