Wednesday, January 26

National pension reform: could it be done?

“Furious recoil”; “disastrous for the South African economy”; “threat of tax revolt”; “skepticism”; “state capture 2.0”; “Indignation”; “would wreak havoc”; “ridiculous plan”; “configured to fail”: When the Department of Social Development published its Green Paper on Comprehensive Social Security Reform, there was a strong response from economists and some politicians.

But how well founded are these arguments? In this article we try to unravel some of the main criticisms of the document, which proposed a National Social Security Fund to which all workers who earn more than R1,667 per month would contribute. Employers and employees would initially contribute 8-12% of earnings up to a limit of R23,000 per month.

This is a ‘left socialist idea’

in a TimesLive article, Efficient Group chief economist Dawie Roodt says: “Clearly what [green paper] He has in mind the increase in taxes and that the state forces us to save more and that politicians have more power over our savings. This is just a left-wing socialist idea that in practice is not going to work. ”

But the National Social Security Fund proposed in the Green Paper is a direct descendant of Germany’s Public Retirement Insurance System, which is 132 years old, or Mandatory pension insurance. This is the oldest public pension scheme and was based on the reforms proposed by Napoleon III. This Mandatory pension insurance It was introduced in 1889 by German Chancellor Otto von Bismarck, a man who suppressed all independent labor organizations, all socialist organizations, and all their publications, and imprisoned thousands of people his government had identified as socialists.

Bismarck’s motivation to introduce the Mandatory pension insurance it was to quell any “perceived threat of social unrest” in the newly unified German state. His reasoning was not that the elderly should not suffer when they retired, but that it was essential to introduce the system so that the state did not collapse.

The state will screw it up or steal our money

Reuben Maleka, from the Public Officials Association (PSA), said that the PSA “views this proposal as yet another attempt by the government to get its hands on hard-earned money from overburdened workers.”

In an article for Cape Argus, Roodt says: “The Green Paper is fine, but we can’t afford it… The downside is that it proposes a substantial tax increase and this is not going to happen as the South African taxpayer is already overburdened. As these things progress, you will probably be under the control of some politician and most likely mismanaged. ”

Economist Daniel Silke said: “The big problem is that the state’s delivery expectations are so poor and its credibility and management capacity are so poor that asking South Africans to contribute in this way carries great risk from the point of view. of those South African wage earners expected to contribute.

“It really is a case where the state cannot impose this type of contribution in this type of configuration unless it has really proven to be an effective and efficient manager of state assets on a large scale and not a waste of resources through inefficiencies and bribes and corruption. . ”

But, as we have outlined, the Green Paper presents a public scheme, rather than a state one, that keeps political control close at hand, in accordance with international norms and standards. The Green Paper proposes a system that would minimize political interference in the governance of the fund.

And most of the income would go immediately to pensioners, because contributions from those currently working would be used to pay retirees.

This is just another tax

Economist Mike Schussler said, “We want to be like Europe when we don’t have the tax or income base. It’s not possible.”

Schussler’s comment implies that mandatory pension plans are only operational in Europe or developed countries. But Colombia, which is a country very similar to South Africa, has a mandatory pension scheme. Colombia has 51 million people compared to South Africa’s 60 million), a Gross Domestic Product of $ 295 billion compared to South Africa’s $ 329 billion) and roughly the same geographic area.

Columbia has a national pension plan augmented by private supplemental offerings, almost exactly the structure outlined in the Green Paper. And the average retirement income as a proportion of income earned before retirement (the replacement rate) in Colombia is 74%. In South Africa it is between 17% and 20%, according to the Organization for Economic Cooperation and Development.

Geordin Hill-Lewis, shadow finance minister and district attorney’s Cape Town mayoral candidate, argues: “The proposal is essentially to tax low-income workers and the struggling middle class much more.”

Mandatory contributions are not the same as taxes and would replace contributions that a person would otherwise make to a privately managed fund. Additionally, workers’ contributions would have a direct impact on their retirement income. This is not a tax by the usual definition.

The proposal would mean that people who currently have no or insufficient retirement benefits, roughly half of those in formal employment, would have benefits, while people who currently pay for retirement plans would likely not pay more than what. they currently pay.

The Green Book was a surprise

This document surprised the voters of the National Council for Economic Development and Labor (Nedlac), the deputy director general of the Treasury, Ismail Momoniat saying August business day.

But a mandatory national retirement fund has been part of the thinking of every government department for nearly two decades, since the 2002 publication of the Taylor Research Committee on a Comprehensive Social Security System for South Africa. It has been a constant feature of discussion papers ever since.

For example, in a 2010 document On the Bargaining Council Retirement Funds compiled by Jacques Malan and Associates for the Department of Labor, there are lessons for designers of a National Social Security Fund. And these build on even earlier proposals put forward by a 2007 Second National Treasury Discussion Paper and a 2009 document, called ‘Retirement Fund Reform’. In 2012, the Interdepartmental Task Force on Social Security and Retirement Reform developed its first discussion paper, developing the idea of ​​the NSSF.

in a Nedlac paper, business representatives even complain that the Green Paper they saw in early 2021, before the public saw it, is virtually unchanged from the drafts five years earlier.

The business lobby would prefer that the government demonstrate that it can manage a more modern configuration before implementing NSSF. “Progress demonstrated in modernization and governance of existing social security funds is a precondition for further expansion of the social security framework,” they say in the Nedlac presentation.

Specific issues raised by companies in Nedlac’s discussion paper include that the maximum contribution limit of R276,000 per year is too high, which would erode the customer base of the retirement industry.

In fact, the Green Paper’s cap is not far from the FIU’s cap on benefits of R212 544 per year. In addition, there would continue to be a supplementary pension market for people with incomes above the contribution threshold. There are 2.4 million people currently contributing to retirement funds with a gross income of more than R353,000 per year, and most of them would probably supplement their retirement funds through private plans. Currently, about 90% of people in these income bands contribute to retirement funds.

WE CAN afford it, says a former Treasury official

One of the main criticisms of the proposed national pension plan is that the country cannot afford it.

For example, Old Mutual Investment Group chief economist Johann Els has said the plan is not at all viable. And in an article first published in City PressAlexander Forbes executive John Anderson was quoted as saying that the contributions of 7.5 million workers in the formal sector, plus those of 4.7 million agricultural, domestic and informal workers would have to be subsidized. Alexander Forbes estimated that “this would require between R15 billion and R30 billion a year from the National Budget, depending on the level of subsidies required.”

On an article in a series published in Econ3x3, the economist and former National Treasury official Andrew Donaldson estimates that the subsidy needed to cover the contributions of people who could not pay the fund is 23.8 billion rand.

But in a third role, Donaldson shows how this could be financed.

Donaldson takes the current retirement system as a starting point, using SARS and Treasury data that assess about 85% of the revenue raised in 2017.

Currently, contributions to retirement up to a limit are tax-exempt. Retirement contributions can be deducted for 27.5% of taxable income, or R360,000, whichever is less.

Only when the funds are withdrawn, in retirement, are taxes applied, and even then, retirees can request very generous refunds on these provisions.

This means that those who can afford to contribute to pension funds, a minority of workers, receive the largest tax credit in South Africa, approaching R100 billion per year, according to Donaldson’s own calculations and the budget revision of the National Treasure. This credit accumulates disproportionately to the very wealthy.

For the highest income band – gross income above R1,975 million per year – the average retirement contribution is R255 230 and the average tax benefit for these people in these contributions is R114 854 per person. The total profit in this income band alone is R10 billion per year. The lower income bands also accumulate large benefits: net income between R917,000 and R1,975 million earns R23 billion in benefits per year, with an average tax benefit of R56,757 per person.

Donaldson proposes a model through which more than R22 billion in revenue could be raised, reducing, not eliminating, these benefits.

It suggests that retirement contributions should still be subject to tax benefits, but at a lower rate as income increases. Currently, gross income between R494,000 and R917,000 per year earns the highest tax benefit as a share of gross income of 4.9%. Under Donaldson’s proposal, the highest benefit would be 4.1% for the median income, between R353,000 and R494,000 per year, and income above this band would receive relatively lower benefits. Therefore, the highest income bands would go from receiving an average of R114,854 per year in tax benefits to R51,213 per year, which is still the highest net benefit.

The additional 22 billion rand raised in this way would almost cover the 23 billion rand deficit that would be needed to ensure that all South Africans, not just the wealthy, could retire with some comfort.

This is the fourth in a series on the Green Paper on pension reform, read the previous articles below:

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

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