Proposed N SS F‘ will be disastrous’ for economy
LAST WEEK, Social Development Minister Lindiwe Zulu published a green paper on Comprehensive Social Security and Retirement Reform, which proposes the creation of a National Social Security Fund (NSSF).
If accepted, the reform will require that salary-earners pay between 8 and 12 percent of their earnings into a state-run fund. The fund will provide retirement, disability and unemployment benefits to formal, informal and self-employed workers.
The government proposes subsidising the contribution of lower-income earners – those earning below R22 320 a year – in order to “lift the poor out of poverty”. In addition, the green paper proposes a universal grant instead of the current South African Social Security Agency (Sassa) system of payment. Those who don’t require the grant will have these funds recouped via the South African Revenue Service, because it is more efficient than Sassa.
The green paper raises a number of issues. The first is a concerning tendency by the government to insist on increasing its involvement in what should be a free market. South Africa has a well-regulated and efficient financial services sector where costs to consumers are constantly being driven down by competition, innovation and technological advances.
The latest proposal smacks of growing government creep, similar to that proposed by the National Health Insurance fund, which proposes nationalising the well-functioning private healthcare sector and putting ultimate control of health care into the hands of the state. The proposed NSSF appears to fit neatly into the same narrative.
The next concern is that South African taxpayers are already subjected to one of the highest tax rates globally, arguably for little commensurate return. An alarmingly small pool of less than 600 000 individuals pay close to 20 percent of all tax.
Where does the government intend to find the funds to subsidise lower-income earners? The state’s finances are already constrained and South Africa’s tax base is shrinking rather than growing. As the National Treasury is well aware, additional taxes will not be conducive to desperately needed economic growth. In fact, any additional tax increases will, in all likelihood, result in decreased tax yield, as the Laffer economic curve illustrates, and encourage high-net-worth individuals to take assets offshore – or emigrate.
The government’s track record as far as service delivery is concerned provides little cause for celebration. Rather than greater state involvement, it needs to focus on its mandate to provide basic services and an enabling business environment where entrepreneurs and businesses can flourish. This will ultimately lead to job creation, which will reduce the number of people who rely on the state for social grants to survive. However, the introduction of a social security fund that discourages job creation is counterintuitive on every conceivable level.
No government will ever be more efficient than a well-regulated free market economy. Instead of trying to control the private sector, the government’s role needs to be restricted to instituting legal proceedings against providers that offer expensive and badly governed schemes. Allowing more competition is the only way that prices will be driven down.
Unfortunately, all indications are that the government has no intention of abandoning its current interventionist approach despite a plethora of examples illustrating the dire consequences of its involvement. Incompetence and widespread corruption have removed the last vestiges of credibility the state may once have had. Given the state’s history of ineptitude, it is highly unlikely that a state-controlled social security fund will deliver better outcomes than the private sector would be able to achieve.
There is no question that the poor and vulnerable in our society need to be protected and better provided for. However, a mandatory 12 percent of taxpayers’ income into this fund – on top of an already heavy tax burden – is an alarming concept and will likely result in a flight of jobs from the country and further erode the tax base.
The last thing the country can afford to do is enact legislation that encourages more businesses to move their base offshore to the likes of Mauritius in order to avoid having to participate in this scheme. Both the retirement and savings industry and the unions have slammed this latest proposal. The government would do well to take note of their criticisms.