BUSINESS SOUTH AFRICA
MEMORANDUM TO THE PORTFOLIO COMMITTEE ON SOCIAL DEVELOPMENT ON THE
REPORT OF THE COMMITTEE OF INQUIRY INTO A COMPREHENSIVE SOCIAL SECURITY SYSTEM FOR SOUTH AFRICA
BSA wishes to submit the comments below on the report of the Committee of Inquiry. The report covers a very wide range of matters affecting social security. As the representative of major chambers of commerce and industry and employer groupings in South Africa, BSA will confine its comments to the main aspects of the report. BSA will not deal with health care as it understands that this will be the subject of a separate exercise.
This memorandum will commence with an overview of the macro-economic context of social security in South Africa. Thereafter the memorandum will follow the same sequence as the report.
SOCIAL SECURITY IN SOUTH AFRICA: AN OVERVIEW OF THE MACRO-ECONOMIC CONTEXT
South Africa’s social assistance dilemma
Social assistance policy formulation in South Africa is caught on the horns of a dilemma, which can be summed up as follows. First, the need for poverty alleviation is large, due to the large number of people who fall outside the employed, producing sector. Second, the capacity for sustaining broad social transfers is limited, due to the small size of the producing sector relative to the non-producing, dependent, sector.
Output and dependency compared
In this section, the demographic and macro-economic constraints on welfare policy and the government’s response to these constraints are discussed. South Africa is compared with two groups of countries:
High-income countries, as most large-scale social assistance programmes are concentrated in this group, and
A peer group of developing countries at a level of economic development similar to South Africa’s. This group is defined as all countries with a per capita GDP of $2,500-6,500 in 2001. The peer group consists of Brazil, Chile, Costa Rica, Croatia, Czech Republic, Hungary, Lebanon, Lithuania, Malaysia, Mexico, Poland, the Slovak Republic, Uruguay and Venezuela.
Output compared. The extent to which the producing part of South Africa can provide for itself and the population as a whole is determined by how much it produces. In South Africa, annual output per employed person is $10,273. In the high-income countries, with their highly productive economies, the output per worker is at $56,888, roughly five times that in South Africa. The output of each worker is ultimately divided up between the worker (take-home pay), the state (all taxes on wages and profits) and business firms (after-tax profits). So, irrespective of whether workers or business firms are ultimately taxed, there is only a fraction available for redistribution per worker in South Africa compared with that available in the countries with extensive social security schemes.
Dependency compared. There are more non-working persons per worker in South Africa than in all the groups or countries in this comparison (with the exception of Lebanon). For every working man or woman in South Africa there are 2.9 people who are not working. In the high-income, high social transfer, countries there are only 1.2 dependent people per working person. In the peer group of developing countries there are 1.4 dependant people per working person.
Put differently, South Africa’s dependency ratio is almost two-and-a-half times more adverse than in the high-income countries; and twice as onerous as that of its peer group countries at a similar stage of development.
Social assistance programs -
as opposed to insurance or savings programmes -
involve a transfer from the employed, working population to the population that is not working. The more adverse the dependency ratio, the larger the burden and depressive effect of a given set of benefits on take-home pay and employment in the producing sector.
Why is South Africa’s dependency ratio so high?
Why does South Africa have such an unfavourable dependency ratio? The following factors all play a role:
South Africa’s working-age cohort (16-65) at 64.7% is small relative to high-income countries (67,1%), though similar to our peers (64.9%).
Of the working age population in South Africa, a remarkably small percentage is in the labour-force, namely 56.7%, compared to our peers (69.9%) and the high-income countries (72.7%).
South Africa’s unemployment rate (measured as 30.5% according to the ‘narrow’ definition) is higher than in our peer group (where unemployment ranges from 2.0% to 20.6%) or in the high-income countries (around 16%).
The cumulative effect of South Africa’s young population, low labour participation rate and high unemployment is an unusually high dependency ratio.
The implications of the high dependency ratio
The dramatically higher number of non-working persons per worker means that the cost of a given broad-based social assistance programme is far higher on a per worker basis in South Africa than in high-income countries or among our development peers.
The size of the transfer burden creates problems irrespective of whether workers or employers are taxed. A tax on workers’ salaries would lead to a significant reduction in take-home pay, reducing the incentive to search for or take up employment. In other words the core problem in South Africa’s welfare equation, the low labour participation rate, would be worsened.
The alternatives are to tax employers, either on profits or on payroll. A tax on profit would reduce investment and employment in the formal sector -
again worsening a root cause of South Africa’s welfare problem, the low rate of employment creation. A tax on payroll would do the same, and also shift production technology away from labour-absorbing options. In this way the condition for social programmes similar to those in the high-income countries -
a strongly more favourable dependency ratio -
would be pushed ever further into the future.
Increased taxation of the formal economy would likely accelerate the trend towards informalisation of the South African economy. The 1999 October Household Survey registered a fall in formal sector employment and a significant rise in informal sector employment. The latest Labour Force Survey (2002) indicates a stable but stagnant formal employment sector over the last two years. Informalisation means a shrinking tax base, avoidance of safety, health and other regulations, and often reduced output due to financing constraints and the use of sub-optimal technology.
The government’s project to strengthen the South African economy
A large part of the government’s economic policy is aimed at reducing the unfavourable imbalance at the heart of the social assistance dilemma, by increasing the size of the producing economy.
The government has progressively reduced the budget deficit, which had reached 6.8 percent of GDP in 1993, to 2.2 percent of GDP in 1999 and subsequently dropped to 0.8% in 2002. A reduction in the borrowing requirement of the public sector followed, from a high of nine percent of GDP in 1994 to below 0.5% in 2000 and 2001 increasing slightly to 1.7% again in 2002. The changes in government finances have set the stage for higher and more sustainable overall growth. In the calendar year 2000 growth exceeded three percent, slowing to 3% in 2001 and subsequently to about 2.5% (year-on-year) by March 2003.These policies are ultimately aimed at increasing, through output and employment growth, the size of South Africa’s producing sector relative to the size of the dependent sector.
Addressing the savings and investment deficit
South Africa’s output growth performance during the 1990s has lagged behind that of the developing world as a whole. Among other things, this has been a result of a substandard performance in generating the basic inputs into the production process, namely physical plant and equipment (what is often referred to as gross domestic fixed investment) and skills development.
South Africa has lagged far behind the developing world average performance in investment in new production capacity. While there are a number of reasons for this performance, South Africa’s domestic savings rate, also very low by developing country standards, has been an important factor. Although foreign inflows are an alternative source of finance for investment activities, in practice countries rely on domestic savings, with only a limited role for foreign inflows.
The concomitant need for higher domestic savings is a further motivation for the path of fiscal restraint being followed by the government, which has shifted from government dissaving to government saving as a result.
Because it is key to the expansion of the producing sector of the economy, the domestic savings issue is an important consideration in the formulation of social security and social assistance policy. Social assistance that is funded by tax revenues often results in a decrease in domestic savings; on the other hand, social insurance and retirement finance arrangements are an important tool in increasing the level of savings by households.
BSA submits that the macro-economic context yields the following guidelines for the formulation of social security policy:
(a) Welfare policy should form part of a policy approach aimed at reducing the dependency ratio; in other words, at moving persons from the dependent economy to the producing economy. At the same time policy should provide relief to those who remain in the dependent economy.
(b) To have positive benefits and be sustainable, policy should not worsen the key reasons for the welfare imbalance, namely unusually low labour participation rates, a high unemployment rate, and a growing informalisation of employment and the work-force.
(c) In the interests of economic stability and sustainable growth, policy should fall within the fiscal parameters set by the government’s medium term expenditure framework.
(d) The framework should have the effect of increasing the savings rate of those who work and earn.
DEFINITION OF SOCIAL SECURITY
In paragraph 3.4 the Committee has adopted the broader concept of social security. The definition covers not only the traditional measures of social insurance and social assistance but also the developmental strategies and programmes undertaken by the State designed to ensure a minimum acceptable living standard. Although not specified in the report these would include access to clean water and sanitation and initiatives on housing, transport and education.
BSA supports the broader definition in view of the need for a wide ranging approach to combat poverty in South Africa.
BASIC INCOME GRANT
Child support grant and the old age assistance
The Taylor committee has recommended that a basic income grant (BIG) be implemented in two phases. In the first there should be a universal child support grant for all children under 18. BSA supports extending the CSG in this way as these persons are the most vulnerable in our society. We shall refer later to the universality aspect which we understand has the effect that the CSG would not be means tested.
The old age assistance (OAA), which applies to males from age 65 and females from age 60, is recognised as an effective means of poverty relief. We support the retention of the OAA.
In the second phase the committee has recommended a BIG. This would be a payment to persons of 18 or more up to the age at which the old age assistance applies (60 or 65 years). While BSA strongly supports the payment of the CSG for persons up to 18 and the OAA to persons over 60 (or 65), we consider that the BIG would not be sustainable and should not be introduced. This is because of the high dependency ratio in South Africa of 2.9 persons who are not working but dependent on a working person compared with 1.4 to one in the peer group countries and 1.2 in the high income countries. There is also the problem of low domestic savings and foreign investment in South Africa referred to below. These factors were dealt with in the macro-economic overview. BSA submits that the limited resources available should not be applied to a BIG but to public work programmes in the manner outlined below.
Legal entitlement and the means test
The cost of the BIG also raises the question of legal entitlement to benefits and the means test. We are aware of the constitutional injunction to provide social security, including social assistance. At this point however we come to the constitutional limitation on the provision of benefits. Here it is unnecessary to weigh the entitlement to benefits against the cost of providing them.
Once the government puts in place a universal right to benefits it confers a legal right to benefits on all persons. That right in turn carries with it a financial obligation which rests on the state. It has been argued that a small increase in taxes would pay for the extra cost.
Our concern is fundamentally that if additional taxes are levied to meet the extra cost this would have the effect of reducing savings and the inflow of foreign investment, on which we rely to create much needed jobs. We have dealt with this above. The alternative would be to increase the budget deficit which the government has worked so hard to reduce to current levels.
This is also why we are not in favour of abolishing the means test. We recognise that the means test is often difficult and even expensive to implement. We submit that scrapping the means test is a worse option. It would create a universal entitlement that the government would have to provide for in the national budget; if taxes are increased they would have the negative effect on investment outlined above if a deficit is used the work of the past four years would be undone to a significant extent. Either way the BIG and the abolition of the means test would reduce the amount of money available for persons who qualify for social assistance on a targeted approach.
The Committee recommends in paragraph 9.2.8 and elsewhere that the means test should be abolished and any payments to individuals who do not qualify for a benefit should be recovered through the income tax system. BSA recognises that administering means tests is costly and often inefficient. As indicated above, BSA is however unable to support the abolition of the means tests because the payment of a universal grant without a means test would result in a legal entitlement to the benefit concerned. It would be wrong in principle to pay benefits from limited financial resources to persons who would not ordinarily qualify for them. In addition in many cases recoupment of the payment would merely involve postponing application of some means test to a later stage if and when the person is assessed for income tax.
PUBLIC WORK PROGRAMMES
We propose that assistance to persons who fall outside the CSG and the OAA should be in the form of public works programmes (PWPs). It has been argued that PWPs should be provided in addition to the BIG. We propose targeted PWPs as an alternative approach for the reasons given above. The Taylor committee has criticised PWPs as having high administrative costs and other disadvantages. We consider however that they have certain major advantages. South Africa has had and continues to have successful PWPs. With a renewed commitment to making them successful, PWPs can make a large difference in helping address poverty.
There is ample research that shows that an emphasis on sustainable job creation holds potential for lifting people out of poverty. Equally important, former project workers are more likely to get jobs after the PWP given appropriate skills development opportunities in the PWP. BSA has in mind integrating marginalised people and their communities into society by offering them the hope of permanent jobs and the self-esteem that goes with such jobs.
What is required is targeted PWPs with a greater focus on community participation, on training and capacity building, on the infra-structural needs of the poor and especially sustainability and second round effects.
Potential cost of targeted public work programmes
It would be borne in mind that the costs incurred in a PWP are applied to activity that creates economic value. This might be in the form of a new asset (such as a pipeline to deliver potable water) but also in the form of maintaining an existing asset (like a road) or even providing a service (like refuse removal). In this respect the PWP differs significantly from a BIG. A BIG is a monetary payment for which no primary economic value is generated.
Based on current experience with PWPs BSA has calculated that a PWP with 1 million participants employed for 10 days per month over one year would cost approximately R6.2 billion. In this case there was a transfer of R410 per person per month.
The cost of R6.2bn would be about 0.6% of GDP or 2.4% of the 2002/3 national budget. On current data, the 10 day employment would absorb about 9.4% of available unemployed person days per annum.
BSA is mindful of the widespread poverty in South Africa and the hardship it creates for individuals as well as its destructive effect on the social fabric of our country. BSA submits that the State should seriously investigate the possibility of introducing self-targeting public works programmes on the lines outlined above as a means of alleviating poverty. With careful planning of projects for particular areas, self-targeting public works programmes could assist significantly not only in reducing poverty among individuals but in uplifting the communities in which they live.
The Taylor Committee has (in paragraph 9.2) recommended the abolition of the distinction between pension, provident and retirement annuity funds.
As a long term goal BSA supports the abolition of the distinction between pension and provident funds. This should however await the overall restructuring of the law on retirement provision including the relevant tax law. Retirement provision is a long term investment and the financial planning based on current law both by individuals and funds and other institutions should be acknowledged . Ad hoc changes should be avoided so as not to disrupt the current arrangements which in general have proved to be successful.
In paragraph 9.2.1 the Committee recommends that all employees in the formal economy should be required to contribute a prescribed minimum percentage of their income for retirement provision. BSA supports the recommendation as a long-term goal. It considers that at this stage however the extra cost of compulsory provision for retirement would stifle much needed economic growth. Instead, the State should actively promote a culture of providing for retirement. The law should also encourage the voluntary formation and membership of retirement funds and continue to allow compulsory contributions by employees under their conditions of service. In this way coverage could be extended to that part of the formally employed not presently covered by retirement funds as well as to other groups, such as the self employed and the informal sector.
The Committee has also recommended that there should be compulsory preservation of retirement provision but access to benefits in the event of extended unemployment. BSA supports this recommendation also as a long-term goal. At this stage it would be difficult to envisage compulsory preservation without compulsory provision for retirement. The proposed link between payments from a retirement fund and payments from the Unemployment Insurance Fund for instance would also be difficult to administer.
The Committee recommends in paragraph 9.2.2 that all funds should be required to have elected trustees, including umbrella funds and retirement annuity funds. BSA submits that a requirement of this kind could in many cases be unnecessarily complicated and expensive. Funds which have been established by collective bargaining and whose boards of management comprise of representatives of trade unions and employers are, it is submitted, already sufficiently representative especially when regard is had to the fact that they may have many thousands of members who live and work in different parts of the country.
In paragraph 9.2.3 the Committee recommends that retirement funds be required to invest a proportion of their assets in socially desirable investments. It is not entirely clear what is meant by this term. It should be borne in mind however that the trustees have a duty to secure market related returns for the members of the fund and that prudence must be observed in making investments. In the final analysis the investments may constitute a form of taxation on retirement funds which then has to be borne only by fund members. The tax may then also be viewed as unfair and unconstitutional, especially if employees are compelled by law to become members of a fund.
If the State nevertheless considers that socially desirably investments should be introduced for retirement funds it is imperative that sufficient tax and other incentives be investigated to ensure that savings for retirement remain attractive, especially for low income earners who pay low personal tax rates.
The Committee recommends that consideration be given to introducing a low cost national savings scheme. BSA supports the introduction of a national savings scheme especially for workers excluded from the formal economy. It is submitted that the scheme should be administered by the private sector which has a proven infrastructure. The use of incentives for non-compulsory savings by low income earners should also be investigated.
In paragraph 9.2.4 the Committee has made various recommendations on the taxation of retirement funds. BSA has not commented on them in this memorandum as it considers that they constitute input for further evaluation by the Standing Commission on Taxation Policy and by the National Treasury. BSA urges government to view comprehensively the broad system of retirement provision and the taxation of retirement provision in particular as ad hoc changes could easily damage confidence and disrupt financial planning by funds and by individuals in what is by its nature a long term industry.
EMPLOYMENT INJURIES AND DISEASES
In paragraph 12.13 the Committee recommends that the rebate system applicable under the Compensation for Occupational Injuries and Diseases Act should be abolished to improve benefits awarded to employees. It is a well established principle of insurance that the insured should be assessed for premiums based on risk. BSA considers that the rebates should be retained in order to encourage employers to promote safety at the workplace.
The Committee has recommended in paragraph 13.3 that there should be a social security board under the Minister of Social Development and an agency reporting to the board to deal with certain functions. BSA submits that whatever institutional framework is agreed upon it should be kept simple and as small as possible to avoid the complexity and fragmentation which characterises the present framework. In addition all boards and agencies currently in existence should be assessed to ensure that they perform a useful purpose. The need for a social protection commission recommended by the Committee in addition to the board should be carefully assessed as its functions relative to the board are not clear from the report.
In paragraph 13.3.6 the Committee has recommended that there should be a single adjudication system for all social security claims. BSA supports this recommendation as it might assist significantly in institutionalising the adjudication process for assessing individual social security entitlements.
In paragraph 14.10.2 the Committee expresses the view that dedicated taxes should be used only where a direct relationship is required between the service concerned and the user. Dedicated taxes should not be considered an alternative to general taxes. BSA considers that as far as possible dedicated taxes should be avoided as they increase the tax payable by middle income earners in particular and by business generally. This in turn has the effect of distorting the tax base and disadvantages certain types of economic activity. As far as possible general taxes should be relied on to fund social security in South Africa.
In conclusion BSA wishes to commend the Taylor Committee for its coherent approach to a complex and wide ranging subject. BSA has attempted to approach its response to the report from the point of view of delivering social security in South Africa in a sustainable way. BSA requests the opportunity to elaborate on the aspects raised in this memorandum by means of oral evidence to the Portfolio Committee.
2 June 2003