SA’s battered middle class received another dose of bad news this week: a green paper on comprehensive social security and retirement reform that proposes the creation of a new fund that will provide pensions to arriving formal, informal and self-employed workers. to retirement.
It also proposes to provide disability benefits to those who are physically unable to work and survivors benefits to their dependents if they do not live to retirement.
Contributions to the pension and risk benefit components of the proposed National Social Security Fund (NSSF) will be pooled, and risks will be shared among all taxpayers.
According to the Green Paper, the plan will be financed by a mandatory contribution to the pension payroll of 8-12% of income “to be covered by employees and employers, at the time of the creation of the NSSF”.
‘Floor and ceiling to contributions’
“There will be a floor and ceiling for contributions: it is proposed that workers earning less than R20,000 per year are not required to contribute to the NSSF, although they will continue to contribute to the FIU [Unemployment Insurance Fund]. Those who earn more than the ceiling of R276,000 per year or R23,000 per month will not currently be required to contribute income above that level. ”
Upon 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 that will determine what percentage of annual earnings is paid.
This would be a defined benefit scheme, which means that pensioners would receive a payment at a rate linked to wage inflation rather than a rate linked to the market performance of the amount saved.
Cas Coovadia, CEO of Business Unity South Africa (Busa), says that the central proposals in the document are not new and discussions on this have been going on for several years.
“We urge the government to consider a balanced approach between the role of the public and private sector in a social security system. Any proposed system must be based on what we have and must be considered within the context of the severe fiscal crisis SA finds itself in. We also note that the NSSF is proposed as a defined benefit scheme. In this case, we must protect the interests of the very young and balance them with those who are already retired.
“We will commit to the Green Paper, but we are concerned about the suggestions in the document for centralized funds to which taxpayers are asked to contribute.
“South African taxpayers, particularly businesses, already pay taxes at some of the highest rates in the world and collecting additional taxes will be counterproductive for economic growth.”
Johan Gouws, Sasfin Wealth’s head of advisory, adds: “This Green Paper surprises many of us a bit as it adds to the proposals for the National Health Insurance, the exit tax for emigrants and the discussion on assets. prescribed “.
“I think we have to be careful not to go from state capture to private wealth capture,” says Gouws.
“The middle class is under an enormous amount of stress right now and this proposed mandatory deduction of up to 12% of earnings, paid by both employees and employers, would put them under even more stress.”
Dr Stephen Smith, Senior Policy Advisor to the South African Savings and Investment Association (Asisa), says the Green Paper identifies three areas within the public social protection system that are missing: a basic contributory state pension, a mandatory health insurance and adequate income security for the elderly. 18 to 59.
Smith says it is important that future social security reform programs build on, rather than interrupt, existing contractual savings and life insurance arrangements of public and private sector employees. “It is these mutual savings funds that finance a large part of the country’s investment needs and finance the capital market of South Africa.
“A state pension that is used to pool and subsidize risks among workers must be balanced with the proportion of income left to finance an adequate pension related to an individual’s customary standard of living.”
Existing contributors to retirement savings funds are already struggling to preserve what they have accumulated and are requesting access to their long-term retirement savings.
The interests of young people
As a defined benefit scheme, a percentage of the contributions made today will be used to finance retirees.
“The interests of future youth must be protected against what our actuaries see as a high probability of increasing contributions to fund the benefit promises,” says Smith, adding that it is important to be clear about how the promises are built into the design. of the NSSF system will have an impact on the fiscus.
According to Smith, it is necessary to ensure that future social security reform programs do not inhibit job 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 economic lockdowns have highlighted the urgent need for adequate social protection, particularly for informal and vulnerable workers.
“We need solutions to provide protection to these workers, to provide support during unemployment and savings until retirement, as the legislation and existing structures are not designed to meet their needs.
“Asisa sees this as the most urgent problem to solve.”