The taxpayer holiday could be over
Local taxpayers will probably recoil in horror when they read today’s headline, because they already believe they’re being taxed to the hilt. South Africa’s revenue collection machine is not without its problems. We live in a country where unemployment is high and the tax base relatively small with the few paying for the many. To make matters worse these taxes aren’t particularly well spent. Thanks to administrative bungling and the rather narrow tax net most well-to-do citizens spend additional money on services that should be covered by the state. After tax contributions to medical aid, security companies, schooling and university education are a case in point.
If government presses ahead with some of its more ambitious social projects taxpayers could soon find two new deductions on their payslips. In years to come take home pay will be further reduced by National Health Insurance (NHI) and National Social Security contributions. Initial estimates are for the NHI contribution to total around 6% of monthly gross – an amount which will then be pooled and used to provide healthcare services to all South Africans. The NSSS deduction will be similarly pooled, though it’s hoped most of these contributions will find their way back to the contributor.
Closer than you think
The latest media reports point to a 14-year long NHI implementation beginning 2012. Dr Olive Shisana, chairperson of the ministerial advisory committee dealing with the implementation, said we could be “taxed” for the service as early as 2012. “There is a shortfall of R11bn in order for us to be able to start – so it becomes obvious – [that taxation] will start in 2012,” she said. When pressed she conceded such decisions rested with National Treasury and the Minister of Finance.
If the tax goes ahead the majority of South African taxpayers will find themselves paying away money without any benefit. The NHI task team admits the initial improvements to healthcare will be made in rural areas. They also admit current infrastructure won’t be upgraded using a “big bang” approach. Details remain sketchy at this stage – and ordinary citizens are left wondering whether the country can afford NHI off such a small tax base. They might also wonder how they will afford their NHI contribution if the NSSS gets off the ground at the same time.
Is pension reform the answer to South Africa’s saving crisis?
In his article Can Pension Reform lead to an increase in Gross Saving, Dr Sheshi Kaniki, Senior Economist at Momentum unpacked some of the themes in the NSSS debate. His first point of business was to determine why people save. “Pension savings are intended to replace enough of an individual’s monthly income so they can enjoy a standard of living [in retirement] not drastically lower than when they were working,” he writes. The problem is far too few South Africans save enough during their working lives to retire comfortably.
An NSSS solution would address the problem by introducing mandatory pension fund contributions and – hopefully – compulsory preservation of accumulated savings. Says Kaniki: “A secondary yet important objective of pension reform is to increase the gross savings rate.” Will NSSS do the trick? To answer this question we must take a closer look at the components of the gross saving rate (which has incidentally been in decline for the last three decades), namely household saving, corporate saving and government savings.
Households have different types of savings too. We save for retirement, for financial emergencies and to leave a legacy for our children. “Under the current NSSS proposals, households will be forced to redirect at least part of their existing retirement and other savings towards mandatory retirement plans,” observes Kaniki. The experts argue that the diversion of funds from existing plans will be less than the total flow of new funds to the savings space – a result which should bolster the gross savings rate. In most scenarios precautionary savings – the amount households put away to cover short-term financial crises – should remain constant post NSSS, with families continuing to tuck away for the next generation too. The conclusion: “Overall saving will increase when a mandatory pension system is introduced.”
Reducing the burden on government
Government’s role in NSSS will be to ensure the population understands the link between contributions and benefits. They’ll also have to convince the cynics that the system will be appropriately administered. If government gets it right, reckons Kaniki, “pension reform should increase the gross saving rate by reducing pressure on fiscal resources.” As things stand government is paying State Old Age Grants (SOAG) to some 2.5 million beneficiaries. A successful NSSS will certainly reduce this obligation over time too.
Editor’s thoughts: Kaniki plays devils advocate in his article. He says a successful NSSS hinges on households having sufficient income to save over and above their pension contributions… The country’s high debt levels and pending deductions for NHI mean we are poorly prepared for compulsory saving. Do you think government will push for simultaneous NHI and NSSS implementations? Add your comment below, or send it to [email protected]
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