Nationwide pension reform: may or not it’s completed?

Furious pushback”; “disastrous for SA economy”; “threat of tax revolt”; “scepticism”; “state capture 2.0”; “outrage”; “would wreak havoc”; “ludicrous plan”; “set up to fail” : when the Division of Social Improvement launched its Inexperienced Paper on Complete Social Safety Reform, there was a robust response from economists and a few politicians.

However how well-founded are these arguments? On this article we attempt to unpack a number of the important criticisms of the paper, which proposed a Nationwide Social Safety Fund to which all staff incomes over R1,667 a month would contribute. Employers and staff would initially contribute between 8 and 12% of earnings as much as a ceiling of R23,000 a month.

Learn: National pension reform: Why we must do it

This can be a ‘left socialist thought’

In a TimesLive article, chief economist of Environment friendly Group Dawie Roodt says, “Clearly what this [green paper] has in thoughts is the rise in taxes and for the state to power us to avoid wasting extra and for politicians to get extra energy over our financial savings. That is only a left, socialist sort of thought which in apply shouldn’t be going to work.”

However the Nationwide Social Safety Fund proposed within the Inexperienced Paper is a direct descendant of Germany’s 132-year-old Public Retirement Insurance coverage System, or Gesetzliche Rentenversicherung. That is the oldest public pensions scheme, and was itself based mostly on reforms put ahead by Napoleon III. This Gesetzliche Rentenversicherung was launched in 1889 by German nation-maker Chancellor Otto von Bismarck – a person who suppressed all unbiased labour organisations, all socialist organisations, and all their publications, and jailed 1000’s of those who his authorities had recognized as socialists.

Bismarck’s motivation for introducing the Gesetzliche Rentenversicherung was to quell any “perceived menace of social unrest” within the just lately unified German state. His reasoning was not that the aged shouldn’t endure on retirement, however that it was important to introduce the system in order that the state didn’t collapse.

Learn: National pension reform: Protecting the funds from state capture

The state will mess it up or steal our cash

Reuben Maleka, of the Public Servants Affiliation (PSA), said that the PSA “regards this proposal as one other try by the federal government to get its palms on overtaxed staff’ hard-earned cash”.

In an article for the Cape Argus, Roodt says: “The Inexperienced Paper is all nicely and good, however we will’t afford it … The draw back is that it proposes a considerable improve in taxes and this isn’t going to occur because the South African taxpayer is already overburdened. As these items go, it is going to most likely be beneath the management of some politician and most certainly be mismanaged.”

Economist Daniel Silke mentioned: “The massive drawback is that the expectations of supply from the state are so poor and its credibility and administration capability are so poor that asking South Africans to contribute on this means is fraught with nice danger from the perspective of these South African wage earners who shall be anticipated to contribute.

Learn: SA women ‘earn’ less than men even in retirement

“It truly is a case the place the state can not mandate this type of contribution into this type of setup until it actually has confirmed itself to be an efficient and environment friendly supervisor of huge scale state property and never a waster of assets by inefficiencies and graft and corruption.”

However as we’ve got outlined, the Inexperienced Paper places ahead a public, moderately than state-run scheme, which retains political management at ‘arms-length’, consistent with worldwide norms and requirements. The Inexperienced Paper proposes a system that might minimise political interference within the governance of the fund.

And most inflows can be instantly despatched out to pensioners, as a result of contributions from these presently working can be used to pay those that have retired.

That is simply one other tax

Economist Mike Schussler said, “We wish to be like Europe after we don’t have the earnings or tax base. It’s not attainable.”

Schussler’s remark implies that necessary pension schemes are solely operational in Europe, or developed nations. However Colombia, which is a rustic similar to South Africa, has a compulsory pensions scheme. Colombia has 51 million folks in comparison with South Africa’s 60 million), a Gross Home Product of $295 billion in comparison with South Africa’s $329 billion), and roughly the identical geographical space.

Columbia has a nationwide pensions scheme augmented by personal supplementary choices – virtually precisely the set-up described within the Inexperienced Paper. And common retirement earnings as a proportion of earnings earned earlier than retirement (the substitute fee) in Columbia is 74%. In South Africa it lies between 17%-20%, in line with the Organisation for Financial Cooperation and Improvement.

The DA’s Geordin Hill-Lewis, shadow finance minister and mayoral candidate for Cape City, argues: “The proposal is actually to tax low-income staff and the struggling center class far more.”

Necessary contributions will not be the identical factor as taxes, and would substitute contributions that an individual would in any other case be making to a privately managed fund. Additional, staff’ contributions would have a direct influence on their retirement earnings. This isn’t a tax by any traditional definition.

The proposal would imply that individuals who presently haven’t any, or inadequate, retirement advantages — about half the folks in formal employment — would have advantages, whereas individuals who presently pay for retirement plans would most likely pay not more than they do at current.

The Inexperienced Paper got here as a shock

This paper got here as a shock to the constituencies on the Nationwide Financial Improvement and Labour Council (Nedlac), Treasury deputy director-general Ismail Momoniat told Enterprise Day in August.

However a nationwide necessary retirement fund has been a part of considering throughout authorities departments for near twenty years, for the reason that 2002 publication of the Taylor Committee of Inquiry right into a Complete System of Social Safety for South Africa. It has been a continuing function of debate papers since then.

As an example, in a 2010 paper on bargaining council retirement funds compiled by Jacques Malan and Associates for the Division of Labour, classes for designers of a Nationwide Social Safety Fund are provided. And these are based mostly on even earlier proposals put ahead by a 2007 Nationwide Treasury Second Dialogue Paper and a 2009 doc, known as ‘Reform of Retirement Funding’. In 2012, the Interdepartmental Job Workforce on Social Safety and Retirement Reform produced its first discussion document, growing the concept of the NSSF.

In a Nedlac paper, the enterprise representatives even complain that the Inexperienced Paper that they noticed in early 2021 — earlier than the general public caught sight of it — is basically unchanged from drafts from 5 years earlier than.

The enterprise foyer would favor the federal government to show it might handle a extra fashionable set-up earlier than implementing the NSSF. “Demonstrated progress within the modernisation and governance of present social safety funds is a precondition for additional growth of the social insurance coverage framework,” they are saying within the Nedlac submission.

Particular points raised by enterprise within the Nedlac dialogue doc embrace that the contribution ceiling of R276 000 per 12 months is just too excessive, which might erode the client base of the retirement business.

The truth is, the Inexperienced Paper ceiling shouldn’t be removed from the UIF profit ceiling of R212 544 yearly. Additional, there would nonetheless be a marketplace for supplementary pensions for folks incomes above the contribution threshold. There are 2.4 million individuals who presently contribute to retirement funds incomes a gross earnings greater than R353 000 per 12 months, and most of these would most likely prime up their retirement funds utilizing personal schemes. At the moment about 90% of individuals in these earnings bands contribute to retirement funds.

We CAN afford it, says former Treasury official

One of many important criticisms of the proposed nationwide pension plan is that the nation can not afford it.

For instance, Outdated Mutual Funding Group chief economist Johann Els has said the plan is in no way viable. And in an article first published in the City Press, Alexander Forbes govt John Anderson was quoted as saying that the contributions of seven.5 million staff within the formal sector, plus these of 4.7 million farm, home and casual sector staff must be subsidised. Alexander Forbes estimated that “this is able to require between R15 billion and R30 billion a 12 months from the Nationwide Funds relying on the extent of subsidies required.”

In a paper in a series published in Econ3x3, economist and former Nationwide Treasury official Andrew Donaldson estimates that the subsidy wanted to cowl the contributions of people that couldn’t afford to pay into the fund, is R23.8 billion.

However in a third paper, Donaldson exhibits how this might be funded.

Donaldson takes the present retirement system as his place to begin, utilizing SARS and Treasury knowledge that assesses about 85% of income collected in 2017.

At current, retirement contributions as much as a restrict are exempt from tax. Retirement contributions might be deducted for 27.5% of taxable earnings, or R360 000 – whichever is smaller.

Solely when funds are drawn down, in retirement, is tax utilized – and even then, pensioners are capable of apply for very beneficiant rebates on these drawdowns.

Which means individuals who can afford to contribute to pension funds — a minority of working folks — are afforded the only largest tax credit score in South Africa, approaching R100 billion per 12 months, in line with Donaldson’s personal calculations and the Nationwide Treasury’s price range overview . This credit score disproportionately accrues to the very rich.

For the very highest earnings band – gross incomes over R1.975 million per 12 months – the typical retirement contribution is R255 230 and the typical tax profit to those folks on these contributions is R114 854 per particular person. The overall profit on this earnings band alone is R10 billion per 12 months. The decrease earnings bands additionally accrue excessive advantages — web incomes between R917 000 and R1.975 million get R23 billion in advantages per 12 months, with the typical tax good thing about R56 757 per particular person.

Donaldson proposes a mannequin by which greater than R22 billion in income might be collected, by lowering – not eradicating – these advantages.

He suggests retirement contributions ought to nonetheless be accountable for tax advantages, however at a decrease fee as earnings rises. At current, gross incomes between R494 000 and R917 000 per 12 months get the very best tax profit as a share of gross earnings of 4.9%. Beneath Donaldson’s proposal, the very best profit can be 4.1% for middle-incomes at R353 000 to R494 000 per 12 months, with incomes increased than this band receiving comparatively smaller advantages. The best earnings bands would due to this fact transfer from receiving a median of R114 854 per 12 months in tax advantages, to R51 213 per 12 months – nonetheless the very best web profit.

The additional R22 billion collected this fashion would very almost cowl the shortfall of R23 billion which might be wanted to make sure that all South Africans — not simply the rich — may retire in some consolation.

That is the fourth in a collection on the Inexperienced Paper on pension reform, learn the earlier articles under:



© 2021 GroundUp. This text was first printed here.

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