National pension reform — unpacking the Green Paper’s potential and pitfalls 

First published by GroundUp.

Jane* is 66. She was formally employed for over 35 years, earning R13,000 a month at the end of her career, and contributing to a pension fund. Now she is retired — and she has no pension.

Her story is common.

Alex van den Heever of the Wits School of Governance says the government does not track the number of people who run out of benefits on retirement or soon after. But the average income of those who retire is a small fraction of what they earned while working.

According to a 2020 report from BankservAfrica, about 350,000 people like Jane over the age of 60 get no income directly, from government, from work or from a pension. According to the Green Paper itself, “about one million older persons are excluded in the existing state benefits”.

Jane did not earn income for nine years while she was raising her four children. After getting divorced in her 40s, she worked five days a week for 12 years at a large company that provided a defined contribution retirement fund, and one-day-a-week as a freelancer.

At 56, Jane cashed out what she could of her retirement fund to pay off debts accumulated by raising children. By law, what was left had to be transformed into an annuity meaning she would have received R250 per month from this on retirement. But at 65, when she was made redundant at the outbreak of the Covid-19 pandemic, she cashed in the small annuity.

Her final net income was R13,000. If she was just supporting herself while she worked, she would be in the top 3% income earners in South Africa.

Yet in retirement, she has no income. Because she owns her flat, she does not qualify for the older person’s grant. She is dependent on her adult children.

The measures in the controversial Green Paper on Comprehensive Social Security and Retirement Reforms released, and then quickly withdrawn, by the Department of Social Development would change things dramatically for Jane and millions of people like her, and also for the 3.8 million people who rely on the older person’s grant.

These proposals are almost two decades in the making, since the release of the report of the Taylor Committee into a social security system for South Africa in 2002.

The Green Paper proposes the establishment of a National Social Security Fund (NSSF), to which all workers earning over R1,667 a month would have to contribute. The new fund would provide retirement, survivor, disability and unemployment benefits, pulling all these together under one roof.

Each month, all employers and employees would initially contribute between 8 and 12% of earnings up to a ceiling.

People earning less than R20,000 a year would not be expected to contribute to the fund, and those earning more than R276,000 per year (R23,000 per month) would not contribute on any income above that level.

Those who currently contribute to a private scheme would shift to the NSSF. If they earn more than the ceiling, they could choose to send further contributions to retirement to an NSSF Default Fund, to an occupational fund, or to their choice of private pension fund.

Those who do not currently pay into retirement funds, and who qualify, would now be contributing to their own retirement and would be guaranteed a pension, if they survived that long. And if they died before 65, the fund would provide a payout to their family, including a flat rate for funeral expenses.

Low-income earners would have their contributions subsidised from the National Treasury. This, according to the Green Paper, “will encourage formalisation of employment and contribute more broadly to protecting decent terms and conditions of work.” In part four of the series, we examine a proposal for funding these contributions by former Treasury official Andrew Donaldson, now of the Southern Africa Labour and Development Research Unit.

The Older Persons Grant would remain but in a new form.

The Green Paper proposes that everyone over the age of 60 should now receive this grant as the base level of social protection for the elderly with no means test. Removing the means test would reduce the administrative burden, and part of the payments of the grant would be recovered by the state in income tax.

How much each worker received as a pension, on top of the Older Person’s Grant, would depend on earnings over the course of their career.

The NSSF would pay as a defined benefit retirement scheme. This means that the level of benefits that a pensioner is entitled to is based on a formula, and can be a flat rate or, as in the Green Paper, earnings-related. This means any investment risk is borne by the fund not by the worker.

Many people in South Africa rely on defined contribution retirement schemes. Here the benefits received on retirement depend on the value of the contributions the worker made, plus investment returns. The contributor pays for the privilege of putting aside their own money, and if they wish to secure a lifelong income on retirement — an annuity — they must pay dearly for this. These arrangements place the risk on the individual; if the stock market crashes at retirement, you’re out of luck.

The Green Paper proposes that two-thirds of a worker’s retirement savings over the R276,000 ceiling must be annuitised — that is, converted to a life-long income. At present, pensioners have to pay hefty fees when they convert their savings to annuities. The NSSF would run its own annuity to stimulate competition with the private sector. At present, women tend to receive lower annuities than men due to their longer lifespans — this would be equalised.

The Green Paper says that workers who have worked a full career can achieve an income in retirement of “at least 40 per cent of their earnings over the course of their career,” through the NSSF. This is double what the average worker can expect at present, according to estimates for South Africa by the Organisation for Economic Cooperation and Development.

The contributions of today’s workers will partially finance today’s pensioners and partially contribute to an accumulation of assets to meet the needs of the pensioners of tomorrow.

A quarter of the fund would be set aside as a reserve to protect against a crisis.

In the event of a workplace injury, death or unemployment, this same fund would pay out the worker, or their beneficiaries.

What would this mean for Jane?

First, Jane would receive the Older Person’s Grant each month. At current rates, that would be R1,890 per month.

Then, she would receive benefits from the National Social Security Fund, according to a formula still to be calculated. The Green Paper’s intention is that pensioners should get 40% of their final earnings (instead of between 17% and 24% as is currently estimated to be the case), including the Older Person’s Grant.

Composition of retirement income at different income levels against a 40 per cent minimum target after full employment. (Source: Green Paper)