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Portfolio Committee on Social Development Budget Hearings: Social Security


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Title: Portfolio Committee on Social Development Budget Hearings: Social Security

Portfolio Committee on Social Development
Budget Hearings Social Security
Presentation by the Department of Social
Development09th March 2007
Presentation outline
  • Legislative Developments, Pending Regulations and
  • Overview of the Comprehensive Social Security
  • Retirement Reform

Comprehensive Social Security
  • 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
  • Focus on
  • Policy and Legislative Development focusing on
  • Social Assistance
  • Social Insurance
  • Social Assistance Implementation Support

Legislative Developments, Pending Regulations and
Comprehensive Social Security Legislation and
  • 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

Comprehensive Social Security Legislation and
  • 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

Overview Of The Comprehensive Social Security
Package of services
  • Income poverty the child support, old age are
    measures to support unemployed poor
  • Service poverty Healthcare Primary secondary
    education water and sanitation, electricity,
  • 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)

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

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
  • children beneficiaries now 8,2 million
  • Disability now cover 1,3 million
  • Foster beneficiaries exceeding 300 000 (fastest
  • 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

Progress on Pillar 1 Social wage
  • Social assistance complimented with the provision
  • 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
  • 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
  • Public Works Programmes set in place to create
    jobs to respond to the plight of the poor.

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
  • The economic opportunities include access to
    education, skills development, entrepreneurial
    and employment opportunities

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
  • 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

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

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
  • 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
  • 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


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

  • 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

  • Create autonomous public hospitals (full
  • Implement a risk equalization fund to make
    provision for income and risk-related
  • 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

Road Accidents Funds
Road Accidents
  • The Road Accident Fund has completed policy
    review and proposals to move to a no fault based
  • 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

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

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

Compensation for Occupational Injuries and
Compensation for Occupational Injuries and
  • 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

Compensation for Occupational Injuries and
  • 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
  • Need to co-ordinate rehabilitation and
    return-to-work approaches

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

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
  • 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

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
  • Reform of retirement provision require fostering
    solidarity among South Africans and distribution
    from high income earners to low and no-earnings
  • Advancing the resolutions on a national health
    insurance system for South Africa has become

Retirement Reform
Overview of Presentation
  • Background
  • International Overview
  • South African Situation
  • Key Recommendations
  • Processes required to move forward
  • Recommendations

  • 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

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

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

International trends
  • Developed country reforms were non-structural
  • Developing countries reforms were more
  • Three general models of structural pension reform
    focused on in Latin America relate to
  • the full replacement of the public by a private
  • 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

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
  • Ensure adequate Government underwriting and risk
    sharing occurs
  • A fair subsidy framework in allocating public
    resources benefits
  • Ensuring retirement income linked to working life
  • 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.

South Africa Situation analysis
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

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
  • 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.

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
  • 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

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.

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
  • 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).

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).

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

  • Given the large number of funds, regulatory
    oversight is virtually impossible and currently
  • 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

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
  • 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.

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.

  • 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.

Thank you
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