By Helena Wasserman for News24
South Africans may be required to contribute up to 12% of their earnings to a new government-backed fund, according to new proposal from the Department of Social Development.
On Wednesday, it gazetted its Green Paper on Comprehensive Social Security and Retirement Reform, which proposes the creation of a new National Social Security Fund (NSSF) – a government-managed fund which will provide retirement, disability benefits and unemployment benefits.
All employers and employees will initially be obliged to contribute up to 12% of qualifying earnings – up to a ceiling, which is currently proposed as R276 000 per year. In effect, this means South Africans will pay up to R2 700 a month to the fund.
The first 10% of this contribution will go to the mandatory fund, rather than to a retirement fund. The next 2% will go towards unemployment insurance.
Higher-income workers are expected also to contribute to traditional pension funds.
The paper proposed that government should subsidise the contributions of low-income workers. Those who earn less than R22 320 per year won’t have to contribute, but a government-backed annuity product will be designed for them.
“A simplified contribution arrangement for self-employed individuals and informal workers will also be established,” the paper states.
The green paper expects that workers who earn higher incomes will “divide contributions” between the NSSF and private-sector funds.
The NSSF pensions will be based on career earnings and the duration of contributions. The disability and survivor benefits will be based on salary at the time of injury or death. The NSSF will also pay a flat-rate funeral benefit, and provide income protection benefits for all workers and their families.
“However, those earning above the tax threshold will need to contribute to supplementary retirement savings and insurance arrangements to ensure an adequate replacement income.”
The paper proposes automatic enrolment to encourage workers to contribute to supplementary retirement and insurance arrangements.
Interested persons and organisations are invited to submit comments on the paper by 10 December.
Other proposals in the Green Paper include:
A universal income grant to the working age population
The Green Paper suggests that a basic income grant should be launched at a level “that will at least lift the individual out of poverty”.
It also favours a universal grant instead of one that is means tested.
“Administratively, it is a lot easier for SARS [SA Revenue Service] to recoup the grant paid to a wealthy individual with a technical adjustment to the tax brackets than for Sassa [SA Social Security Agency] to interview millions of applicants to determine whether the applicant qualifies based on income. A universal grant is therefore potentially more efficient, cost effective and better targeted resulting in fewer exclusions,” the paper says.
“The key benefit of universal benefits is that it promotes social solidarity and buy-in to the system; and it is administratively much simpler to administer with fewer exclusion challenges. It reduces stigma of the poor and discontent amongst the wealthy who feel that they are the ones funding the system.”
It says that the country’s tax system is “significantly more advanced” than Sassa, “hence relying on the tax agency ability to test income is likely to be a lot more effective than through Social Security Agency.”
“It will also be much easier to implement a reform that will require a significant adjustment to taxes as it willbe easier for government to sell an increase in taxes on the working age population with an increased transfer to that same population.”
Regulatory reform of the pensions and life insurance industry
Higher-income workers will be encouraged through tax incentives to contribute to pension and insurance plans, in addition to the NSSF.
But the new paper proposes a new framework to approve funds which can qualify for these tax incentives. One of the proposed qualifying criteria is that they meet certain cost-efficiency standards, including caps on fees.
“Such funds will need to meet stringent standards of care, prudence, governance, fiduciary responsibility, transparency and control of costs.”
“Proposals for an individual retirement funds framework include portability with no early termination penalties; greater product standardisation and disclosure; limited charge structures; and stronger investment regulation, including limitations on individual investment choice.”
The paper was critical about the costs associated with certain retirement products, imprudent investments and poor governance and administration – which all reduce the value of a worker’s lifetime savings.
The extension of UIF benefits
Currently, the Unemployment Insurance Fund provides unemployment benefits for up to eight months at a replacement rate of between 38% and 60%, depending on a worker’s salary. Credits are accrued at a rate of one day for every six worked.
The paper proposes that credits will be accrued at a rate of one day for every four days worked and the long-term unemployed will receive a continuation benefit.
This means that workers who have exhausted their full UIF benefits, will be paid at a lower rate to protect workers from having to draw down their retirement savings.
Road Accident Benefit Scheme
The proposed scheme will replace the current Road Accident Fund, and provide income replacement benefits on a similar basis to the Compensation Fund, with the benefit dependent on the injured worker’s capacity to earn. It has not yet been decided what assessment tool will be used.
Means test phased out
It is proposed that the means tests for social grants be phased out through the alignment of social assistance with the structure of personal income tax rebates.
The objective is that all dependent children, the disabled and the elderly should be eligible for a grant, regardless of their income or assets. For families with incomes above the tax threshold, tax rebates will replace social assistance entitlements.
The department said that the green paper’s recommendations will take several years to implement, and that a phased-in implementation approach is proposed.