The government wants to have its ”bold and ambitious” new social-security scheme, that could include a R30 billion-a-year wage subsidy, in place by 2010, Finance Minister Trevor Manuel announced on Wednesday.
The scheme was outlined by President Thabo Mbeki in his State of the Nation address earlier this month, where he said it was ”critical” to reforming South Africa’s social-security system.
Delivering his budget speech, Manuel told Parliament the planned budget surplus in the coming fiscal year created space for future social-security reforms.
He said though the current system of social grants -‒ which go to just under 12-million people, and account for just over 3% of gross domestic product — provided an effective safety net to the poor, it was also important to encourage saving and self-reliance.
The tax system contained a retirement savings incentive that particularly benefited higher-income individuals.
”But for working people who fall below the tax threshold, there is effectively no incentive, and indeed there is the perverse effect that if you save enough you might lose the old age pension because of the way the means test works,” he said.
Though South Africa had a well-developed retirement industry, and most employees were covered by pension or provident fund arrangements, in practice too many people surrendered their policies or cashed in their benefits when they changed jobs.
It was estimated that more than half of those who contributed to a retirement fund reached retirement age with a pension that was less than 28% of their final wage or salary.
”The time has come to put in place a new arrangement in which all South Africans will share, and that provides a basic saving and social protection system that meets the needs of low-income employees.
”We are therefore proposing a mandatory, earnings-related social-security scheme to provide improved unemployment insurance, disability and death benefits targeted at the income needs of dependants, and a standard retirement savings arrangement,” he said.
The scheme would also apply to self-employed individuals. It would be financed by a social security tax administered by the SA Revenue Service, and collected in individual accounts in the name of every contributor.
”Significant capacity building and institutional reform are needed on both the tax side and to administer benefits,” he said.
”This work has begun, with a view to implementation by 2010.”
To offset the cost of the social security tax for low-income workers, and to lower the cost of creating jobs, the government was proposing a wage subsidy for those whose earnings fell below the income tax threshold.
”These proposals are bold and ambitious,” he said. ”Much work still needs to be done.”
He said it was essential the scheme be administratively efficient, making streamlined use of payroll-based contributions, modern information systems and efficient payment arrangements.
According to the budget review, the Treasury policy document tabled along with his speech, the scheme proposals would be tabled for public consultation this year.
It said the social security scheme will leave the existing social grant system unchanged ”in substance”, and grant beneficiaries would continue to receive direct income support as the safety net expanded.
However, consideration should be given to abolishing the means test for the old age grant, or shifting the thresholds ”considerably”, so that the grant could be enhanced by a supplementary private pension.
The Treasury said the overall scheme would allow the government to provide ”more targeted fiscal measures” in support of job creation and growth.
It said the wage subsidy would cost South Africa R20-billion to R30-billion, depending on its coverage.
The subsidy, it said, might take the form of reimbursement to the employer, implemented as a rebate or credit in the PAYE system, calculated in relation to the gross wage paid to employees earning below a threshold of R45 000 a year.
For a wage less than R15 000 a year, the subsidy could equal a third of the wage.
”There is a case to be made for more targeted subsidy arrangements, perhaps focusing on particular sectors, or on young people or first-time entrants to the labour market,” it said.
This would lower the costs of job creation. – Sapa