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People are queuing for a social allowance. The Green Paper on Comprehensive Social Security and Retirement Reforms would abolish means testing of the old-age allowance and create a national contributory pension fund. (Archive photo: Masixole Feni)

The Green Paper on Comprehensive Social Security and Pension Reforms, published last month by the Ministry of Social Development and withdrawn almost immediately, attracted a storm of criticism from economists and some politicians. But the proposed measures deserve attention given that South Africa’s current pension system is in disarray. Here is the first in a series of GroundUp articles on the subject.

First published by GroundUp.

Jane * is 66 years old. She was officially employed for over 35 years, was making R13,000 a month at the end of her career, and was paying into a pension fund. Now she is retired – and she has no pension.

Your story is general.

Alex van den Heever of the Wits School of Governance says the government doesn’t track the number of people who run out of benefits in retirement or shortly afterwards. But the average income of those who retire is only a small fraction of what they made while working.

According to a 2020 report by BankservAfrica, around 350,000 people like Jane over 60 do not receive income directly from the state, from work, or from a pension. According to the Green Paper itself, “around one million elderly people are excluded from the existing state benefits”.

Jane made no income for nine years while raising her four children. After divorcing at 40, she worked five days a week for a large company that provided a defined contribution pension fund and freelance one day a week for 12 years.

At the age of 56, Jane raised as much as possible from her retirement fund to pay off debts she had accumulated from raising children. According to the law, the rest had to be converted into a pension, which meant that upon retirement she would have received R 250 per month. But at 65, when she was fired when the Covid 19 pandemic broke out, she took the small pension.

Her final net income was R13,000. If she just made a living while at work, she would be among the 3% of the best income earners in South Africa.

But in retirement she has no income. Since she is the owner of her home, she is not entitled to old-age allowance. She is dependent on her adult children.

The measures in the controversial Green Paper on Comprehensive Social Security and Pension Reforms, published by the Department of Social Development and then quickly withdrawn, would do things for Jane and millions of people like her, as well as the 3.8 million people who depend on her Are instructed to dramatically change the allowance of the elderly.

These proposals have been in the works for nearly two decades since the publication of the Taylor Committee Report on a Social Security Scheme for South Africa in 2002.

The Green Paper proposes the establishment of a National Social Security Fund (NSSF) to which all workers with a monthly income of more than Rand 1,667 must contribute. The new fund would provide pension, survivors, disability and unemployment benefits and bring all of these benefits under one roof.

Each month, all employers and employees would initially contribute between 8 and 12% of earnings up to an upper limit.

Individuals earning less than R20,000 per year are not expected to contribute to the fund and persons earning more than R276,000 per year (R23,000 per month) will not be expected to contribute more than that amount paid.

Those currently contributing to a private system would switch to the NSSF. If they earn more than the upper limit, they can transfer additional pension contributions to an NSSF default fund, to a professional fund or to a private pension fund of their choice.

Those who do not currently pay into pension funds and qualify would now pay into retirement plans themselves and would have a guaranteed pension if they survived that long. And if they died 65 years ago, the fund would make a payout to their family, including a lump sum for funeral expenses.

Low wage earners would have their contributions subsidized by the state treasury. This, according to the Green Paper, “will promote the formalization of employment and make a greater contribution to the protection of decent working conditions”. In the fourth part of the series, we examine a proposal to fund these contributions by former Treasury Secretary Andrew Donaldson, who is now part of the Labor and Development Research Unit of Southern Africa.

The senior citizens’ scholarship would remain, but in a new form.

The Green Paper suggests that everyone over the age of 60 should now receive this grant as a basis for social security for older people without a means test. The abolition of the means test would reduce the administrative burden and part of the grant payments would be collected by the state in income tax.

How much each employee receives as a pension in addition to the old-age allowance depends on the income over the course of his career.

The NSSF would pay as a defined benefit retirement plan. This means that the amount of benefits to which a pensioner is entitled is based on a formula and can be flat-rate or, as in the Green Paper, income-related. This means that the investment risk is borne by the fund and not the employee.

Many people in South Africa rely on defined contribution pension schemes. Here, the retirement benefits depend on the value of the contributions made by the employee plus the investment income. The contributor pays for the privilege of putting his own money aside, and if he wants to secure a lifelong income – an annuity – in retirement, he has to pay dearly for it. These agreements place the risk on the individual; If the stock market collapses in retirement, you’re out of luck.

The Green Paper suggests that two-thirds of a worker’s retirement savings that exceed the R276,000 ceiling should be retired, ie converted into lifelong income. Currently, retirees have to pay high fees when converting their savings into annuities. The NSSF would pay its own pension to encourage competition with the private sector. Currently, women tend to receive lower pensions than men due to their higher life expectancy – that would be more balanced.

The Green Paper states that employees who have completed a full career can earn a retirement income through the NSSF of “at least 40 percent of their earnings over the course of their career”. This is twice what the average worker can currently expect, according to estimates by the Organization for Economic Co-operation and Development for South Africa.

The contributions of today’s workers will partly fund today’s retirees and partly help build wealth to meet the needs of tomorrow’s retirees.

A quarter of the fund would be set aside as a reserve to protect against a crisis.

In the event of an accident at work, death or unemployment, this fund would pay out the employee or his beneficiaries.

What would that mean for Jane?

First, Jane would receive the Elderly Scholarship every month. At the current rates that would be R 1,890 per month.

Then she would receive benefits from the National Social Insurance Fund according to a formula to be calculated. The Green Paper stipulates that retirees should receive 40% of their final income (instead of between 17% and 24% as is currently estimated), including the old-age allowance.

Composition of retirement income at various income levels versus a 40 percent minimum target after full employment. (Source: Green Paper)

For Jane, 40% of her final net income would be at least R5,200 per month.

It’s not a fortune, but it would give her security and make her less dependent on her family.

Critics of the plan fear transferring this crucial responsibility to an incompetent and corrupt state. They also warn of the consequences for the insurance industry. We’ll discuss these concerns in upcoming articles. DM

* Not her real name

This is part of a series of articles on the Green Paper on Comprehensive Social Security and Retirement Reforms. Next up: our current pension system.

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