The majority of South Africans will not reach retirement age as the average life expectancy falls to 50 years, with the average male expected to live to 48 years.
The National Social Security Fund (NSSF) will therefore have to focus on benefits for death and disability. This will be redistributive in nature, but is a reality our society faces as our government’s failure to tackle unemployment and the criminal handling of the HIV/Aids pandemic means more people are dependent on social grants for survival.
Earlier this year during a visit to South Africa Dr David McCarthy, a world expert on pension reform, said that the poor have far more pressing needs than retirement savings. South Africa’s unemployment at 23% is equal to the unemployment rate of the US at the height of the Great Depression and South Africa has fallen on the UN Human Development Index, which now ranks in 121st place.
South Africa’s high level of inequality and low life expectancy due to HIV/Aids means that most of the poor will not reach retirement age and, if they do, thanks to the tax-funded state pension, many will be better off financially than during their productive years.
South Africa’s Social Old Age Pension (SOAP) meets the needs of the poor in retirement with two million people receiving an income of R940 a month.
On average this income supports five family members or a total of 10 million people — nearly a quarter of our population — providing a form of social security, albeit inadequate.
According to David O’Brien, head of retirement reform at Old Mutual, two million of South Africa’s nine million formally employed people earn less than R1 000 a month. Therefore they would be excluded from contributing to the NSSF based on current proposals and would on retirement receive the state pension which is already equal to their current earnings.
This is in fact better than what the average South African can expect on retirement. Old Mutual estimates that on retirement the average South African will receive a replacement ratio of 28% from their retirement savings.
In other words the average South African will receive a retirement income equal to only 28% of their income in their final year of employment. The International Labour Organisation recommends a country has a minimum replacement ratio of 40%.
O’Brien says the state pension provides a 40% replacement ratio to 55% of working South Africans. It is clear that South Africa has already gone a long way to meet the needs of lower-income retirees.
The gap that remains is to provide risk benefits to a segment of the population that faces destitution if the breadwinner dies or becomes disabled. HIV/Aids has also increased the number of people who are unable to work due to illness.
The government’s need to provide for risk benefits through a national fund will be redistributive in nature. High-income earners who may qualify for better premiums for risk benefits will cross-subsidise lower-income earners in high-risk industries.
John Kotze, group assurance executive at Old Mutual Corporate, says, for example, that on average 20 out of 1 000 miners employed die each year. In the financial industry the mortality rate per 1 000 lives drops to three. Therefore group life cover for employees in the mining industry is substantially more expensive than in the financial sector.
The average miner contributes 50% of his retirement savings to risk benefits compared with about 20% for financial services employees. Therefore an individual in the mining industry will always be underfunded on retirement. The argument for a redistributive pension system is to cover a basic need for many lower-income South Africans.
While this will be seen as another tax on a relatively small tax base, it is a way for society to spread the high risks that miners, for example, take every day to produce the gold, platinum and coal, which in turn generates wealth for the country as a whole. But government should not forget that it too needs to take responsibility for the fact that South Africa faces unacceptably high unemployment and a falling life expectancy, which put strain on the economy and which cannot be solved with more taxes and grants. South Africa’s increasing dependency on a small tax base to provide for the basic survival for a large portion of society cannot be sustained indefinitely.
Preserving retirement
David O’Brien, head of retirement reform at Old Mutual, says if formally employed South Africans preserved their retirement funds when changing jobs, the average replacement value on retirement would be 79%, which would suggest that saving for retirement is not the issue, but rather shows a need to lock in retirement funds.
However, this is a delicate issue. For many middle- to lower-income South Africans who are saving for retirement, the need to draw on their retirement funds is often an issue of survival as South Africa offers no safety net for the unemployed. O’Brien says a blanket decision to prevent withdrawals could have negative consequences.
“There needs to be a balance between saving for the future and basic survival,” says O’Brien. Old Mutual Corporate announced this week that it has eliminated upfront administration fees for people who are clients of Old Mutual or who are employed by organisations who are invested in Old Mutual and wish to preserve their investments in its corporate Protektor Preservation Fund.