South Africa

Maverick Citizen Op-Ed

Comprehensive social security reform for South Africa is essential

Presently, many low-income households are forced to rely on privately offered individual products with very high fees and stringent conditions that lock you in with one provider until such time as the product matures. (Photo: Nadine Hutton/Bloomberg via Getty Images)

Our legacy social security regime has developed what can be termed a ‘policy lock’, where the interests vested in the incumbent system mount concerted, and largely successful, attempts to block reform. This extends to even obstructing conversations about reform – as who knows where public conversations may lead? 

Alex van den Heever is an adjunct professor and holds the chair of Social Security Systems Administration and Management Studies at the Wits School of Governance.

The recent publication of a Green Paper on social security reform in South Africa has elicited immediate public reaction – mainly from elements within the financial services industry who are plainly nervous about the implications of a more complete system of protection for income earners affecting pension arrangements as well as death and disability coverage. 

Put simply, the proposals envisage the introduction of a standard three-tier social security system, together with a supporting institutional and governance framework, where we currently only have two: 

  • with the first tier comprising general tax-funded transfers to households in the form of social assistance grants (some of which is in place); 
  • the second for a tier where benefits for unemployment, maternity, illness, disability and death are related to earnings, with coverage financed from contributions (which is largely not in place), and 
  • a third tier, where private arrangements for the coverage of pensions, disability and death are inter alia required to comply with statutory participation, portability and benefit guarantees (which, despite the scale of the industry, are not in place). 

Context matters

To better understand the context for these reforms, it is worth noting that South Africa is an international outlier in not having a second-tier social security system, which is found in virtually all countries of South Africa’s per capita income and above, as well as many below. 

The missing second tier is largely an anomaly of apartheid where the virtual guarantee of employment for whites resulted in comprehensive social protection through employee benefits and some limited social security benefits. 

Under apartheid, the South African government did not face any political consequences for its shallow contributory social security system as no one that voted was left unprotected. This is, however, not the current context, and was never going to be sustainable in a democratic state. 

The absence of a well-developed second tier has effectively resulted in the emergence of a very large voluntary private tier for pensions, death and disability protection as both individuals and employers have attempted to protect themselves as best they can. 

However, the shape and quality of schemes offered to employers (the key decision-makers for employees) and individuals has largely been determined by the influential financial services industry itself.  

Our legacy social security regime has developed what can be termed a “policy lock”, where the interests vested in the incumbent system mount concerted, and largely successful, attempts to block reform. This extends to even obstructing conversations about reform – as who knows where public conversations may lead? 

While this is expected, it raises important questions about whether the institutional incumbents have to date been excessively privileged in South Africa’s social security debates relative to the interests of the wider population. 

The debate and vested interests

Before looking at what the wider debate entails, it is worth making explicit what interests the financial services industry is trying to protect – given its wealth, importance and inserted role in these deliberations. 

As indicated above, the Green Paper proposes a series of second-tier earnings-related social security schemes which aim to address the very poor protection currently being offered to low- and middle-income earners.  

It also proposes an improved regulatory framework for third-tier private schemes to institutionalise three things: first, access to group-scheme coverage; second, benefit guarantees; and third, protection from excessive fees – particularly when accessing annuities at retirement. 

Presently, many low-income households are forced to rely on privately offered individual products with very high fees and stringent conditions that lock you in with one provider until such time as the product matures. 

The precarious nature of their employment also means that even when they access employer-based schemes (which offer better protection than individual products), these are temporary and often drawn down during their volatile employment careers. 

A second-tier social insurance scheme offering basic earnings-related protection for these income groups would, however, clearly have implications for the quite profitable individual products if the final framework established a more stable and reliable substitute arrangement for this coverage. 

However, while this may seem important, the principal concern for the financial services industry actually lies elsewhere. 

It involves the proposal for a pay-as-you-go (PAYG) earnings-related tier for retirement provision. In the proposal, all income earners would contribute and benefit from this tier – substituting some coverage presently offered through private retirement funds. 

Due to the size and stability of a contribution base made up of all income earners, it is possible to establish a pensions regime where contributions fund benefits on a recurrent basis without the need for the accumulation of a vast reserve as presently exists for the Government Employees Pension Fund (GEPF). 

Virtually all social security regimes internationally rely on such PAYG arrangements. 

They only vary on the degree of partial funding, by which is meant their level of reserving. 

Full advance funding requires that a pension arrangement maintain a “termination reserve” – or a reserve sufficient to make good on all liabilities if the fund must be terminated immediately. 

While full advance funding makes sense for employer-based pension funds, as the underlying employer may go insolvent, the greater the level of pooling (i.e. the greater the number and diversity of contributors) the less the risk that a single dramatic contingency (adverse event) could undermine the ability of a fund to finance its liabilities. 

This is the standard logic of the law of large numbers. 

When this pooling is societal, by which is meant every income earner in a country, the risks associated with a PAYG regime become manageable without a substantial reserve – usually with little more than a buffer fund to provide time for adjustments to contributions and benefits to restore long-term equilibrium where any imbalance has resulted from demographic changes and economic cycles. 

Sweden, Poland and Italy have, for instance, institutionalised this balancing act into an automatic adjustment mechanism that offers a benchmark for the design of earnings-related PAYG social pension schemes in the modern era. 

The full advance funding of the GEPF in South Africa is also anomalous, as it is effectively underwritten at a societal level, i.e. by the taxpayer. 

The only contingency that could require a termination reserve for the GEPF to be activated, or for any second-tier pension scheme for that matter, is the complete collapse of the South African economy. 

Unfortunately, were such a contingency to occur, the assets in the reserve would have no value – except for any international investments. However, were the GEPF to place a substantial part of its investments outside of South Africa, domestic businesses would not benefit from the savings, further nullifying any rationale for the reserve. 

So, the GEPF relies on a self-insurance arrangement for a contingent event that is highly improbable, but if it were to occur would provide no insurance. 

Effectively, the reserve serves no purpose. At least no reserve-related purpose. 

The reason why these discussions are uncomfortable for large parts of the financial services industry is that any convergence on a more balanced framework threatens the easy returns they make on excessive asset management fees in a largely captive market. 

The industry makes these fees on the assets under management of all private pension funds as well as those of the GEPF. 

In the case of the GEPF, with upward of R2-trillion in reserves, most assets are farmed out by the Public Investment Corporation (PIC) to institutional asset managers for which they earn a percentage. 

In the case of private investments, the question is whether competitive markets govern the behaviour of corporate actors. For this to happen, consumers must be placed in a position to act in their own interests. They must be informed and able to exercise meaningful choices. 

However, the average consumer is unable to navigate or challenge product suppliers in this industry due to a pernicious mix of market concentration, product complexity and non-independent advice from brokers who are effectively integrated into the product suppliers.

The tax incentives for pension contributions exacerbate this problem by channelling trillions of rands of savings into specialised funds over which members and beneficiaries have no effective control or influence. 

This generates a “perfect” market (from the product suppliers’ perspective) for overcharging captured consumers. This is, of course, the opposite of a classic perfect market required for efficient market outcomes. 

It is therefore important to understand the context for the public narratives flowing from the financial services industry in relation to the Green Paper. 

While there is some threat for their low-end insurance products, their principal concern is the threat to revenues from assets under management that could result from a PAYG regime for pensions that substitute for some of the advance-funded private retirement arrangements. 

The larger the proposed second tier, the greater the substitution effect and the bigger the loss. 

It is worth noting that because of this threat, the financial services industry has been camped at National Treasury’s door since the 2002 Taylor Committee of Inquiry to try to keep such debates out of the public domain. 

This strategy has been very successful – as evidenced by a mere official of National Treasury feeling sufficiently emboldened as to publicly castigate a member of the executive for publishing a Green Paper without Cabinet approval (which, by the way, is not required). 

Normally it is for the president, Cabinet or Parliament to bring an errant minister into line. Not a government official. This bizarre intervention speaks volumes for what is going on, and should be carefully noted. 

Another interesting feature of the public debate to date has been for the financial services industry to characterise the second-tier contributions as a “tax”. 

This is done as a deliberate scare tactic to cause public dismay with the reforms. 

What is proposed? 

The paper offers an indicative social security contribution of between 8% to 12% of payroll, up to an income ceiling for a combination of benefits. 

But these are contributions that substitute for existing social insurance and private premiums for retirement, death and disability. They are not general taxes. If they were, every employer-required contribution to a private pension fund would be a tax. 

Apart from the low-income groups presently not covered, no one would contribute anything more than what they do now. New low-income contributors would be supported by a contribution subsidy. The current mishmash of social insurance contributions would be consolidated into one. 

The point-of-departure proposal is therefore to consolidate the various incumbent social insurance schemes (UIF, the Compensation Fund, the Road Accident Fund etc) within the proposed National Social Security Fund, and to add second-tier pension, death and disability protection. 

The contributions would therefore qualify members for specified benefit entitlements, which, to be clear, is not how a general tax works. 

For the people presently contributing to a retirement arrangement, the contribution would involve either the substitution of an existing contribution to a private fund into the National Social Security Fund, or – depending on public engagement – an underwriting arrangement (not unlike reinsurance where a primary insurers is insured by secondary insurer with a larger more diverse risk pool) organised by the social security fund to ensure that guaranteed benefits can be achieved through a private fund. 

The third-tier system, where contributions are expressly made to private funds, would involve no changes to current contributions. The objective of the reforms here would be threefold: first, to ensure guaranteed levels of protection in retirement; second, to ensure adequate levels of death and disability insurance protection; and third, to ensure value-for-money on the quality of benefits relative to the contributions. 

Interestingly, these specific proposals were largely framed by the National Treasury, to which I can personally attest, as part of an inter-departmental task team on social security – and not by the Department of Social Development. 

Therefore, while the interests and sustainability of South Africa’s financial services industry are crucial to South Africa’s prosperity, this should not extend to it being permitted to engineer public engagement to favour only its interests. 

Any reform process should equally not harm a well-established industry, however well-intentioned. Every effort should be made to ensure that any comprehensive system of social security promotes resilience in society, the economy and the financial services industry. 

Governance

Central to this objective is an improved governance framework for social security. 

A compelling feature of the proposed institutional framework in the Green Paper is the introduction of a social security supervisory (not advisory) board to oversee the various parts of the social security system, which would include the proposed social security fund and the South African Social Security Agency (Sassa). 

The board is structurally designed to be independent of the executive of government, and is empowered to appoint and remove the senior executives of the various agencies it oversees – not the minister. 

This involves a fundamental departure from the public agency design followed by the government to date. It implies the establishment of public, rather than state, agencies. 

It should be noted that, over the past 20 years, National Treasury has championed the cause of the deeply flawed and capturable so-called “state-run agencies”. 

They were the department, for instance, principally responsible for Sassa being introduced without an independent supervisory board, in contrast to the original proposals made by the Department of Social Development. 

The process of public engagement will plainly deepen governance proposals along these lines and contribute to a generally needed deliberation on the structural features of other public organisations, both current and new.  

The institutionalised corruption that drives the failure of state-run agencies requires that South Africans address the wider governance frameworks and corporate governance designs of any necessary public agency. 

It is, however, plainly self-defeating to suggest that we should hold off on any and all government action on the basis that “it will always be corrupt”. Making public organisations fit-for-purpose is, and always has been, a structural design issue. This is therefore where the focus of attention is required. 

By way of contrast, it is worth noting that there is no adequate countervailing governance framework to address the disempowerment of consumers in the privatised system of social protection. The threadbare patchwork of ombuds offices cannot make up for the structural side-lining of consumers and the public in this industry. 

The idea that people are better protected from being fleeced in a system that is untransparent, uncompetitive and oligopolised is a fantasy. Corruption in the private sector is as institutionalised as in the public sector. The difference is that the rules of the game make the former type of corruption “legal” in a formal sense. 

The solutions to this predicament do not lie with the elimination of public agencies or private markets, but instead with better governance arrangements that put citizens, consumers and the general public back in control of their destinies. 

I, for one, certainly hope that a substantive evidence-based deliberation on the future of South Africa’s social security system takes place. This would involve a process that moves away from behind-the-scenes bilateral conversations between the financial services industry and a few officials in Treasury, to one that includes wider society and more substantive involvement from the government as a whole. 

Ultimately, the purpose of this process is to develop a sustainable social security framework that will work for South Africa for the next 100 years. This, instead of a system based on very generous tax giveaways for which nothing of social value is expected in return, a scattering of misaligned and poorly managed public social security schemes, and a paltry residual social assistance system. South Africa deserves more. But, to get more, the country must step up – or accept the shabby hand it is currently being dealt in perpetuity. DM/MC

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All Comments 6

  • I don’t think at this point it is wrong to demand transparency & accountability from the ANC when it comes to our taxes before they can ask for more. Most people I know are not against social services by default, but it is absolutely correct to assume the worst when it comes to the ANC & corruption. Even in the midst of the greatest pandemic in recent times, Cadres were stealing huge amounts of money & we have seen no accountability.

    As you say, context matters, & merely waving away core arguments that don’t fit into a narrative will not solve anything. The current inability of the ANC to run anything without corruption is based on facts not perception. More money will not help, & even if it would, it is clear that this would not help in anyway to finally see any accountability for the ANC. Basically the ANC will be buying votes with the money of a tiny shrinking middle class (of all races!)

    The assumption that any state paid pension would work the same way it does in Europe is ludicrous. When we have a tax base like Sweden, & near zero corruption we can gladly start comparing. This of course doesn’t even begin to address the difference in service delivery we see in European countries.

    Lets not forget the other social systems that are all looming in the future, such as the NHI, BIG etc.

    If you really want people to buy into a social security fund, then take their worries more seriously..apart from that, yes lets have an open discussion, including inconvenient criticism.

  • Why the structure that everybody pays up to 12% of 276? That is going to hurst the people that earn R300k per year very hard as they contribute as much as people earning R3m a year. It is arse about face

  • As long as corruption is running wild in this country and whistle blowers have no protection, I cannot agree to NHI or pension reform.

  • The problems with this implementation of this:

    1) The ANC/criminals that run this country
    2) The ever shrinking tax base
    3) The ever increase number of unskilled people who contribute little/nothing to the state coffers

    Until we get rid of the ANC, we must hold the line. Absolutely NO changes that further entrench state control must be made until the ANC is gone, or by some sort of miracle they purge themselves of the corrupt (goodbye 75%+ of the party).