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National pension reform: Why we must do it

Our pensions and social protection system is broken and unfair.
Image: Shutterstock

When the Department of Social Development (DSD) released its Green Paper on Comprehensive Social Security and Retirement Reforms, the proposal to set up a national pension scheme was swiftly shot down.

The Green Paper proposed a National Social Security Fund to which all workers earning over R1 667 a month would contribute. Employers and employees would initially contribute between 8 and 12% of earnings up to a ceiling of R23 000 a month.

Such was the force of the opposition that there was no debate about whether South Africa’s pensions system is working. Even Minister of Social Development Lindiwe Zulu did not defend the proposals. Instead, the DSD swiftly withdrew the paper, promising to return it later for public comment.

“Some of the technical aspects of the proposals were not well understood and many have misrepresented the proposals, particularly on the National Social Security Fund. It has become apparent that some of these areas need further clarification to avoid any further confusion,” said the 1 September statement issued by Lumka Oliphant, spokesperson for the DSD. And so the public debate on pensions reform died before it could begin.

Yet South Africa’s pensions system is broken and unfair.

If you were a South African who was precisely average, on reaching 65, the age of mandatory retirement, every month you would receive 17% of the average monthly income, before tax, you earned while you were working. This is called the replacement rate.

In India, this replacement rate would be 83%; in France, 60%; and the average for the developed world is 49%, according to the Organisation for Economic Cooperation and Development’s 2019 report on pensions.

South Africa’s replacement rate is the worst of any of the 44 countries in the report.

South Africa uses a two-tier system of retirement. People who reach retirement must rely on a private fund, or receive the older persons grant.

Private pensions are not mandatory. Some are set up by employers, and both employers and employees make contributions. Some are run through the industrial bargaining councils where employer organisations and trade unions meet. Also, some people buy their own pensions from a financial services provider.

The older persons grant is funded from the fiscus, is available to people over the age of 60, and is R1,890 per month, or R1,910 if you are over the age of 75 – depending on whether you pass the means-test.

Elsewhere in the world, pensions are used to encourage people to leave the labour force, to make room for others, knowing that they will have a replacement income which allows them to live in comfort when they stop working.

How many people get pensions?

According to the annual report of the Financial Sector Conduct Authority – we don’t actually know.

We do know that, according to the most recent annual report, “Total membership of retirement funds in South Africa at 31 December 2018 stood at 17 522 325, of which 11 447 361 were active members and 6 074 964 were pensioners, deferred pensioners, dependents and unclaimed benefit members. Some double counting is unavoidable, as some individuals are members of more than one fund.

According to estimates based on the latest available data from SARS and the National Treasury, by Andrew Donaldson, former Deputy Director of the Budget Office and Public Policy at the National Treasury and now at UCT’s SA Labour and Development Research Unit, at least 6.8 million South Africans contribute to retirement funds, with the true number, before Covid-19, likely “about 7 million”.

But a 2020 report by BankservAfrica found that just one million of South Africa’s 5.6 million-strong population over the age of 60 received private pensions. Even those who do get private pensions often do not receive enough income – BankservAfrica estimates that half a million pensioners are partly eligible for the Older Persons Grant because their pension income is so low.

South Africa’s pensions system was developed in another era, where only white people were virtually guaranteed jobs, and these jobs would often be held for an entire career.

But the country has changed. Workers often shift careers, or face extended periods of unemployment. Often workers have to draw from their retirement savings when they lose their jobs. The savings that they do accumulate are taxed on withdrawal, and they have to pay fees to the firms which manage those savings.

But most people who reach retirement age in South Africa do not have any retirement savings. According to the results of 10x’s Retirement Reality report for 2020, nearly half of respondents have no retirement plan at all. Most of them cannot afford to put money away each month.

In the first part of a series on funding universal pension coverage, Andrew Donaldson estimates that 57% of employed people are not covered by pensions – over 9 million people. Pension coverage is particularly low among lower incomes.

The Green Paper reports that over 6 million workers in the formal sector alone have no retirement, disability or survivor benefits – more than a third of all in formal employment. Roughly one million people of pensionable age are excluded from state benefits.

South Africa relies on the Older Persons Grant to keep away extreme poverty in retirement. According to the Green Paper, 3.1 million pensioners received the grant in 2019-20 at a cost of R83.5 billion to the National Treasury. But the grant is less than a third of the monthly national minimum wage, and so fails to adequately meet replacement rate standards of 40% for minimum wage workers.

At the same time, the Treasury offers tax benefits to those who can afford to contribute to pension funds. According to the National Treasury’s latest budget review statement, about R100 billion in benefits is given to retirement funds.

These disproportionately benefit top earners.

In other words, the tax saved by contributors to these funds is more than the money spent on the Older Persons Grant.

But many of these relatively wealthy South Africans could also benefit from pensions reform.

As Chair of Social Security at the Wits School of Governance Alex van den Heever writes, the private pensions market in South Africa is “a pernicious mix of market concentration, product complexity and non-independent advice from brokers who are effectively integrated into the product suppliers.” South Africans face huge fees, restrictive conditions, and little choice when it comes to managing their pensions.

This is part of a series on pensions reform. Next: What is a public fund?

Read the first article: National pension reform: this is about everyone’s future

© 2021 GroundUp. This article was first published here.

COMMENTS   32

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An “old age” grant should apply to all people who qualify as “old”.
However unless those with the foresight to cater for their old age become indigent ,they don’t qualify.
So let’s not call it an old age pension but an indigents grant !! One also he as to wonder how my any Govt employees are doubling up on this one ;

What this article isn’t saying, is where the money will come from to provide everybody with what the author thinks is a fair pension. Hint: Maggie Thatcher called it by name – “other people’s money.” The bad news for the likes of the author is that SA has run out of the latter ages ago already.

agree, not with my f…… money!

A bit misleading to claim “At the same time, the Treasury offers tax benefits to those who can afford to contribute to pension funds… about R100 billion in benefits is given to retirement funds”.

The R100b is taxed when withdrawn, in other words it’s just delayed tax.

Exactly, in essence the government is investing through you as proxy since if the increased investment amount grows substantially you will pay more tax than what the government would have collected had it taxed you initially.

“If you were a South African who was precisely average, on reaching 65, the age of mandatory retirement, every month you would receive 17%”
Nope – if you were a South African who was precisely average you would be dead long before 65 – currently male life expectancy is 59.

The best off are those in the Govt. Employees Pension Fund with Defined Benefit pensions. If you take current annuity rates virtually nobody in the private sector can come close to buying a similar pension with investments of 15% of their pay made over the same period.

Herewith another hairbrained scheme sevised by Socialist ideology.
As per the UIF scheme you must contribute to a certain salary scale.
By all means proceed with the scheme, but give individuals the option to opt out.

James Stent The fact that South Africa’s replacement rate (at 17% vs. the high of 83%) is the worst of any of the 44 countries in the report is shocking.
One point to bear in mind is that many people who were excluded from participating in any form of pension fund by the apartheid laws may have long service in employment (especially in the Public sector) but only started making contributions from the 1990’s. The salary base from which their contributions were subsequently made we significantly low and unfortunately so were the employers’ proportionate contributions. The effects of this “too late too low contributions” history must be factored in by Government in attempting to ameliorate the plight of old people on whom the unemployed youth masses REPLY. The so called means test criteria by Social Department for Old Persons Grant must be seriously reviewed.

I tried to read this with an open mind, but I really don’t see where any of this is unfair. Options exist. Everyone has freedom to save for his retirement, and what you put in is a reasonable indication of the rewards you can expect. Perhaps the only unfair thing is that some people don’t put anything away, but they are still entitled to free benefits at the expense of others.

There is some unfairness in terms of the extent to which Govt Employees Benefit from the state underwritten GEPF and its fantastic benefits.
Also, the article author is wrong here – “South Africa uses a two-tier system of retirement. People who reach retirement must rely on a private fund, or receive the older persons grant.’
The majority of employed people in South Africa are employed by the state and benefit from the Govt Employees Pension Fund.

There are many aspects of the debate that this article does not address, the cost to businesses to provide these benefits, the mismanagement by pensioners drawing at rates that exceed the recommended rates and depleting their capital, or the millions of people without employment which are heading to retirement funded by grants and set to receive a government pension.

Economic activity is the mother of savings. Employment opportunities distribute those savings in the most justifiable way. Everyone benefits in proportion to his contributions to the mother of savings. The social grant is meant to buy social stability and not material equality. The mother of savings did not create unemployment. Government policy is the father of unemployment, now the same bastard wants economic activity to look after the children?!

The misplaced quest for material equality and social justice kills the mother of savings and leads to widespread poverty and suffering. Socialism kills the source of economic activity, creates rising unemployment, reverses the peaceful and just distribution of wealth, and concentrates wealth in the hands of the politically connected elite.

It is much better to be the poorest person in a purportedly unjust free capitalist society than an average person in an idealistic and bankrupt socialist regime.

If you believe in a free-market system, you will accept that some people will always own more than others. But common sense will also tell you that inequality needs to be capped somewhere otherwise it becomes so extreme that it causes social unrest.

So here is a (serious solution-oriented) question for all free marketers (i am making these figures up so don’t fixate on them, but you get the gist) : if you take the average networth of the wealthiest 1 million (eg R2 million each??) SAns versus the average networth of the poorest 1 million (eg R500 each??), then it means the wealthy are 4000 times better off than the poor.

Now assume we want that ratio to stay at 4000 and not go any higher. How can the free-market system be tweaked to achieve that ?

I appreciate your comment. We would not be in this mess if we had more critical thinkers like yourself.

It is crucially important to realize that inequality in itself does not lead to social unrest. It is when the poor and marginalized members of society can no longer survive on a daily basis. When dignified and proud people suffer under the degrading circumstances of poverty. When the socio-economic situation robs people of their human dignity. Then, they will revolt against any group they perceive as wealthy, even though that group did not cause the “inequality”.

History shows this clearly. The French Revolution, Russian Revolution, Cultural Revolution in China, and The Holocaust, just no name a few, followed in the footsteps of a severe economic contraction, that created rampant unemployment and poverty, and was caused by currency devaluation after a banking crisis.

Inequality is not a problem if the poor are able to live decent lives. Inequality is inherent to the human condition because material equality is a function of intellectual equality. Our material position merely reflects our mindset, all else being equal.

Money is the agent of trust between strangers. We manufacture stuff and provide services to total strangers in the belief that we can trust their money. When governments debase money they do much more than corrupt the unit of account, they actually destroy trust in the community. When they are no longer able to afford bread, they look for someone to blame. They want to punish those who “stole from them”. This is how German society turned on itself during the Holocaust. Neighbor attacking a neighbor, and everybody targeting the minorities.

We are experiencing something similar in South Africa at the moment. In Germany, they targeted the Jews. Here they target “White Monopoly Capital”, Somalis, Pakistanis, Malawians, Zimbabweans, business owners with BEE, and savers with expropriation without compensation. They target minority groups.

The bomb is primed. It will only take a doubling in the price of bread and maize meal for the masses to target minorities. Keep in mind that the escalating price of commodities is the result of money printing in the developed world. They devalue the currency and we sit with the problems.

With massive job creation and a strong emphasis on improving the education system.

serious question. how does one invest in retirement and come out on top considering that (all things being equal) assets merely preserve their present value, without the cash inflation penalty? Isn’t it better just to do the research yourself and save on professional fees. Whats the justification for the retirement industry? to pretend not to take advantage of ignorance?

The investment industry is quite upfront about this concept. They tell you that they are merely trying to keep up with inflation – protect your interests, so to speak.

This brings us to their business model. They collect fees on assets under management that grow due to inflation. This implies that the Reserve Bank determines the profitability of the asset managers. The entire financial industry is based on the devaluation of the currency. This is a worldwide phenomenon.

So, good luck!

Some thoughts from a budding capitalist:

1) No-one is excluded from saving for their old day, whether through savings or a pension product or both. So, accessibility is not an excuse.
2) “Affordability” is subjective and using “average person” data is as irrelevant as it is wrong. Person A earns R7000pm and saves R400pm – it is a factor of her living costs (maybe she’s in a rural area) and more importantly, personal discipline and financial literacy. Person B earns R19000pm, but he saves nothing, for the same reasons as above. Policy cannot fix this, but education and a growing economy can. (Big surprise)
3) I avoid, nay defer, income tax on my monthly pension contributions. This is deferred and not completely avoided as already mentioned in the comments. More importantly though, this is money I EARNED. Comparing my EARNED money for which taxation is deferred to someone else’s FREE money that government gives them is stupid. Also, that same free money came from me and my taxes – government didn’t earn it either…
4) Part of the reason why government needs to allow the tax deferal in 3 above is because they want to tell me how to invest that money (Reg 28). Without an incentive to be Reg 28 compliant most investors or savers would not have such high exposure to SA Inc. Why? Because SA Inc isn’t growing the economy. Grow the economy…? Hmm… de ja vu…
5) Lastly, I’m all for a sliding scale of contributions to a system like income tax. I don’t like paying ANY tax, let alone 30%+, but percentages need to be contextualised with absolutes and 30% tax on R300k-odd per annum is generally more ‘affordable’ than even 5% on R30k per annum. I get that and so I pay my my income tax. However, the proposed system wants someone earning R1667pm to be taxed. That is taxing someone who earns LESS than the R1890pm you get on the Old Person grant?! This is a stunning display of the ruling party logic – lift yourself up by your shoe laces.

Now, how much of that State Capture money have we gotten back yet? I’m sure a 12% tax on that can fund the GroundUp and DSD ideology already.

The Green Paper, proposing a National Social Security Fund, for all workers earning above R1 667 a month, was withdrawn on 1 September, due to the upcoming elections. They didn’t want it to be used as a distraction or election tactic.

The department of social development, will reintroduce the green paper, in the beginning of 2022.

It will pass in parliament as there is sufficient support from the ANC and the EFF. It is an excellent initiative and will only cost 8-12% of an employees income.

Your ANN7 propaganda angle wont fly here,go play on 702 and News24’s pages kiddo.

If you/your employer are paying into a private retirement fund you should not be forced to contribute to the cANCer fund.

My strategy is anything over R350,000pa in retirement contributions = SDA & FIA…. they bring so much peace

“But the grant is less than a third of the monthly national minimum wage, and so fails to adequately meet replacement rate standards of 40% for minimum wage workers.”

Uhmm no.

Someone didn’t check their math, the old age grant is R1890 if you work 45 hour weeks your monthly wage at R21.69 would be about R4100 pm
R1890 / R4100
That is a replacement rate of 46%
So we are only 3% behind the developed world average of 49%

With that said, I definitely would not want to retire with that amount of income…

One should just start saving from a very young age. If put 10% away from all income you earn, right from earning your very first income cheque, you should not have any problem in retirement at all.

First pay yourself that 10% and thereafter you pay the rest of your dues. The power of compound interest/capital growth or both – over such a long time span – plus the patience will make you very wealthy eventually and you will be very thankful towards yourself.

There us truly no excuse to be poor. Lazy perhaps yes, but wealth wants to be created, it doesn’t fall like Manna from the heavens, or grow on trees.

Not so easy in SA henry. Just saving will result in your assets gradually being eaten by tax and inflation. Financial advisers can often eat more of the same. “Where are the investors yachts”? You have to spend, I would say, 10% of your time managing these savings then, on top of that, be lucky.

SA could still end up like Zim, very quickly.

No. Govt tries all desperate avenues to access the few trillion Rand in private retirement fund assets.

South Africa has a problem that nobody trusts the government. NHI, pension reform, all are treated with mistrust, for good reason.

Secondly,broader social policies do not work in a country where few have jobs, little growth and is unlikely to change since the workforce is ill equiped to deal with changes to the global economy. The rest of the world will experience this in varying degrees as automation and software take over. UBI will be used to appease the world masses for a while, but in SA we have already run out of money.

It is probably time to follow a plan similar to what is laid out in the Sovereign Individual as SA is unlikely to ever be able to get work for the majority of its citizens nor afford UBI.

Why do SA workers have no retirement to speak of? Because the ANC has destroyed livelihoods with their redistributive and socialist policies. That’s why. Countries that lean their economies toward free market, tend to generate higher incomes for their inhabitants. The evidence is overwhelming to the extent that it can be taken as given. In a socialist environment like in SA, people get progressively poorer over time. The irony is the poorer the country gets, the more socialist leaning the policies. Ultimately, the socialist model is unsustainable.

It is the will of “our” people to live in a socialist state. Most of the electorate live with cognitive dissonance on a daily basis i.e., they believe the state will save them and at the same time the state is corrupt, inept, incompetent and distrust it.

They actually believe the state MUST save them. They voted for it after all!

Having a BROKE government shows you all the ways they are trying to coerce you into giving them MORE of your hard earned money for LOOTING!!!! Until they can run 1 successful office DO NOT APPROPRIATE THEM ANY MORE MONEY!!!!!!!!!!!!!! Say’s the American

A study and comparison should qualify the free living expenses provided over and above cash provided.

With free housing, water, health care, education and electricity thrown in, the scope of the existing social welfare pot provided is much larger than stated here.

At the end of the day we have too many people for our economy and little opportunity to grow the latter. That means population growth has to be limited. Two child policy before it is too late?

End of comments.

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