Social security and retirement reform Andrew Donaldson 2008 Seminar on Proposals for Social Security and Retirement R

1. 1 Social security and retirement reform Andrew Donaldson2008 Seminar on Proposals for Social Security and Retirement Reform September 2008

2. National Treasury 2 Interdepartmental task team: work agenda Social assistance grants � minimum benefits financed on budget Design of new social security contributory arrangements Basic pension Extended unemployment benefits Survivor and disability benefits Social security governance and system framework Enrolment ? Collection ? Account administration ? Fund management ? Payment of benefits Coordination of administrative agencies and systems SARS, UIF, Compensation funds, Guardian�s Fund, GEPF� Possible �clearing house� partnership with private funds administration

3. National Treasury 3 IDTT work agenda (cont) Regulatory reform of retirement fund industry Preservation, portability Mandatory savings � standard provisions Proposals for a fund accreditation framework Disclosure and control of costs Governance standards Links between employment, wages and social security Wage subsidy or cross-subsidy options Tax treatment of retirement contributions and funds National health insurance Complementary social insurance reforms RAF reform, occupational health and safety

4. National Treasury 4 Social security in context of anti-poverty strategy

5. National Treasury 5 Macro-fiscal context SA savings rate too low to sustain rapid growth Redistribution through fiscus needs to be complemented by improved household saving and investment Poverty reduction on budget is under strain because of inadequate progress with employment creation and income-generating activities Social security reform faces difficult choices about priorities and trade-offs: Elderly vs family benefits Challenge of extending survivor benefits in presence of high mortality rates In social security design � risk benefts vs saving for retirement Wage or social security subsidy faces trade-off against other priority spending areas

6. National Treasury 6 Social security, employment and economic development � A dynamic modern economy needs protection of workers, not of jobs� Stiglitz Can income protection be orthogonal to job security ? If social protection is organised industrially, then income security is correlated with job security Retirement provision and social security arrangements vary by sector and occupational group Limited income security: Inhibits skills and business development in construction, hospitality trades Holds back mobility out of agriculture Disadvantages career progression of women Dependence-crowding in low income households inhibits accumulation and household advancement Social security and incomes policy require careful alignment of incentives and benefit structures

7. National Treasury 7 Complementary forms of income protection Redistribution through fiscus - Progressive tax structure Non-contributory social assistance Collective administration Public social services Either universal or means-tested Social grants Education, health Pooling of funds - Contributory social security Occupational benefits Standard entitlements Unemployment insurance Group life Savings - Benefits depend on contributions Benefits are funded Individual entitlement to benefits Work-related participation in system Can be voluntary or mandatory Influenced by tax treatment Can function outside of the fiscus, underwritten by private funds Provident & pension funds Collective investment schemes

8. National Treasury 8 Inequality, redistribution and risk pooling

9. National Treasury 9 Redistributive pooling � non-contributory �first pillar� Reform in progress: Raise means test thresholds Raise CSG qualifying age to 15 Equalise Old Age Grant qualifying age for men and women Cost implications: Raise means test thresholds: up to R2 billion a year Extend child grants to 15: about R1.5 billion a year Lower SOAG age threshold for men to 60: R2 billion a year

10. National Treasury 10 Social security design issues Basic contributory pension arrangement Savings 10-12 % of earnings Defined benefit based on indexed lifetime earnings Annuitisation at standard community rate Extent of coverage, earnings floor for contributions Mandatory participation in national fund, or default national fund and opt-out of accredited schemes Risk benefits (unemployment, disability and survivors): 5-6 % of earnings, up to present UIF threshold (R150 000 pa) Extension of unemployment insurance � minimum benefit or employment guarantee; links with labour centre initiatives Scope for coordination and alignment of disability and survivors arrangements (Compensation funds, disability and chronic illness assessment, Guardian�s Fund, bargaining council and provident fund trustee responsibilities) Collection by SARS, through PAYE system Requires individual contributor accounts to be maintained Based on standard definition of remuneration

11. National Treasury 11 The preservation dilemma Many social security and retirement systems aim to achieve �preservation� of savings � so as to ensure that people achieve an adequate replacement rate at retirement Misperception that preservation will be imposed despite existing rights of access to funds has gained currency � in fact the direction of reform is to ease the tax burden on withdrawals For low income households, mandatory full preservation is impractical and not optimal: urgent household needs may be more important than security of retirement income What kinds of withdrawal from mandatory savings should be allowed? For housing guarantees? Maintenance / divorce orders ? Unemployment? Discretionary provided some level of saving is maintained?

12. National Treasury 12 Balancing preservation, equity in annuitisation and access to funds Option 1: Mandatory participation in NSSF up to earnings threshold (say, R80 000 pa) Mandatory/voluntary supplementary savings through accredited funds Note: distinguish higher rate of contribution from contribution out of higher earnings Access to NSSF savings for approved purposes only Annuitisation by NSSF as multiple of indexed contribution credits Option 2: Allow opt-out for accredited industry funds for savings not risk benefits Subject to minimum benefit and governance standards NSSF serves as default fund Reinsurance through NSSF NSSF quotes default annuity rates, access capped Option 3: Allow opt-out for industry or voluntary funds during savings build-up Mandatory transfer of standard accumulation amount to NSSF for annuity purchase at retirement Balance may be drawn for lifetime needs or as lumpsum at retirement

13. National Treasury 13 UIF reform � balancing labour market and income security needs Consideration to be given to inclusion of public servants, migrant workers on fixed-term contract, learners and the self employed Adjustments needed to risk benefits covered through other state programmes (UIF section 14 exclusions) Development of a framework for linking unemployment benefits with measures aimed at re-integration into the labour market Extending the period of UIF benefits to be investigated, to provide for social assistance to those who remain unemployed beyond expiry of funded benefits

14. National Treasury 14 Survivor benefits � administrative challenge Present arrangements fragmented and inefficient Identification of beneficiaries and distribution of death benefits is onerous burden on trustees Benefits vary widely Delays and administrative failures common Overlaps between death and disability insurance (�group life�), RAF and compensation funds arrangements Survivor benefits are not integrated with social assistance (child support and foster care grants) Guardian�s Fund administers orphans� benefits on behalf of GEPF and other legacy funds Systems outdated and inefficient Large-scale administrative challenge � 4 : 1 ratio of adult deaths to retirements

15. National Treasury 15 Institutional fragmentation � public sector Occupational compensation � Three separate administrative arrangements under Labour, Health (lung diseases) and NT (public service) Guardian�s Fund: administrative challenges; inadequate trusteeship over orphan�s funds Single public service � municipal pension funds in disarray Implications of social security & retirement reform for GEPF not yet adequately researched SASSA � UIF � compensation funds � RAF � contributory social security fund Is it time to share institutional capacity and systems infrastructure? Governance arrangements need to be aligned with system requirements: collection, registration, administration of accounts, management of funds, payment � member protection, adjudication of disputes Planning & sequencing reforms requires detailed strategy and improved inter-departmental coordination

16. National Treasury 16 Systems improvement and modernisation Benefits: economies of scale in administration, simplicity and accessibility for beneficiaries, standardization of systems and integrated fraud control arrangements SASSA is largest payments infrastructure, currently makes use of regional payments contractors (using both banks and Post Office) More efficient long term payments arrangements needed UIF administration has successfully enrolled household and agriculture employees and streamlined payments through an electronic platform Option of public-private partnership in administration clearing-house to be explored

17. National Treasury 17 A pensions administration �clearing house�?

18. National Treasury 18 Retirement fund industry reforms Transition to mandatory retirement provision involves several reforms: Preservation of benefits and portability Defined minimum benefits Management of transaction costs and disclosure of fees Development of common regulatory framework Pension and provident funds GEPF and other exempt schemes Issues in annuity design Standards for accredited (tax privileged) retirement funds Provision for post-retirement medical contribution assurance Reducing costs means product standardisation, improved disclosure, capping of charges, managed competition Encouraging economies of scale � such as industry funds Regulatory and tax reforms are aimed at improving equity, efficiency and adequacy

19. National Treasury 19 Labour market and poverty implications SA needs to encourage job creation, social security has to avoid raising labour costs Hence wage subsidy proposal Well-designed social security can support formalisation of employment & reduce dependence on welfare assistance Mandatory contributory savings & preservation of retirement benefits requires improved unemployment and risk (death, disability) benefits �Poverty trap� can be overcome by earnings-related bridge between social assistance programmes & tax-privileged retirement, risk and medical scheme benefits Illustrative modeling results: Impact of social grants (2), plus wage subsidy and social insurance (3), on poverty (R322 pppm in 2000 prices) by 2020: Gini Poverty head-count (million) Income gap (R billion) 1 0.626 16.27 357.3 2 0.614 13.38 189.5 3 0.577 8.55 98.7 Cost: Social grants R63 billion; wage subsidy R30 billion; tax relief R22 billion Source: Simkins, Social security projections

20. National Treasury 20 Implications for tax system Consideration of combined payroll taxes (UIF, skills levy) in a consolidated social security contribution Public service included Coverage issues to be considered: agriculture, self-employed, household employees Offsetting wage subsidy and changes to the personal income tax structure Further reform of retirement fund & medical scheme tax deductibility to cap benefits & improve equity Tax encouragement of mandatory contributions to a basic savings element Some tax encouragement of supplementary savings No special tax treatment above a certain ceiling Scrapping of RFT: improved retirement benefits Simplification of formula applied to tax-free lump sum benefits Administrative and systems capacity to manage individual contribution records

21. National Treasury 21 National health insurance South Africa lagging behind in meeting health MDGs � what are the priorities for meeting household needs? Water supply and sanitation Malaria prevention � vector control TB and infectious diseases HIV prevention and Aids treatment Vaccination against childhood diseases Trauma services and road accident prevention Broadening access to health insurance needs to be balanced with funding other health promotion investments Three alternative NHI paradigms: A state-owned and managed hospital and primary health system (coordinated supply of services) eg UK prior to reforms Membership of health insurance on standard terms and conditions (purchase of services by insurers) eg Japan Decentralised district management of services, autonomous hospitals (funded on formula basis) eg France

22. National Treasury 22 NHI � funding considerations Gap between public health spending and comprehensive insurance is large: perhaps 1 : 10 But many peer group countries provide an affordable �core health package� that yields better outcomes than SA achieves A costed PMB standard is a possible point of departure for equitable NHI benefit: but balance between hospital benefits and ambulatory (primary) care in basic benefit package difficult to achieve Regulation of tariff-setting and medical scheme benefit structures is necessary element in managing resource allocations Intersection with retirement funding : PRMA arrangements Several specific health services invite joint public-private funding: Emergency medical services and trauma ARV distribution and HIV management Immunisation and health promotion programmes Laboratory services and pharmaceutical logistics Better alignment between public and private hospital services means building better public hospital management systems

23. National Treasury 23 Progress to date Basic social security design Good progress towards a shared government view, further analysis needed Reform options need intensive review by industry, business and labour Institutional coordination of administrative arrangements Broad institutional governance option explored Limited progress in interdepartmental cooperation Systems design and development Conceptual framework and �administration clearing house� model developed SARS personal income tax reforms lay foundation for contribution collection Retirement regulation reform Good progress on further legislative and regulatory steps Sequencing of reforms & consultation with industry ongoing Employment and wage subsidy proposal Discussion paper and evaluation model have been prepared Linkages with wider social security reform (NHI, RAF, labour policy) Health insurance issues currently under scrutiny

24. National Treasury 24 Research, analysis and modelling : towards an ASSA agenda ? Long-term demographic, employment and income trends � Robustness of alternative arrangements to future scenarios International trends in retirement and social security Migration issues and cross-border harmonization Coverage, costs and benefits Comparative performance of SA retirement & life arrangements Economies of scale Balance and alignment of savings & risk pooling; retirement & death/disability benefits Reform of present DB and public sector arrangements Occupational health & compensation and RAF reform National health insurance and medical scheme design Basic benefit package design Options for public-private partnership Regulation and competition reform