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National pension reform: this is about everyone’s future

Unpacking the Green Paper on social security reform.
Image: Supplied

The Green Paper on Comprehensive Social Security and Retirement Reforms, which was released and almost immediately withdrawn last month by the Department of Social Development, attracted a storm of criticism from economists and some politicians. But the measures suggested deserve attention, considering the mess which is South Africa’s current pensions system. Here’s the first in a series of GroundUp articles on the issue.

Jane* is 66. She was formally employed for over 35 years, earning R13 000 a month at the end of her career, and contributing to a pension fund. Now she is retired — and she has no pension.

Her story is common.

Alex van den Heever of the Wits School of Governance says the government does not track the number of people who run out of benefits on retirement or soon after. But the average income of those who retire is a small fraction of what they earned while working.

According to a 2020 report from BankservAfrica, about 350 000 people like Jane over the age of 60 get no income directly, from government, from work or from a pension. According to the Green Paper itself, “about 1 million older persons are excluded in the existing state benefits”.

Jane did not earn income for nine years while she was raising her four children. After getting divorced in her 40s, she worked five days-a-week for 12 years at a large company that provided a defined contribution retirement fund, and one-day-a-week as a freelancer.

At 56, Jane cashed out what she could of her retirement fund to pay off debts accumulated by raising children. By law, what was left had to be transformed into an annuity meaning she would have received R250 per month from this on retirement. But at 65, when she was made redundant at the outbreak of the Covid-19 pandemic, she cashed in the small annuity.

Her final net income was R13 000. If she was just supporting herself while she worked, she would be in the top 3% income earners in South Africa.

Yet in retirement she has no income. Because she owns her flat, she does not qualify for the older person’s grant. She is dependent on her adult children.

The measures in the controversial Green Paper on Comprehensive Social Security and Retirement Reforms released, and then quickly withdrawn, by the Department of Social Development would change things dramatically for Jane and millions of people like her, and also for the 3.8 million people who rely on the older person’s grant.

These proposals are almost two decades in the making, since the release of the report of the Taylor Committee into a social security system for South Africa in 2002.

The Green Paper proposes the establishment of a National Social Security Fund (NSSF), to which all workers earning over R1 667 a month would have to contribute. The new fund would provide retirement, survivor, disability and unemployment benefits, pulling all these together under one roof.

Each month, all employers and employees would initially contribute between 8 and 12% of earnings up to a ceiling.

People earning less than R20 000 a year would not be expected to contribute to the fund, and those earning more than R276 000 per year (R23 000 per month) would not contribute on any income above that level.

Those who currently contribute to a private scheme would shift to the NSSF. If they earn more than the ceiling, they could choose to send further contributions to retirement to an NSSF Default Fund, to an occupational fund, or to their choice of private pension fund.

Those who do not currently pay into retirement funds, and who qualify, would now be contributing to their own retirement, and would be guaranteed a pension, if they survived that long. And if they died before 65, the fund would provide a payout to their family, including a flat rate for funeral expenses.

Low-income earners would have their contributions subsidised from the National Treasury. This, according to the Green Paper, “will encourage formalisation of employment and contribute more broadly to protecting decent terms and conditions of work.” In part four of the series, we examine a proposal for funding these contributions by former Treasury official Andrew Donaldson, now of the Southern Africa Labour and Development Research Unit.

The Older Persons Grants would remain but in a new form.

The Green Paper proposes that everyone over the age of 60 should now receive this grant as the base level of social protection for the elderly with no means test. Removing the means test would reduce the administrative burden, and part of the payments of the grant would be recovered by the state in income tax.

How much each worker received as a pension, on top of the Older Person’s Grant, would depend on earnings over the course of their career.

The NSSF would pay as a defined benefit retirement scheme. This means that the level of benefits that a pensioner is entitled to is based on a formula, and can be a flat rate or, as in the Green Paper, earnings-related. This means any investment risk is borne by the fund not by the worker.

Many people in South Africa rely on defined contribution retirement schemes. Here the benefits received on retirement depend on the value of the contributions the worker made, plus investment returns. The contributor pays for the privilege of putting aside their own money, and if they wish to secure a lifelong income on retirement — an annuity — they must pay dearly for this. These arrangements place the risk on the individual; if the stock market crashes at retirement, you’re out of luck.

The Green Paper proposes that two-thirds of a worker’s retirement savings over the R276 000 ceiling must be annuitised – that is, converted to a life-long income. At present, pensioners have to pay hefty fees when they convert their savings to annuities. The NSSF would run its own annuity to stimulate competition with the private sector. At present, women tend to receive lower annuities than men due to their longer lifespans – this would be equalised.

The Green Paper says that workers who have worked a full career can achieve an income in retirement of “at least 40% of their earnings over the course of their career,” through the NSSF. This is double what the average worker can expect at present, according to estimates for South Africa by the Organisation for Economic Cooperation and Development.

The contributions of today’s workers will partially finance today’s pensioners and partially contribute to an accumulation of assets to meet the needs of the pensioners of tomorrow.

A quarter of the fund would be set aside as a reserve to protect against a crisis.

In the event of a workplace injury, death or unemployment, this same fund would pay out the worker, or their beneficiaries.

What would this mean for Jane?

First, Jane would receive the Older Person’s Grant each month. At current rates, that would be R1 890 per month.

Then, she would receive benefits from the National Social Security Fund, according to a formula still to be calculated. The Green Paper’s intention is that pensioners should get 40% of their final earnings (instead of between 17% and 24% as is currently estimated to be the case), including the Older Person’s Grant.

Composition of retirement income at different income levels against a 40% minimum target after full employment. Source: Green Paper

For Jane, 40% of her final net income would be at least R5 200 per month.

It’s not a fortune but it would give her security and allow her to be less dependent on her family.

Critics of the plan are worried about giving this critical responsibility to a state that is incapable and corrupt. They also warn of the consequences for the insurance industry. We’ll discuss these concerns in upcoming articles.

*Not her real name

This is part of a series of articles on the Green Paper on Comprehensive Social Security and Retirement Reforms. Next: our current pensions system.

COMMENTS   8

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Imagine what the cadres can steal here. Contributions can be deducted from the workers and not paid over to the managing authority who in turn can invest in private equity deals ie companies owned by family members. And the numbers will be huge. Very juicy deal-and like most SOEs will land up with irregular expenditure theft and fraud all over.

I know there are a lot of people with small pension or provident preservation funds waiting to consolidate them when they retire.

Wait until you try a (section 14) to consolidate them.
The FSB process is ultra slow and they wan to bring more legislation?
Rather do not pay for a pension or provident fund at all.

It is an absolute nightmare, took me over 3 years to complete one.
I could have earned the same amount transferred from one insurance company to another by having worked the hours spend on emails and the phone.

Let me give you a tip, it only works if you file a complaint at the transferring company or contact the PFA after one month of logging the complaint.

My future looks pretty bleak getting taxed into oblivion for all these fancy schemes. My wife and I are specifically holding off on have kids because it is just too expensive.

What is the problem with Jane relying on her adult children to support her? She racked up debts supporting them maybe they should help her out. Why must I pay for her retirement?

Very true. Especially on your deliberate financial decision to not have children. Not sure if Jane decided to have children or not, but it would not be fair to you to make a financial decision not to have children, then have to pay for other people having children.

It looks like I will reduce my pension contributions to the minimum allowed next year.

The pension admin/SARS admin is getting impossible to deal with.

This all seems reasonable, except when you realize that:

1) it is just another pool of money that the polititions and fraudsters can put their dirties paws into.

2) it starts of as an 8% tax but can be increased with the passing of a small adjustment of the act and could become 20% quite soon. And in the current situation people struggle so much with all these taxes they might as well start of with a tax rate of 100% from the start

3) This whole scheme is based on more people contributing than withdrawing benefits….an d in South Africa it will always be the other way round.

The thing about socialism is that at some stage you run out of other peoples money…we are now at that point.

This sounds like the miracle of 5 loaves and two fishes. The few will pay for the many. Those putting in at the top end will never get out what they put in. Their standards of living will drop massively.

The time looks ripe for me to cash out my pension while it worth something or go on retirement and get it cashed out in five years.

End of comments.

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