The new social-security pension will bring relief to the middle-income earners and should not be a tax burden on the better-off, said Treasury officials on Friday.
”If you are currently contributing to a retirement fund at [a rate of] 15% the likelihood is that this will mean no extra contributions,” said the chief director of financial sector policy at the Treasury, Jonathan Dixon.
He said, however, that everyone would contribute ”at least a fraction” of their contributions to the social security fund.
”What the individual puts in is what the individual gets out.”
Dixon was part of a high-level team of Treasury and finance officials, led by Finance Minister Trevor Manuel, which released details in Johannesburg of the proposal for beefing up the social-security pension, reforming the private pension system, and accompanying tax reforms.
These details are in a social security and retirement reform discussion paper.
The reforms are expected to be introduced from 2007 to 2010.
The social security system will be in addition to the existing state old age grant of R870 a month. The existing means test for the social grant will be ”lifted significantly” although not necessarily abolished.
Participation will be mandatory up to an agreed earnings threshold, probably R60 000 a year. It will provide basic retirement, unemployment, death and disability benefits.
There will be additional mandatory participation in private retirement funds for those earning above the threshold, to ensure that those at all earning levels provide for their retirement.
Those earning above the threshold may either add further contributions to the social-security scheme, or choose work-based or individual retirement funds.
Contributions will be collected as a payroll tax and there will be a state wage subsidy for those earning below R60 000 a year to help pay for this.
It will start in the formal sector then be extended to informal and household employees.
”The proposal is that everyone in formal employment will pay a social security contribution of between 13 and 18% of their earnings, up to an agreed threshold,” states a Treasury document on the proposals.
”This will include the present unemployment insurance contribution, and in addition will finance an individual savings account for retirement, and death and disability benefits.”
The private retirement fund industry reforms aim to ensure a strong, cost-effective and well-regulated private pensions sector.
The private industry will continue to supplement the basic retirement benefit of the new fund.
The reforms aim to improve oversight and encourage a reduction in the number of funds — there are 13 500 registered retirement funds — to cut costs.
The reforms will be accompanied by tax changes which aim to encourage the retirement savings.
Two-thirds of South Africans retire without sufficient provision for retirement, said Manuel.
”That two-thirds of people is clearly a big, big issue.”
He said retirement funding was a R1-trillion industry.
”It’s not something we want to mess around with, we want to strengthen it.”
Manuel said the widespread reform was needed because setting up the system could not be done without looking at the rest of the industry.
”We need to ensure that we can develop a plan that will be durable.”
Dixon said South Africa had a good social grant structure on the one hand and a well-developed system of tax breaks to encourage retirement saving for the better off on the other, but that those in between fell between the cracks with no cost-effective options.
”The stark issue really is that there is a fracture in the structure.”
The new system aims to deal with this problem.
”After 13 years you have a situation where government policies have created the fiscal space to be able to look at and tackle these type of reforms.”
”This is not about how I look after myself, it’s how we look after each other,” said SA Revenue Services (Sars) Commissioner Pravin Gordhan.
Sars will administer the social-security system. Gordhan said that, from an employer perspective, the reforms would result in a more simplified tax regime in three to five years although payroll systems must be modified. The wage subsidy would also act as an encouragement to employ more people.
Treasury director general Lesetja Kganyago said good administration would be crucial.
”If you do not have jacked-up administration people will not have confidence in the system and it is very important that people have confidence.”
The scheme has been under discussion since 2002. More details on the proposals will follow in March and later this year.
Manuel called for business, labour and other interested parties to learn about the proposals and get involved in the discussions.
The discussion paper is available on the Treasury website . – Sapa