Wednesday, January 19

National pension reform: it’s about everyone’s future


The Green Paper on Comprehensive Social Security and Retirement Reforms, which was published and almost immediately withdrawn last month by the Department of Social Development, drew a storm of criticism from economists and some politicians.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

Jane * is 66 years old. He worked formally for more than 35 years, earned R13,000 per month at the end of his career, and contributed to a pension fund. She is now retired and does not have a pension.

His story is common.

Alex van den Heever of the Wits School of Governance says the government does not track the number of people who are left without benefits upon or shortly after retirement. But the median income of those who retire is a small fraction of what they earned while working.

According to a 2020 report from BankservAfricaAround 350,000 people like Jane over 60 do not earn income directly, from the government, from work or from a pension. According to the Green Book itself, “About 1 million seniors are excluded from existing state benefits.”

Jane had no income for nine years while raising her four children. After divorcing when she was 40, she worked five days a week for 12 years at a large company that provided her with a defined contribution retirement fund and one day a week as a freelancer.

At 56, Jane cashed in her retirement fund as much as she could to pay off the debts she had accumulated from raising children. By law, what was left had to be turned into an annuity, which means that she would have received R250 per month of this upon retirement. But at 65, when she was fired by the Covid-19 pandemic outbreak, she cashed in the small annuity.

Her final net income was R13,000. If she only supported herself while working, she would be in the top 3% income earners in South Africa.

However, retired she has no income. Because she owns her flat, she is not entitled to the elder grant. She is dependent on her adult children.

Measures in the controversial Green Paper on Comprehensive Social Security and Retirement Reforms published and then quickly withdrawn by the Department of Social Development would dramatically change things for Jane and millions of people like her, and also for the 3.8 million people They depend on the grant of the elderly person.

These proposals have been almost two decades in the making, since the publication of the Taylor Committee’s report on a social security system for South Africa in 2002.

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

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

People earning less than R20,000 per 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 income above that level.

Those currently contributing to a private scheme would move to the NSSF. If they earn more than the maximum limit, they could choose to send more retirement contributions to an NSSF default fund, an occupational fund, or the private pension fund of their choice.

Those who currently do not 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 age 65, the fund would provide a payment to their family, including a flat fee for funeral expenses.

Low-income taxpayers would receive subsidies from the National Treasury. This, according to the Green Paper, “will promote the formalization of employment and will contribute more broadly to protect decent terms and conditions of work.” In part four of the series, we examine a proposal to fund these contributions from former Treasury official Andrew Donaldson, now with the Southern Africa Labor and Development Research Unit.

Grants for seniors would remain, but in a new way.

The Green Paper proposes that all people over 60 years of age now receive this grant as a basic level of social protection for the elderly without proof of means. Eliminating the means test would reduce the administrative burden and part of the grant payments would be recovered by the state in income taxes.

The amount that each worker received as a pension, in addition to the Scholarship for the elderly, would depend on the income throughout their career.

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

Many people in South Africa rely on defined contribution retirement plans. Here the benefits received upon retirement depend on the value of the contributions made by the worker, plus the investment returns. The taxpayer pays for the privilege of setting aside his own money, and if he wants to secure a lifetime income upon retirement, an annuity, he must pay dearly. These arrangements put the individual at risk; If the stock market crashes when you retire, you’re out of luck.

The Green Paper proposes that two-thirds of a worker’s retirement savings above the ceiling of R 276,000 should be annualized, that is, converted into income for life. Today, pensioners have to pay high fees when they convert their savings into annuities. The NSSF would administer its own annuity to stimulate competition with the private sector. Today, women tend to receive lower annuities than men due to their longer life expectancy; this would equalize.

The Green Book says that workers who have worked a full career can earn a retirement income of “at least 40% of their earnings over the course of their career,” through the NSSF. This is twice what the average worker can expect today, according to estimates for South Africa from the Organization for Economic Cooperation and Development.

Contributions from today’s workers will partially fund today’s pensioners and partially contribute to an accumulation of assets to meet the needs of tomorrow’s pensioners.

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 the worker or their beneficiaries.

What would this mean for Jane?

First, Jane would receive the Senior Scholarship every month. At current rates, that would be R1 890 per month.

Then, he would receive benefits from the National Social Security Fund, according to a formula yet to be calculated. The intention of the Green Paper is for pensioners to get 40% of their final income (instead of between 17% and 24% as currently estimated), including the Senior Citizen Grant.

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

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

It is not a fortune, but it would give him security and allow him to depend less on his family.

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

* Not your real name

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


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