Any future social security reform programme should build on and not disrupt the existing contractual savings and life insurance arrangements of both public and private sector employees, senior policy adviser of the association representing the savings and retirement funds Stephen Smith stressed on Thursday.
The Association for Savings and Investment SA (Asisa) represents the majority of SA’s asset managers, collective investment scheme management companies, linked-investment service providers, multi-managers and life insurers.
Smith was responding to the green paper released on Wednesday for public comment by social development minister Lindiwe Zulu, which proposes the comprehensive reform of the social security and retirement system, including the creation of a state-managed national social security fund (NSSF).
The green paper has been released for public consultation and has not yet been approved by cabinet. It recognises that it will take several years to implement the proposals.
Smith said the savings pools accumulated by the life industry financed much of the country’s investment requirements and fund SA’s capital market. He stressed that a better-integrated social security system requires that a balance is achieved between different components.
“For example, a state pension which is used to pool and subsidise risks between workers has to be balanced against what proportion of income remains for the funding of an adequate pension related to an individual’s accustomed standard of living.”
Smith says the proposals will have to be weighed with reference to how scarce individual and state resources are optimised on an affordable and sustainable basis. This means providing those most at risk with solutions first.
“Existing contributors are already struggling to preserve what they have accumulated, asking for access to their long-term retirement savings.”
He said the proposed NSSF would be a defined-benefit scheme and would pay benefits on a partially funded basis. “This means that today’s contributors have a percentage of their contributions used to fund those who have retired. The interests of the future young need to be protected against what is viewed by our actuaries as a strong likelihood of ever-increasing contributions to fund benefit promises.”
It is also important, Smith said, to have clarity on how the promises embedded in the design of the NSSF system will affect the fiscus. According to Smith, it needs to be ensured that future social security reform programmes do not inhibit employment creation.
“A job is still the best form of security. Social security is a safety net when all else fails.”
Smith, however, noted that the Covid-19 pandemic and consequences of the economic lockdown have highlighted “the urgent need for the appropriate social protection, particularly of informal and vulnerable workers as existing legislation and structures are not designed to cater for their needs. Asisa sees this as the most urgent issue to solve.”
Smith noted that the green paper contained significant proposals to streamline and restructure the social security system. “These are complex and wide-reaching reforms, which will not result in immediate change,” he said.
The paper identified three areas within the public social protection system that are lacking: a basic contributory state pension, statutory health insurance and adequate income security for those aged 18 to 59 years of age.
Asisa said in a statement that as part of a business sector task team it had been engaging with the government and social partners at the National Economic Development and Labour Council (Nedlac) for the past four years on a 2012 discussion document on comprehensive social security and retirement reform. Smith noted that the core proposals set out in the green paper are not new and have been the subject of discussion and debate for almost 20 years.
In terms of the green paper, the proposed NSSF would provide retirement, survivor, disability and unemployment benefits.
“All employers and employees will be obliged to initially contribute between 8% and 12% of qualifying earnings up to a ceiling, based on the Unemployment Insurance Fund (UIF) ceiling, which is currently at R276,000 a year. The final contribution rate will be informed by the funding approach agreed following consultations,” the paper says.
The government will subsidise the contributions of low-income workers. It is proposed that employees earning below an income threshold (R22,320 a year) would not have to contribute to the NSSF for retirement or risk benefits but will continue to contribute to the UIF. A simplified contribution arrangement for self-employed individuals and informal workers will be established.
The additional expense to the fiscus could be phased in over time through changes to the structure and value of tax rebates, subsidies and the possible introduction of additional tax.
Those earning above the tax threshold will need to contribute to supplementary retirement savings and insurance arrangements to ensure an adequate replacement income. The NSSF will also provide a default fund that will offer annuities.
“Workers above the tax threshold will be encouraged to contribute to either the employer’s occupational scheme or the NSSF default fund (the publicly offered competitive option). Employees will be allowed to opt out of the employer scheme in favour of the default fund should they deem it more suitable,” the paper notes.
It says the reform is intended to address gaps in the current system, such as the absence of a mandatory system for social security pension provision for retirement, death and disability benefits for all workers. This results in the exclusion of millions of workers from pension coverage as they are unable to access existing private sector options.
About 6.2-million formal sector workers are excluded from private occupational and voluntary schemes.
“This contributes to significant reductions in income at retirement, which results in old-age poverty and reliance on the social grant system as the only source of income in old age,” the green paper says.
“There is consensus that this gap must be addressed by introducing a mandatory retirement, death and disability insurance for all workers. These mandatory benefits should be provided through a publicly offered NSSF operated on the principles of risk pooling and social solidarity.”
To promote consumer protection, it is proposed that the private sector retirement providers be subject to more proactive supervision through an approved funds framework.
The green paper notes that the current social security system is fragmented at policymaking and implementation levels, resulting in high costs, exclusion, duplication and complexity. To address this, it proposes that the institutional framework for social security provision be overhauled through the alignment of the benefits and administration systems. The reforms aim to improve access, coverage, administrative efficiency, delivery and transparency.
Discussions on a comprehensive social security system have been ongoing in Nedlac. In 2016, the government tabled a discussion paper at Nedlac, which established a task team to work on the proposals. The green paper has considered the engagements with social partners and updated various sections since the tabling of the initial discussion paper in Nedlac.
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