Social security for South Africa

[duncan drennan]

I would say that the biggest announcements in the Budget Speech 2007 were the following,

• Social security system to be implemented
• Abolition of retirement tax

Both have to do with savings and retirement. Now, I'd very much against a social security system, even the inventor admitted that it would fail in the long term, but that he wouldn't be around to worry about it (I wish I could find a reference for that).

We will all now be taxed to add towards this system. The tax will be capped at some level (like UIF) and then you can contribute towards your own retirement funding. A lot of the reason for this is to allow people who get no tax break for saving (i.e. those who earn under the tax limit) some sort of incentive to save (in the same way that retirement savings can currently be deducted from your taxable income).

I personally don't really want to be forced to save in this way. I'd rather contribute my savings into my own funds rather than government managed ones. This obviously also opens up a whole new can or worms for fraud to take place on a HUGE scale.

The social security policy document has now been released....will need to read through to find out how things might go.

[Dave A]

It looks like there's a long road ahead before/if this is going to happen.

There would be "huge discussions" in the National Economic Development and Labour Council (Nedlac) between business, labour and the government over the formulation and implementation of a new national social-security system, Labour Minister Membathisi Mdladlana said on Monday.

Mdladlana said the government had already detected "rumbles" from the private sector over the issue.

Speaking after meeting visiting Algeria Labour and Social Security Minister Tayeb Louh -- to discuss implementation of social security systems in both South Africa and Algeria -- Mdladlana said that he acknowledged that there was little doubt that the new system, which would incorporate a pension element for working people, would be "a huge administrative matter".

Asked specifically if the system would effectively place a significant new tax burden on the working people of South Africa -- as it is proposed that the system would be compulsory for all employed South Africans -- he said that there would be "a hell of a discussion" at Nedlac.

"We have heard some rumbles from the private sector abut this matter ... billions [of rands] are involved in the pension industry as you know and this [the new system] may affect some of the private-sector investments [in the retirement industry].
full story from M&G here

[duncan drennan]

I'm sure it will be a couple of years before there is anything material - I would guess in the region of 3-4yrs (although, maybe before Mr Manuel retires? would social security be his legacy?)

The thing is, that ball is now rolling. Obviously it is easier to change the direction of that ball before it gathers momentum. I'm guessing the pension/annuity industry is pissed, as it is going to take money directly out of their pockets.

So here is a question: currently if I make a retirement annuity "paid up" I lose a heck of a lot of money. Even reducing the payments one gets penalised. (luckily the ombudsman has had an impact on the size of these penalties...anyway). Sooooo, if the government forces me to pay into social security, and I reduce my RA contribution - am I going to be penalised?

Well, that's just one of the issues that is going to arise.....

[Dave A]

I see some of the practicalities are highlighted in this article by Bruce Cameron.

Social security tax
The main elements of the social security tax, which will be deducted from your income as an add-on to the standard income tax for employees (SITE), are:

• The lowest level of the social security tax will be about R750 a month (15 percent of an annual salary of R60 000). This will be used to finance minimum retirement benefit contributions, improved unemployed insurance, and death and disability benefits.
  
• The government could pay a wage subsidy to employers for low-income employees to cover the cost of the social security tax for these employees. Employers will receive the subsidy as a deduction against SITE. The proposed structure of the wage subsidy, which will cost the government up to R30 billion a year, is:
  
  • A subsidy equal to one-third of the wage paid where an employee's wage is less than R15 000 a year, up to a maximum of R5 000 (one-third of a wage of R15 000);
  • A subsidy of R7 500 less one- sixth of the wage paid for employees who earn between R15 000 and R45 000 a year; and
  • No subsidy for employees who earn above R45 000 a year.

The government believes a wage subsidy will encourage employment and create an inducement for low wages to rise to a minimum wage.

• The creation of a government defined contribution retirement fund. Details of how the fund will work include:
  
  • A compulsory minimum contribution based on your income, up to a still-to-be-determined maximum level - funded from the tax.
  • A compulsory supplementary contribution to an occupational pension fund or individual retirement fund (for example, a retirement annuity) for individuals, over and above the maximum contributions to the government fund.
  • Additional voluntary contributions to an occupational or individual retirement fund.
  • Existing small funds that are not cost-effective and/or that have large numbers of members whose contribution levels would be below the contribution levels of the government retirement fund would be allowed to merge with the government fund.
  
  
  There are currently 13 500 occupational funds, of which 80 percent have less than 100 members.
  
  
  • The intention is that no one should pay more than they currently contribute to a retirement fund. The proposal is that the social security contribution should be no greater than 18 percent of your annual income. The higher your income, the lower the percentage will be.
  • Your contributions will accumulate to your own account within the government pension fund, but for investment purposes, your savings will be pooled with those of all other members. Investment returns will be added proportionally to your accumulated retirement savings.
  • As is currently the case, your employer will be able to subsidise your contributions.
  • You will not be able to withdraw your retirement savings if you resign, or are retrenched or fired. The government is, however, proposing that you will be provided with some income flow from the unemployment insurance fund and/or from your retirement fund savings while you are unemployed.
  • At retirement you will have to use at least two-thirds of your accumulated savings to provide a monthly pension for life.
  
  
  
• Occupational risk benefits, such as assurance that pays out in the event of the death or disability of a member, will be provided. Occupational schemes, such as employer-sponsored schemes, will be able to continue to offer these benefits as a top-up to the government provision.
  
• The current system of unemployment fund contributions will be scrapped and will be included in the social security net.

[duncan drennan]

There is an article on the M&G with some more info on the social security reform.

On contributions,

It is recommended that all employed people pay 15% of before-tax income into the fund; however, this will have a cap of R750 based on the Site-tax threshold of R60 000. In other words, anyone earning more than R60 000 will only pay R750 to the fund. But they will also have to pay some additional mandatory amount to a private occupational or individual retirement fund to ensure they have appropriate provision for insurance and income replacement in retirement.

Some interesting questions raised on the administration side,

For businesses, this is where the real costs will come in addition to more red tape. Treasury is hoping that the wage subsidy will help offset the costs of bringing these people into the formal sector. For example, an employer employing a part-time worker earning less than R15 000 a year will receive a wage subsidy of R375 a month. Only R188 will go to the social security fund, the rest will offset the employment costs for the employer. Then what about domestic workers? They would also require wage subsidies, but how would this be managed on a household to household basis?

This does raise an interesting point - the wage subsidy is effectively an incentive to be a part of the formal tax collection structure. Will we see higher collections due to the subsidy?

[Dave A]

The more I look at this, the more concerned I become at a multitude of levels.

A quick add of the direct payroll "taxes":

U.I.F 2%
SDL 1%
Workmans Compensation 1-3% (?) dependant on industry
Then where there are industrial councils....
BEE payroll related measures....

And it's all very well to talk of wage subsidies; that money comes from the fiscus which comes from.... taxes? Associating the subsidy with social security implimentation to make it look like it's going to cost us less is not much more than an excercise in chinese maths. And now you've got two sets of administration costs added too.

Of course, this also opens the door for cross-subsidisation, another practice fraught with danger.

[Graeme]

Looking at the scandalous behaviour of some (many? most?) "supervised" private enterprise pension fund administrators, one shudders to think of what could happen if Government is going to administer the vast investments of a social security system - and investing in public companies will give the government, as a shareholder, an even greater right to call the tune than they have already. A nightmare.