South Africa Proposes Mandatory Welfare Fund Contributions

(Bloomberg) -- South Africa should impose compulsory levies on companies and workers to create and capitalize a public social welfare fund, the Department of Social Development proposed.

All employers and workers should contribute as much as 12% of their earnings to set up a fund that could provide unemployment, retirement and disability benefits, the department said in a so-called green paper on social security and retirement reform. Levies should be mandatory for those earning at least 276,004 rand ($18,190) a year, the current ceiling for unemployment insurance contributions, and the government should subsidize low-income workers’ dues, the department said.   

While elements of the proposal date back more than a decade, riots that erupted last month and claimed 354 lives have reinvigorated those calling for the state to increase support for the vulnerable. South Africa is one of the world’s most unequal nations, a legacy of the apartheid system that disadvantaged the Black majority and ended in 1994.

A move to impose additional levies could hasten an exodus of high earners from South Africa. It would also mark a significant change from ex-Finance Minister Tito Mboweni’s February budget, which reversed a decision to raise an extra 40 billion rand in taxes, granted inflation-beating tax relief for individuals and signaled a full percentage point cut in corporate taxes in the next fiscal year. 

Enoch Godongwana, a former labor unionist and head of economic policy for the ruling African National Congress, who replaced Mboweni as finance chief on Aug. 5, told investors last week that he doesn’t envision significant budgetary policy changes.

Inappropopriate Proposal

The proposal for a publicly administered fund was inappropriate as it didn’t account for the progress made in retirement funding reform, and would undermine employer and labor union rights, said John Anderson, an executive for investment, products and enablement at Alexander Forbes, the country’s largest insurance and retirement-fund adviser.

“The proposal would result in an effective monopoly,” Anderson said. “Government would need to establish new and unproven capabilities to administer the structure, with little evidence to suggest greater efficiencies or service standards over existing private-sector administrators.” 

The social development department also suggested that welfare grants be made universally available to all regardless of income or assets, and that funding be secured by changing the structure and quantum of tax rebates, and possibly introducing new subsidies and additional taxes. It could take as long as two years for the proposals to become law if they’re adopted.

A basic income grant of 1,306 rand a month, an inflation-adjusted upper-bound poverty line for South Africa, could push the country’s debt burden through 100% of gross domestic product within two years and may trigger credit-rating downgrades, according to Michael Kafe, an economist at Barclays Bank Plc.

IMF Warning

South Africa’s debt assessments are at the lowest levels since it first obtained credit ratings 27 years ago. The International Monetary Fund warned last month that deviations from the National Treasury’s projection that debt will peak at 88.9% of gross domestic product in the 2026 fiscal year could put public finances on an “explosive path.”

Stephen Smith, a policy adviser and member of the  Association for Savings and Investment South Africa’s social security standing committee, said clarity was needed on how the proposals will impact on state finances. 

“It needs to be ensured that future social security reform programs do not inhibit employment creation,” he said. A job is still the best form of security. Social security is a safety net when all else fails.”

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