Title: Portfolio%20Committee%20on%20Social%20Development%20Budget%20Hearings:%20Social%20Security
1Portfolio Committee on Social Development
Budget Hearings Social Security
Presentation by the Department of Social
Development09th March 2007
2Presentation outline
- Legislative Developments, Pending Regulations and
policies - Overview of the Comprehensive Social Security
System - Retirement Reform
3Comprehensive Social Security
- PROGRAMME OBJECTIVE
- To enhance the human well-being of all through
measures that address income poverty through
adequate incomes throughout a persons
life-cycle, including equity and efficiency of
benefits - Focus on
- Policy and Legislative Development focusing on
- Social Assistance
- Social Insurance
- Social Assistance Implementation Support
4Legislative Developments, Pending Regulations and
policies
5Comprehensive Social Security Legislation and
policies
- Social Assistance
- Disability Benefits
- Develop policy to address needs of people with
chronic diseases - The policy will provide distinction between
people with disabilities and people suffering
from chronic illnesses - To provide for needs of these category of our
client group - Develop tools to facilitate uniformity in
assessing disability - Children Benefits
- Revise policy on comprehensive social security
for children to address needs of all vulnerable
children up to the age of 18 - Consolidation of services to children
- Outcomes of the study of perverse incentives
6Comprehensive Social Security Legislation and
policies
- Social Assistance
- Re-engineering of the Social Relief funds
- Consolidation of social relief funds into one
institutional framework - Social Insurance
- Draft legislation to effect reform of retirement
provisions
7Overview Of The Comprehensive Social Security
System
8Package of services
- Income poverty the child support, old age are
measures to support unemployed poor
households/individuals - Service poverty Healthcare Primary secondary
education water and sanitation, electricity,
housing - Asset poverty access to productive and
income-generating assets (such as land and
credit) access to social assets (such as
community infrastructure) - Special needs measures to assist the disabled,
foster care grant, child dependence grant - Social insurance UIF, RAF, COIDA, etc, private
retirement/ life assurance funds, private medical
schemes in their regulation (including risk
equalization and employer mandates)
9Governments 3 pillar social security framework
- Government adopted the concept of comprehensive
social protection in 2004 - Pillar 1 social assistance and the social wage
- Pillar 2 social insurance - those can afford
must contribute in a system based on social
solidarity to protect against unemployment,
sickness, disability, old age and death - Pillar 3 voluntary contributions for benefits
over and above pillars 1 2, e.g. additional
retirement annuities
10Progress on Pillar 1 Social Assistance
- Number of social assistance grant beneficiaries
has grown from about 2,5 million in 1997 to 12
million today - Budget for grants now amounts to R61 billion p.a.
- Old age grant beneficiaries now over 2,1 million
(plateau) - children beneficiaries now 8,2 million
- Disability now cover 1,3 million
- Foster beneficiaries exceeding 300 000 (fastest
growing) - Setting up Social Security Agency for an
effective and efficient national grants
administrative system - Shift of the function from provinces to national
was effected. - The implementation of a new service delivery
model and a system integrity programme have been
initiated with a view to improve delivery
11Progress on Pillar 1 Social wage
- Social assistance complimented with the provision
of - Education, free to those who are in non-fee
paying school areas, The illiteracy rate declined
from 25 in 1994 to 4 today - Free health care to certain vulnerable
categories, Our research indicates that 94
beneficiaries now live within 10km of a health
facility - Potable water, which was available to only 59 in
1994, is now provided to 83 of population - Access to electricity is now available to about
75 of population, compared to below 50 prior to
1994. - Public Works Programmes set in place to create
jobs to respond to the plight of the poor.
12Existing and New initiatives
- Government has been working towards expanding
Public Works Programmes (EPWP) in both
infrastructure and services sectors - Currently over 300 000 people benefit from these
the EPWP towards a target of 1 million job
opportunities within five years - A new initiatives is to link beneficiaries of
social grants to poverty alleviation and economic
opportunities. - The economic opportunities include access to
education, skills development, entrepreneurial
and employment opportunities
13Pillar 1 - Challenges
- PC-SOCDEV need to note that there are gaps in the
social assistance programme in respect of
vulnerable persons between 14 and 60 years (65
for men) who fall outside of social assistance
programme. - Already government is exploring measures to
support vulnerable children between the ages of
14 and 18 years - We are developing measures to support people with
chronic conditions - Although government is on target to achieve MDGs
in respect of water, sanitation and electricity,
there are service delivery challenges
14Progress on Pillar 2 Social insurance
- The area of social insurance cover
- Retirement provisions
- Social health insurance
- Road Accident fund
- Unemployment
- Compensation occupational injuries and diseases
on duty
15Retirement Provisions
- The Department of Social Development completed a
thorough review of retirement provisions. The
findings indicate that - Only 6 out of 12 million employed persons
contribute to some form of retirement savings,
using more than 13 500 funds - The system is fragmented, inadequate, prohibits
portability, - It punishes those who wish to transfer benefits,
- System excludes low-income people,
- Costs for products are the highest in the world
and benefits do not always provide value for
money. - The Cluster is proposing the removal of the means
tests for old age grants, a mandatory system of
retirement savings, with disability and death
benefits, and provision for post-retirement
medical contributions and consolidation of
administration of social security
16 Social Health Insurance
17Coverage in Medical Schemes by Household Income
Source Based on Census 2001
18Health Problems with Current Pillar 1 Subsidy
for Healthcare
Lower income groups receive least subsidy
Income too high for fully-subsidised public
sector health care. But income too low for tax
expenditure subsidy.
Higher income groups receive most subsidy
19Health private sector
- Currently the subsidy framework reinforces gross
inequity by subsidizing it, and permits
significant risk-selection - Full elimination of the above requires
- Implementation of the REF (underway)
- Restructuring of medical schemes benefit
arrangements to achieve community rating - Expansion of Prescribed Minimum Benefits
- Shift of competition away from risk-selection and
product design, to price and the quality of
coverage
20Healthcare
- Removal of point-of-service means test
- Implement an explicit minimum benefit framework
applicable in both the public and private sectors - Both should be made explicit in legislation with
norms and standards in the public sector and
prescribed minimum benefits in the private sector - Implement universal minimum entitlements
- In-kind for non-contributors
- Contribution subsidy for medical scheme members
21Healthcare
- Create autonomous public hospitals (full
decentralization) - Implement a risk equalization fund to make
provision for income and risk-related
cross-subsidies - Implement an environment for low-income group
risk-pooling in the private sector - Introduce a coherent price setting framework for
out-of-network tariffs - Introduce structural reforms in the private
sector to deal with provider market concentration
and its cost consequences
22Road Accidents Funds
23Road Accidents
- The Road Accident Fund has completed policy
review and proposals to move to a no fault based
system. - Consultations are currently underway with a view
to finalise policy proposals for a new system - System a hybrid based on liability insurance and
some social law principles - No advantages of a social insurance system are
incorporated in the design - The no-fault system needs to be implemented as
all alternatives are inefficient - No logic to the application of a fault-based
system in the allocation of benefits INCLUDING
socially reprehensible behaviour
24Road Accidents
- There is no logic in withholding benefits from
families and dependants where socially
reprehensible behaviour occurred - The costs of healthcare and associated loss of
support will fall on someone - Discrimination should only be permitted to
anti-selection this is not the case even with
socially reprehensible behaviour
25Road Accidents
- Shift to benefit system
- Principle of indemnification of certain costs
should be followed - Medical costs no limit (fund needs to negotiate
arrangements to limit its liability) - Must have no-balance billing tariff schedule
- Should provide for designated service providers
- Needs to sort out its liability relative to that
of medical schemes (can have significant
efficiency improvements if this is done) - Funeral costs fixed payment to ceiling
- Life-enhancement benefits related to degree of
assessed impairment - Loss of income benefits should continue but be
paid out on a periodic basis only - Common law right to damages is incorrectly dealt
with by Satchwell (in our view) - will result in transfer to imperfectly
functioning insurance system - consideration should be give to compulsory
third-party insurance for this component,
distinct from other benefit determinations, paid
for through the tax system - fixed benefits should be paid for using the
petrol tax
26Compensation for Occupational Injuries and
Diseases
27Compensation for Occupational Injuries and
Diseases
- Requires a comprehensive review
- Governance and administration
- Fragmentation
- Governance framework problematic
- Coverage incomplete some workers excluded
- Revenue more efficient revenue collection
system required shift to SARS? - Medical compensation Benefit framework correct
but cost saving measures are required - No regional co-ordination
28Compensation for Occupational Injuries and
Diseases
- Right to claim compensation limited to 12 months
- appears unfair given that many people do not know
their rights - obligation to inform should be placed on COIDA,
otherwise no time limitation? - this right also nonsensical in cases of chronic
diseases linked to employment - Need specialised tribunal for disputes in
relation to all occupational injuries and
diseases - Need to co-ordinate rehabilitation and
return-to-work approaches
29Unemployment Insurance
- The expansion of coverage to domestic and farm
workers has been a great success, bringing 1
million persons into the net - Unemployment insurance as provided in South
Africa is an important social insurance
mechanism, particularly for low-income people. - However, as it stands it will make little impact
on the consequences of the unemployment problem
as manifested in South Africa today. - The system is essentially compensatory
- very little preventive measures are in place.
- It is doubtful whether the Fund itself can be
employed to serve the wider ambit of minimising
unemployment and the creation of unemployment
alleviation schemes
30Unemployment Insurance
- There are serious gaps as regards coverage in
terms of the present UIF system. - The unemployment insurance scheme does not cover
- Persons who are receiving certain other payments,
even though they may have to contribute to the
Fund - Civil servants,
- Non-citizen fixed-term contract workers
- Those in atypical employment (independent
contractors, dependent contractors and the
self-employed) and - The informally employed (in particular those who
perform unpaid care work) and those in long-term
unemployment.
31Conclusion on CSS
- Great achievements, excellent progress but
there are challenges! - Good progress was made in expanding the social
assistance grants provision and basic services,
but have to do more - high levels of unemployment and responding to the
plight of able-bodied men and women is a
challenge - Reform of retirement provision require fostering
solidarity among South Africans and distribution
from high income earners to low and no-earnings
groups. - Advancing the resolutions on a national health
insurance system for South Africa has become
critical.
32Retirement Reform
33Overview of Presentation
- Background
- International Overview
- South African Situation
- Key Recommendations
- Processes required to move forward
- Recommendations
34Background
- A high level overview of South Africas
retirement system was presented to the Cluster
and Cabinet - Cabinet approved that the Cluster set up a task
team, undertake and present the findings of a
review and report to Cabinet - A Task Team was constituted and work completed by
end of June 2006 - The review covers the following
- An overview of international developments
- A SA situational analysis
- Assessment of Treasury proposals and
- Key recommendations for reform
35International Context
- Developed Countries
- The main threat to traditional PAYG systems
centred on aging, which altered the dependency
ratio between working and retired populations. - Government carries the risk of long-term
arrangements established with small younger
demographic profile
36International Context
- Developing countries
- Learning from the mistakes of industrialised
countries, have shifted risk from Governments
resulting in under-provision - Have used privatizations of retirement
arrangements to develop capital markets - Possibility of over-shooting and excessive
transfer of risk onto individuals - Cluster members also undertook benchmark visits
and shared our proposals
37International trends
- Developed country reforms were non-structural
(parametric) - Developing countries reforms were more
structural - Three general models of structural pension reform
focused on in Latin America relate to - the full replacement of the public by a private
system - or the public sector system is reformed, with the
private sector introduced as competition and - the public system is not closed down continues
to offer a basic pension along with a private
system offering a supplementary pension. - Retirement systems will involve one or all of the
potential (re) distribution issues of life-cycle
transfers from an individual in youth to their
old-age from young people to those who are
retired from males to females and from rich to
poor.
38Objectives for Strategic framework
- Objectives identified for a SA system
- Poverty elimination through ensuring a minimum
level of income - Ensure sufficient diversification of income
sources and benefit provision to mitigate
economic, investment governance risks - Ensure the achievement of reasonable income
replacement - Ensure adequate Government underwriting and risk
sharing occurs - A fair subsidy framework in allocating public
resources benefits - Ensuring retirement income linked to working life
earnings - Ensuring citizens have access to appropriate
survivor benefits - Ensure all income earners have access to a
reasonable facility to make provision for
post-retirement medical scheme contributions.
39South Africa Situation analysis
40SA Historical context
- The SA retirement system has evolved exclusively
from a fully privatized arrangement based on
occupational and individual forms of cover. - The absence of a mandatory tier of the South
African contributory system therefore makes it
unique from an international perspective. - Furthermore, the absence of any form of state
provision (or delivery) of an earnings-related
retirement system is unusual. - The system is fragmented, not in line with social
security principles, and as a 2nd pillar it
behaves like a 3rd pillar
41Assessing retirement coverage
- South Africa has close on 14 000 retirement funds
with 9.9 million membership, with 8.7 million
active members - The figures include participation in more than
one fund (a double count of 1.3 is estimated),
they are an inaccurate reflection of total
participation. - The total number of contributors to retirement
funds is 6 million. - Since the total potential contributors are 11.3
million (excluding agricultural unspecified
workers in the LFS), the total number of employed
non-contributors could be as high as 5.4 million.
- The majority of these South Africans will become
dependant on social assistance. - Roughly 6 million people could make a
contribution toward their retirement.
42Coverage Quality Replacement Rates
- Almost all pension funds vary significantly from
normal pensioner ratios due to distortion in
participation and employment practices. - Very high pensioner ratios could be explained by
low retirement ages, early retirement reduced
labour force. - Public sector funds different, which is in all
likelihood due to its positive mandatory nature - Replacement rates refer to the income received or
replaced by retirement income from a pension
fund. - There is a distinct, detectable drop in incomes
as people go into retirement, roughly of the
order of 50 or more - In some parts of the industry replacement rates
could be as low as 23.9 with high administration
costs
43Administration costs
- The administration costs of retirement funds
charge impact significantly on the final value of
retirement payouts - A recent appraisal by Rusconi of retirement fund
administration costs of the private industry in
South Africa revealed very high charges and low
value for money. - The review exposed the fact that cost ratios for
most policies range between 26.7 and 43.2. - Poor transparency and a resulting lack of price
competition are amongst the key reasons for these
high administration costs. The evidence suggests
that in South Africa virtually all pension fund
members pay charges way in excess of
international norms. Costs are systematically
higher for smaller funds. - A pre-condition for a properly functioning market
of any form is that the price is transparent,
thereby providing a basis for the choice of
alternative service providers.
44Subsidy framework
- Government subsidizes retirement provisions from
general tax revenue to fund old age grants and
through Tax Expenditure Subsidies (TESs) for
individuals contributing to private retirement
arrangements. - TESs are heavily biased in favour higher-income
individuals and raises significant equity and
efficiency questions - The effective contribution subsidy for retirement
provided was estimated at R32 billion in 2005. - Combining both the contribution subsidy and the
subsidy on retirement investment earnings comes
to R28.5 billion or 1.9 of GDP. Were the old age
pension to be universalized, i.e. the means test
removed, the total cost of the grant would be
valued at approximately R27.7 billion (2005).
45Subsidy Framework
- If the subsidy to private retirement were removed
entirely and replaced by this allocation, coupled
with a mandate (rather than an incentive) to join
a retirement fund, Government would save R20.3
billion annually and potentially improve on
existing levels of private participations - The key conclusions of international World Bank
economists are that no basis exists for using the
tax system to encourage private savings. - Even with the incentive, people may not save
enough, and The best way of being paternalist
is mandating minimum retirement savings, either
through state provision or compulsory
contributions... (Whitehouse, 2001).
46Post-retirement Medical scheme contributions
- Many people face a significant decline in income
in retirement and those who rely on retirement
savings to participate in a medical scheme end up
being disappointed. - In the past many employers supported their
post-retirement group, but in the past 10 years
many have begun to remove this support, either
they reneged promises or removed the benefit. - The central social security consideration is the
continuation of effective employer subsidies into
the post-retirement period. - There is also a need to protect the contributions
of dependants in the case of the death and
disability of the employee. - The arrangements used by employers to pre-fund
post-retirement medical scheme obligation are
fragmented, lack transparency, and are generally
not transferred when employees change employment.
- In the absence of a more effective arrangement,
the existing declining trends in protection will
persist
47Governance
- Given the large number of funds, regulatory
oversight is virtually impossible and currently
ineffective - Many of the regulatory problems identified in the
market can be traced back to - Poor governance arrangements
- Permitted conflicts of interest amongst
financial advisors to individuals, employers and
trustees, employers and administrators and
consultants to trustees and employers - The findings by Regulator of serious issues of
unfair practices are only the tip of the iceberg.
Many members just do not complain - Whereas regulatory action may currently focus on
the easy cases massive fraud fund collapses
etc. the less visible but potentially far more
devastating losses pass below the radar
48Key Recommendations
- The means test leads to a poverty trap, It
affects the well-being of woman very negatively. - The Subsidy to higher income groups lacks
defendable rationale and thus require public
debate. Its removal will save R20 billion. - A mandatory contributory system should be
introduced to ensure minimum levels. Contributors
will be all taxpayers, mandated from an age
agreed upon. - Contributions should be set at a percentage of
pre-tax income to achieve replacement rates of
40. - Two tiers of mandatory contribution should be
considered 50 for a pay-as-you-go (PAYG)
defined benefit and 50 defined contribution. The
PAYG tier should be formula-based, with automatic
adjustments in benefits through time if the ratio
of contributors to beneficiaries changes.
49Key Recommendations
- A Government Sponsored Retirement Fund (GSRF)
should be introduced. This should be made the
default retirement provider unless an employer
opts out. An employer should be permitted to opt
out if they participate in an accredited
retirement fund. - Accredited retirement funds that meet specified
governance standards, must be compelled to over
time reduce administration costs to 15 for
services or below before consideration. As in
many countries, the private schemes will be made
up of large funds that can achieve sufficient
economies of scale to meet the target. - The retirement policy should incorporate
ancillary benefits including - Post-retirement medical scheme contributions
- Death
- Survivors benefits and
- disability cover must be offered.
50Recommendations
- It is recommended that the PC
- Note the gaps and weaknesses in the current
system of retirement provisions in SA. - Note that provincial arrangements exists in
provision of retirement, including local
governments, and provincial Cabinets may require
a discussion on this matter - Note that consultations are underway with
Treasury, Health and Labour in the Cluster - Notes that further work be undertaken in refining
the key recommendations.
51Thank you