Brace yourselves for another 'social' tax
President Mbeki delivered his annual State of the Nation address on Friday, 9 February 2007. The address touched on a wide range of topics, including service delivery, social sector programmes for the coming year, public service capacity building and various international relations issues in Africa and abroad.
The financial services industry will probably be most interested in the section where President Mbeki discussed economic initiatives. Mbeki stressed that the government remained committed to eradicating the legacy of poverty and inequality in South Africa.
"The principle guiding this approach is that, over and above social assistance provided through the government budget, we need to explore the introduction of an earnings-related contributory social security system that is informed by the principle of social solidarity," he said.
Could this be the unveiling of a compulsory pension scheme? This seems to contradict recommendations made in the Retirement Fund Reforms policy discussion document released by the National Treasury recently.
Unveiling another social security tax
President Mbeki went on to outline the proposal, which government hopes to implement over the next few years:
"This will mean that all South Africans will enjoy membership of a common, administratively efficient social insurance system, while those earning higher incomes will be able to continue contributing to private retirement and insurance schemes. In the discussions thus far conducted within government, consensus is emerging that elements of this system would need to include:
"1) Continuation of the minimum benefits contained in our social grants system with the benefits paid through a modern administrative system;
"2) A wage subsidy for low-wage employees, possibly directed at first entrants into the job market, especially young people; and
"3) A social security tax to finance basic retirement savings, death, disability and unemployment benefits"
Mbeki stressed that this new "social security dispensation"would require comprehensive discussions with all the industry stakeholders. Talks are likely to take place through NEDLAC.
Minister of Finance, Trevor Manuel will provide more insight during his budget speech later this month. We will watch his statement carefully to see if we can learn more about how these proposed changes will affect individual investors and the financial services industry as a whole.
A case of the rich subsidising the poor
At face value, the proposal will result in some form of redistribution from the wealthy to the poor.
Currently, government spends about R19.5 billion a year to pay pensions to some 2.1 million pensioners. Under the proposed scheme, every man over 65 and woman over 60 will receive a state pension. This payment would consist of the basic 'old age' pension (currently R850 per month) plus a 'top up' based on the individual's contributions to the state pension scheme.
It is too early to speculate on the effect this proposal will have on the retirement industry. Members of private pension schemes number some 900,000 and draw in the region of R8.2 billion in pensions a year.
If this weekend's Sunday Times is correct in suggesting that government will reduce or stop tax relief for pension fund contributions, the impact could be significant.
Editor's thoughts:
If these proposals are implemented, the burden on the private investor wishing to secure a comfortable retirement will increase tenfold. We expect to know more about these developments after this year's budget speech - failing which we will have to wait for the long awaited second report on Retirement Fund Reforms. Please send your views on this matter to [email protected]
