Submission by the
Economic Policy Research Institute
to the
Department of Social Development
on the Report of the
Committee of Enquiry for Comprehensive Social Security
15 June 2002

For the more than nine million people living in South Africa’s most destitute households (spending less than R400 per month), a monthly social grant of R100 per person will nearly triple their access to food and other resources needed for survival. For the more than twelve million people living in poor but not destitute households (spending between R400 and R800 per month), the proposed Basic Income Grant will double their capacity to purchase food and other necessities. The very poorest in the country live on less than R60 per person per month. One quarter of South Africa’s children are seriously malnourished. Poverty keeps many children out of school, and undermines employment prospects for millions of adults. For the poor households, the proposed Basic Income Grant can make a dramatic difference. It directly attacks the severe poverty and high unemployment in South Africa that threatens social stability and long term growth prospects. A Basic Income Grant provides an instrumental tool for raising living standards and improving the efficiency of social delivery.

The social security system in South Africa targets poverty rooted in the legacy of apartheid. Low incomes compound poor access to health care, education, housing, and social infrastructure. The severity of South Africa's poverty persists in spite of existing social security programmes—most of the poor live in households that receive no social security benefits at all, and the rest remain poor in spite of the benefits they receive. Nevertheless, South Africa’s social security grants make a significant impact, reducing the average poverty gap by approximately 23%.

The relatively low percentage obscures a diverse set of impacts. The State Old Age Pension reduces the poverty gap for pensioners by 94%. Poor households that include pensioners are on average significantly less poor than poor households without pensioners. For the average poor household without a pension-eligible member, however, social security’s impact is almost negligible. For households with only children and working age adults, for instance, the social security system reduces the poverty gap by only 8.4%, compared to 46.1% for similar households that include a pensioner. South Africa’s social safety net has a very loose weave.

Means testing distinguishes the Basic Income Grant from other forms of social security. The application of the means test and other eligibility criteria influences the rate of take-up of existing programmes. One of the major causes of the social security system’s inability to secure adequate social protection is the low rate of take-up of these programmes. EPRI’s analysis of household survey data and administrative data documents that only an estimated 43% of eligible individuals actually succeed in receiving the grants for which they are qualified. The take-up rate is relatively high for the State Old Age Pensions—approximately 85%. For the Child Support Grant, however, the take-up rate is very low—approximately 20%—with negative consequences for the effectiveness of the social security system. The low take-up rate is in part a consequence of system failure. Extremely poor individuals are likely to fail in large numbers to qualify for a grant with a complicated and expensive means test and application process. Social security reform that fails to address the structural problem of low take-up is unlikely to yield substantial social benefits.

The coverage gaps within South Africa’s social security system combined with the structurally low rate of take-up of the Child Support Grant underscore the need for comprehensive reform. The nature of structural unemployment in the face of a changing global economy that marginalises unskilled workers expands the necessary scope of a social safety net. Not only do children, retirees and the disabled need social protection—millions of potential workers are vulnerable to unemployment and the resulting impoverishment.

The nature of an income transfer has important implications for its socio-economic benefits. A universal grant, provided as an entitlement and without a means test, will more readily reach the poorest population. Also, by removing the stigma that labels the recipient as "poor", the grant bolsters economic support without draining psychological resources. The universal nature of the grant addresses critical structural problems with social security take-up that undermine the effectiveness of the current system. Dispensing with the means test lowers the cost of accessing the grant to both the government and the beneficiaries. Providing the grant as a fundamental right reduces arbitrary discretion, minimising opportunities for corruption.

The Basic Income Grant enables the social security system to reduce the poverty gap by three-quarters, compared to one-quarter without the grant. No other social security reform can provide the effective breadth of coverage demonstrated by the Basic Income Grant.

The Basic Income Grant supports economic growth and job creation through at least three transmission mechanisms. First, the income transfers promote the accumulation of human and social capital. The interactions are mutually re-inforcing. Both nutrition and education support health, and health raises not only the absorption of learning but also the total return to education by extending lifespan. The expectation alone of imminent improvements in these social spheres may improve social stability.

Second, theoretical and empirical evidence indicates that the Basic Income Grant positively influences both the supply and demand sides of the labour market. Closely linked to the optimal management of social risk, the labour supply transmission mechanism operates through the effect that higher living standards exert on the capacity of unemployed job seekers to find work. Likewise, a Basic Income Grant has the potential to increase the demand by employers for workers through its direct and indirect effects on productivity. Directly, a Basic Income Grant supports the accumulation of human capital by a worker, and it supports the worker’s productivity-bolstering consumption. Better nutrition, health care, housing and transportation all support the increased productivity of the worker. Indirectly, the Basic Income Grant supports higher worker productivity by reducing the informal "tax" on workers that results from the combination of severe poverty and a remittance-oriented private social safety net.

While the implementation of a Basic Income Grant will partially reduce the need for the private social support network, it will release significant resources to wage earners to bolster their own productivity-improving consumption. The interaction of this effect and the tax effect discussed above creates a type of effective wage subsidy: as employers increase the wages of workers, more of the wage increase goes to the employee’s own consumption. This magnifies the increase in labour productivity, increasing the profits of the business enterprise and potentially increasing employment.

Third, two macro-economic transmission mechanisms exist by which the Basic Income Grant may stimulate economic growth. First, the Basic Income Grant will bolster the overall level of aggregate demand in the economy. Second, the grant has the potential to shift the composition of spending towards labour-absorbing sectors of the economy.

EPRI’s fiscal analysis documents the net cost of a Basic Income Grant to be R23.9 billion. This represents a substantial commitment of fiscal resources—equivalent to the income tax reductions for the past two years. EPRI’s most recent study of tax effort corroborates and strengthens the previous analysis, demonstrating that South Africa’s tax structure has the potential to finance the entire cost of the programme without undermining the country’s competitiveness. The long-term growth impact resulting from the positive developmental effects further support macroeconomic stability and fiscal affordability.

The economic growth resulting from social security reform has two effects on the fiscal impact of the Basic Income Grant. First, it raises overall national income, and thus supports the capacity of the economy to support fiscal expenditure. Second, by concentrating growth on lower income individuals, recipients of the Basic Income Grant gradually move to income levels in which their net transfer is reduced. This lowers the overall net cost of the grant transfers over time.

Just as the Basic Income Grant has a positive impact on economic growth, it also supports more efficient social services. Higher living standards raise the efficiency of the educational system, reducing the repeat rate and thus economising on educational resources. Improved nutrition raises lifetime health levels, reducing the strain on the public health system. The medium-to-long term impact of the Basic Income Grant is likely to reduce the cost pressure on several social sectors, resulting in a reduction in the net fiscal cost of the grant.

The evidence analysed by the Economic Policy Research Institute and summarised in this submission supports the conclusion that the Basic Income Grant is feasible, affordable, and supportive of poverty reduction, economic growth and job creation. A universal grant has the potential to fortify the ability of the poor to manage risk while directly improving their livelihoods. In addition, the grant can improve the efficiency of social capital and societal cohesiveness while stimulating overall economic activity. These factors contribute to job creation, supporting a dynamic growth process. Complementary public policy fostering socio-economic development can reinforce the process by which a Basic Income Grant generates growth that in turn sustains further broad-based improvements in living standards. Of all the social delivery options, the Basic Income Grant makes the most economical use of scarce administrative and bureaucratic resources. In particular, through the elimination of the means test, the grant substantially reduces the bureaucratic burden while ensuring access to the poorest and most vulnerable. EPRI’s research fully supports the finding of the Committee of Enquiry that "the Basic Income Grant has the potential, more than any other possible social protection intervention, to reduce poverty and promote human development and sustainable livelihoods."