SA’s battered middle class got another dose of bad news this week – a green paper on Comprehensive Social Security and Retirement Reform that proposes setting up a new fund that will provide pensions to formal, informal and self-employed workers who reach retirement.
It also proposes providing disability benefits to those physically unable to work, and survivor benefits to their dependants should they not live until retirement.
Contributions to the pension and risk benefit components of the proposed National Social Security Fund (NSSF) will be pooled, with risks being shared between all contributors.
According to the green paper, the scheme will be funded by way of a mandatory pension payroll contribution of 8-12% of earnings “to be met by employees and employers, at the establishment of the NSSF”.
‘Floor and ceiling to contributions’
“There will be both a floor and a ceiling to contributions: it is proposed that workers earning less than R20 000 per year should not be obliged to contribute to the NSSF, though they will continue to contribute to the UIF [Unemployment Insurance Fund]. Those earning more than the ceiling R276 000 per annum or R23 000 per month, at present will not be obligated to contribute on income above that level.”
At retirement, a worker who contributed to the NSSF will receive a pension calculated according to a formula based on lifetime wages, length of service, and an accrual rate which will determine what percentage of yearly income is paid out.
This would be a defined benefit scheme, meaning pensioners would be paid out at a rate linked to wage inflation rather than at a rate linked to market performance of the amount saved.
National Treasury has tried to play down the publication of the Green Paper saying “it is not policy”. However, clearly there is some level of intent by government on this proposal with the Department of Social Development’s publication of the Green Paper.
Cas Coovadia, CEO of Business Unity South Africa (Busa), says the core proposals in the paper are not new and discussions around this have been going on for several years.
“We would urge government to consider a balanced approach between the public and private sector’s role in a social security system. Any proposed system must build on what we have and must be considered within the context of the serious fiscal crisis SA is in. We also note that the NSSF is proposed as a defined benefit scheme. In this instance, we must protect the interests of younger people and balance these against those already retired.
“We will engage on the green paper but are concerned about suggestions in the document of centralised funds to which taxpayers are asked to contribute.
“SA taxpayers, particularly corporates, are already taxed at some of the highest rates globally and levying additional taxes will be counter-productive to economic growth.”
Adds Johan Gouws, head of advice at Sasfin Wealth: “This green paper comes as a bit of surprise to many of us, coming as it does on top of the National Health Insurance proposals, and the exit tax for emigrants, and the discussion around prescribed assets.”
“I think we have to be careful we don’t move from state capture to private wealth capture,” says Gouws.
“The middle class is under a tremendous amount of stress at the moment and this proposed mandatory deduction of up to 12% of earnings, paid for by both employees and employers, would place them under even more stress.”
Areas that are lacking
Association for Savings and Investment South Africa (Asisa) senior policy advisor Dr Stephen Smith says the green paper identifies three areas within the public social protection system that are lacking: a basic contributory state pension, statutory health insurance, and adequate income security for those aged 18 to 59.
Smith says it is important that future social security reform programmes build on, rather than disrupt, the existing contractual savings and life insurance arrangements of both public and private sector employees. “It is these savings pools that finance much of the country’s investment requirements and fund South Africa’s capital market.
“A state pension that is used to pool and subsidise risks between workers has to be balanced against what proportion of income remains for the funding of an adequate pension related to an individual’s accustomed standard of living.”
Existing contributors to retirement savings funds are already struggling to preserve what they have accumulated, asking for access to their long-term retirement savings.
Listen to the SAfm Market Update interview with Fifi Peters and Sasfin’s Johan Gouws on the topic:
The interests of the young
As a defined benefit scheme, a percentage of contributions made today will be used to fund those who have retired.
“The interests of the future young need to be protected against what is viewed by our actuaries as a strong likelihood of ever-increasing contributions to fund benefit promises,” says Smith, adding that it is important to have clarity on how the promises embedded in the design of the NSSF system will impact on the fiscus.
According to Smith, it needs to be ensured that future social security reform programmes do not inhibit employment creation.
“A job is still the best form of security. Social security is a safety net when all else fails.”
Smith says the Covid-19 pandemic and the consequences of the economic lockdowns have highlighted the urgent need for the appropriate social protection, particularly of informal and vulnerable workers.
“We need solutions to provide protection for these workers, to provide support through unemployment and saving through to retirement as existing legislation and structures are not designed to cater for their needs.
“Asisa sees this as the most urgent issue to solve.”