Portfolio%20Committee%20on%20Social%20Development%20Budget%20Hearings:%20Social%20Security

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Portfolio Committee on Social Development
Budget Hearings Social Security
Presentation by the Department of Social
Development09th March 2007
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Presentation outline

• Legislative Developments, Pending Regulations and
  policies
• Overview of the Comprehensive Social Security
  System
• Retirement Reform

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Comprehensive 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

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Legislative Developments, Pending Regulations and
policies
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Comprehensive 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

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Comprehensive 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

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Overview Of The Comprehensive Social Security
System
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Package 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)

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Governments 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

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Progress 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

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Progress 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.

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Existing 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

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Pillar 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

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Progress 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

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Retirement 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

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Social Health Insurance
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Coverage in Medical Schemes by Household Income
Source Based on Census 2001
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Health 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
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Health 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

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Healthcare

• 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

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Healthcare

• 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

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Road Accidents Funds
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Road 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

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Road 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

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Road 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

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Compensation for Occupational Injuries and
Diseases
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Compensation 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

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Compensation 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

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Unemployment 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

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Unemployment 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.

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Conclusion 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.

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Retirement Reform
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Overview of Presentation

• Background
• International Overview
• South African Situation
• Key Recommendations
• Processes required to move forward
• Recommendations

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Background

• 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

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International 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

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International 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

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International 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.

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Objectives 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.

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South Africa Situation analysis
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SA 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

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Assessing 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.

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Coverage 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

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Administration 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.

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Subsidy 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).

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Subsidy 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).

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Post-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

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Governance

• 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

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Key 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.

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Key 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.

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Recommendations

• 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.

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Thank you