A dramatic series of reforms aimed at transforming the funding of the welfare system is being debated in the government, with Minister of Finance Trevor Manuel suggesting for the first time that a major new tier of mandatory private retirement and health benefits should be developed.
“As formal employment grows, South Africa will need to strengthen its ‘second pillar’ of contributory social insurance arrangements to accompany state-financed services,” the Medium- Term Budget Policy Statement says.
“Elements of this reform include extending participation in retirement funds, reform of unemployment, occupational injury, and road accident compensation, and evolution of a social health insurance framework.”
Several rich countries have, with varying degrees of reluctance, adopted the three-pillar approach recommended by the World Bank to relieve pressure on overburdened public welfare systems.
The first pillar is a tax-funded, state-managed and redistributory safety net; the second is mandatory contributions to privately managed funds; and the third is voluntary saving.
South Africa has elements of the first and last, with a large, poorly coordinated space between them. According to Treasury economic policy chief Elias Masilela, work on the regulatory and legislative basis for a modernised approach is being conducted, with an eye to expanding social security and boosting household saving levels.
Early indications of the complexity attending this kind of reform in an environment of high unemployment have already emerged in the debate over health-care finance. There is as yet no agreement in Cabinet over the scope and pace of change in the sector, with Minister of Health Manto Tshabalala-Msimang pushing for a rapid shift to mandatory social health insurance, and the National Treasury arguing for a more cautious, phased approach.
The Department of Health has, since last year, been punting proposals that would see salaried employees making mandatory contributions through private medical schemes to a fund that would enable more low-income workers to have access to health insurance.
The department has also been calling for changes to the tax treatment of medical benefits, arguing that exemptions for company and individual medical aid contributions result in an unfair subsidy to those who can afford expensive medical aid packages.
The Treasury has so far resisted pressure for radical and immediate changes, but officials are now considering tax reforms that may prepare the ground for a social health insurance approach, although they stress that “single payer” national insurance is not being considered.
Treasury health director Mark Blecher told the Mail & Guardian a number of options were under review in an effort to identify reforms that would increase equity without eliminating the advantages of the current system. Companies are able to claim deductions on two-thirds of the cost of medical aid contributions, and employees on one-third, which means that the most expensive packages generate the biggest tax break.
“We are considering a number of changes. We could make the entire employer contribution deductible up to a cap. That would create more of a subsidy and incentive for middle and low-income workers. It would extend cover in a more equitable way, and put pressure on some of the more inefficient, unaffordable schemes to contain increases,” Blecher said.
The Treasury argues that it is crucial to move carefully on reforms that could see up to R40-billion annually flowing through a social health insurance fund. That would dwarf the R11-billion disbursed by the road accident, unemployment insurance, and workplace compensation funds.
“The health sector wants a big bang: a big fund, a mandatory tax, and so on. We certainly need to start thinking about it, but at the moment formal employment isn’t growing fast enough,” Blecher argues.
Enormous challenges will also attend reforms to retirement funding. Instead of a cut in the 18% tax on retirement funds they are currently campaigning for, insurers and life companies may find themselves having to develop individual retirement accounts or similar vehicles to handle compulsory retirement savings, both for lower-income workers and the well-off.
Masilela did not want to be drawn on the details, but said: “You will hear lots of things … It is still in the cooking — major, far-reaching reforms have to happen, but delivery on these dreams depends on private sector behaviour.”