Wednesday, January 19

National pension reform: why we should do it

When the Department of Social Development (DSD) published its Green Paper on comprehensive social security and retirement reforms, the proposal to establish a national pension plan was quickly rejected.

The Green Paper proposed a National Social Security Fund to which all workers earning more than R1,667 per month would contribute. Employers and employees would initially contribute 8-12% of earnings up to a limit of R 23,000 per month.

Such was the strength of the opposition that there was no debate as to whether the South African pension system is working. Even the Minister of Social Development, Lindiwe Zulu, did not defend the proposals. Instead, the DSD quickly withdrew the document, 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 about the National Social Security Fund. It has become apparent that some of these areas need further clarification to avoid further confusion, ”said the September 1 statement issued by Lumka Oliphant, DSD spokesperson. And so the public debate on pension reform died before it could begin.

However, the South African pension system is broken and unfair.

If you were a South African who had precisely on average, when you turn 65, the mandatory retirement age, every month you would receive 17% of the average monthly income, before taxes, that 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 Organization for Economic Cooperation and Development 2019 pension report.

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

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

Private pensions are not compulsory. Some are created by employers, and both employers and employees make contributions. Some are managed through industrial bargaining councils where employers’ organizations and trade unions meet. Also, some people buy their own pensions from a financial service provider.

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

In other parts of the world, pensions are used to encourage people to leave the workforce, to make room for others, knowing that they will have a replacement income that allows them to live comfortably when they stop working.

How many people receive pensions?

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

We know that, according to most recent annual report, “The total membership of retirement funds in South Africa as of December 31, 2018 amounted to 17,522,325, of which 11,447,361 were active members and 6,074,964 were pensioners, deferred pensioners, dependents and affiliates of unclaimed benefits . Double counting is inevitable as some people 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 National Treasury Office of Budget and Public Policy and now in the Labor Research and Development Unit at UCT South Africa, at least 6.8 million South Africans contribute to retirement funds, and the actual number, before Covid-19, probably “around 7 million”.

But a BankservAfrica 2020 Report found that only one million of South Africa’s 5.6 million people over 60 received private pensions. Even those who receive private pensions often do not receive enough income: BankservAfrica estimates that half a million pensioners are partly eligible for the elderly allowance because their pension income is very low.

South Africa’s pension system developed in another era, when only whites had virtually guaranteed jobs, and these jobs would often be held for an entire career.

But the country has changed. Workers often change careers or face long periods of unemployment. Workers often have to draw on their retirement savings when they lose their job. The savings they accumulate are taxed upon withdrawal and they have to pay fees to the companies that manage those savings.

But most of the people who reach retirement age in South Africa have no savings for retirement. According to the results of 10x’s Retirement Reality Report By 2020, nearly half of those surveyed have no retirement plan. Most of them cannot afford to save every month.

At first part From a series on financing universal pension coverage, Andrew Donaldson estimates that 57% of employed people are not covered by pensions: more than 9 million people. Pension coverage is particularly low among the lowest income.

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

South Africa relies on the Senior Grant to avoid extreme poverty in retirement. According to the Green Book, 3.1 million pensioners received the grant in 2019-20 at a cost of R83.5 billion to the National Treasury. But the subsidy is less than a third of the monthly national minimum wage, so it does not adequately meet the 40% replacement rate standards for minimum wage workers.

At the same time, the Treasury offers tax benefits to those who can contribute to pension funds. According to the Statement of the most recent budget revision of the National Treasury, about R100 billion in benefits are given to retirement funds.

These disproportionately benefit those who earn the most.

In other words, the tax saved by taxpayers on these funds is more than the money spent on the Senior Grant.

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

As President of Social Security at the Wits School of Governance Alex van den Heever writes, the private pension market in South Africa is “a pernicious combination of market concentration, product complexity, and non-independent advice from brokers that are effectively integrated into product providers.” South Africans face high fees, restrictive conditions, and few options when it comes to managing their pensions.

This is part of a Serie on pension reform. Next: What is a public fund?

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

© 2021 GroundUp. This article was published for the first time here.

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