The Road Accident Fund (RAF) has been much in the news of late, for the usual dispiriting reasons. The RAF is an important, tax-funded spender. It manages great complexity, with over R50bn of revenue and expenditure a year — a formidable amount that the National Treasury expects to increase at an annual average rate of 19% per year over the next three years, from R53.1bn in 2024/25 to R89.7bn in 2027/28.
As a social service, the RAF and its R50bn-plus bill can be compared favourably — perhaps unfavourably — with other kinds of tax-funded expenditure. The old age grant now runs at R117bn, and the child support grant at R90.4bn, in an annual social development budget of R422bn.
The RAF is estimated by the Treasury to have a negative asset value (liabilities over assets) of R370bn, rising to R423bn by 2027/28). Can SA afford such largesse? Could other spending not make a better claim for the money, or lower taxes be a better idea and win more votes?
Fall off your bike on the mountainside, get bitten by a shark or snake, or drown in the sea, a river or a lake, and society commiserates and hopes your damages are covered by some insurance. Society cannot hope to do much more for the victim given a lack of resources. But get unlucky on the road, have a car push you off your bicycle, and SA society comes to the rescue — very expensively.
The payments by the RAF are funded by a levy on the price for petrol and diesel, set at R2.18/l of unleaded petrol. That is now about 10% of the price paid at the pump. That is essentially a stealth tax paid for benefits that the wider public surely does not recognise very well.
How many drivers or taxpayers are aware of how much they are paying for the RAF when they fill up? And who, other than the successful claimants on the fund, are aware of the scale of the benefits provided? Bad luck is not expected; it sadly just happens.
Compulsory third-party insurance elsewhere is typically covered by private insurance companies and the premiums they raise from vehicle owners, as was once he case, long ago, in SA — until that arrangement was superseded by the RAF. A mistake, surely.
According to the report of the RAF for 2023/24, there were 79,377 new claims registered that financial year, and 63,015 claims settled. The average claim on the fund had grown by 9.5% to R287,000. There has been a sharp decline from the 374,000 claims made in 2019.
Total outlays of the RAF were R45.6bn in 2023/24, of which payments made to compensate for incomes lost totalled R21.6bn, a chunky 47% of all payouts. The average claim for earnings lost was R1.2m, and so-called general damages paid amounted to R12.7bn, 28% of total payments made.
Out of financial necessity the fund has succeeded recently in reducing the number of personal claims made, improving the rate at which claims are paid out, and reducing legal fees incurred. The sums paid out have increased at a slower rate, from R42bn in 2019 to R45.6bn in 2024.
Further slowing down the growth in payouts is essential. A first step would be to ensure that the loss of future income, inflation adjusted, was appropriately discounted by the high after-realised inflation yields available from the RSA bond, which is available to any beneficiary with a lump sum pay out. It is somewhere close to a real and certain 5% per year for 10 years.
On a claim for the allowed maximum R350,000 of annual income lost, for say an agreed 10 years, to which an agreed inflation rate of say 5% per annum were added each year, a payout equal to the present value of the future agreed income losses would be R3.4m when applying an 8% discount rate (5% inflation plus 3% real), or close to R3m — R400,000 less — when using a higher discount rate of 5% per annum above inflation.
Still, far less would have to be paid out were the years of lost income more strictly limited, and the income inflation rate were assumed to be far lower. The accident victim could, moreover, be forced to buy a monthly annuity in exchange for the larger lump sums. A regular source of income would be more socially desirable than a lump sum that is easily squandered.
Insurance companies could compete for the lump sum provided by the RAF, offering an annuity to be administered by them on behalf of the client. And they could collect the income tax due, as they do with any administered pension, another way to reduce the net cost of the RAF.
The liability for the annuity offered would most likely be matched by the insurer purchasing a government bond of similar duration, hence helping to fund government debt, perhaps less expensively. Most important, vehicle owners could be encouraged to substitute private accident insurance for the RAF, though it would need tax incentives to have them convert.
The savings for the taxpayer of private third-party insurance could be immense. The RAF law would have to be amended to allow some of these changes, which are essential for fiscal sustainability.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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