Employed South Africans will pay a percentage of their monthly earnings into a new mandatory social security scheme. It is proposed that total payments will be capped at R750 a month, with lower-income workers paying between 13% and 18% of their monthly earnings into this fund.
The cap means that only people earning below R3 500 a month will have the full amount deducted from their salary and government intends providing a wage subsidy to cover the amount of the deduction.
The forced savings proposal is part of sweeping reforms as government attempts to help create a savings culture in the country.
The scheme will provide for pension payments as well as death and disability cover.
Those who want to contribute further will be able to choose between additional contributions to the social security scheme and participation in an occupational or individual retirement fund.
As employees will be able to elect whether their additional savings will go to the social security fund or their own provident or pension funds, it will not entirely replace existing funds. But there will be an offer to move from existing pension or provident funds to the social security scheme.
Details of the new scheme are contained in a document handed to journalists at the budget briefings on Wednesday. The document says that the current tax deductibility of pension contributions will not be taken away and that “the tax system will continue to reward retirement saving”.
The government still has to decide who will manage the fund. Traditionally these are managed by governments, but the document states that some countries have opted for competitive services provided by the private sector.
Part of the reforms will also review the complex manner in which tax on the lump sum received on retirement is calculated in order to simplify it. The first step is that anyone earning less than R43 000 per year will pay no tax on the lump sum on retirement.
The government is looking to provide some form of retirement benefit for all South Africans which is funded during their years of employment. Individuals will be able to choose whether they wish to make further provision for both retirement and death and disability or accept the basic cover.
A second look
Social welfare now reaches 11,8-million beneficiaries, from fewer than three-million in 1997, with the numbers increasing every year by an average of 23,6%, writes Jocelyn Newmarch. They are supported through old age pensions, child support, disability and foster care grants.
This increased social spending, said economist Dawie Roodt, has led to the strong demand in the economy.
But old age pensions, meagre as they are, are for poorer people actually a disincentive to save. These workers don’t benefit from tax breaks for retirement funding, which only kick in at higher income levels. If they do save for a pension, they will lose the state support, which is only available to the indigent who can pass a means test. Even workers who save for retirement often cash in their savings when they change jobs, leaving them unprotected later on.