Why you may have to pay 12% of your earnings into government’s social security fund

The Department of Social Development’s Green Paper on social security and retirement reform is now available for public comment.

One of its proposals is the establishment of a national social security fund The Department says that the most notable gap in our social security system is the absence of a mandatory contributory public social security fund that provides retirement, disability and survivor benefits to the workforce.

“Although private occupational and voluntary schemes partially fill this gap, some 6.2 million formal sector workers – primarily low-income earners, informal workers and informal sector workers are excluded from such arrangements.

“Several countries have mandatory schemes that provide retirement savings for their citizens. Although some occupational schemes are mandatory as conditions of employment, South Africa does not have a mandatory public social security fund that is based on social security principles of risk pooling and social solidarity.”

The Department says that therefore, the key reform proposal is the introduction of a National Social Security Fund (NSSF), a centrally managed public fund to provide retirement, survivor, disability benefits and unemployment benefits.

All employers and employees will be obliged to initially contribute between 8 and 12 per cent of qualifying earnings up to a ceiling, based on the Unemployment Insurance fund (UIF) ceiling, which is currently at R276 000 per annum. The final contribution rate will be informed by the funding approach agreed following consultations.

“Government should subsidise the contributions of low-income workers to minimise disruptions to the demand or supply of labour associated with the introduction of mandatory contributions.”

It is proposed that employees earning below an income threshold (R22 320 per year) should not be obliged to contribute to the NSSF for retirement or risk benefits but will continue to contribute to the UIF. A simplified contribution arrangement for self-employed individuals and informal workers will also be established.

The Department says the The NSSF tier 2 will run on a defined-benefit basis. A worker’s pension in retirement will be based on career earnings and the duration of contributions. The disability and survivor benefits will be based on salary at the time of injury or death. The NSSF will also pay a flat-rate funeral benefit.

“The NSSF will provide income protection benefits for all workers and their families. However, those earning above the tax threshold will need to contribute to supplementary retirement savings and insurance arrangements to ensure an adequate replacement income.”

To achieve this, it is proposed that the NSSF tier 2 be augmented by introducing an auto-enrolment based third tier. The NSSF will also provide the default fund (NSSF-Default), which will operate within the new third tier framework and offer annuities. To enhance the quality of a third tier offering, an approved funds framework should be introduced, which would provide a regulatory standard applied to private and public tier-3 providers and products.

The Department says that the NSSF will be governed by a Board, which will have ultimate responsibility for the supervision of the fund and will ensure that they steer the fund towards a sustainable future by adopting sound, ethical, and legal governance and financial management policies and importantly ensure its ability to undertake its responsibilities.

The Board will appoint and, if needed, dismiss the Chief Executive Officer (CEO) and will supervise the management team, strategic plans, procurement, business processes, organizational structure, work force appointments and management, transparency, accountability, data and reporting. The executive management of the NSSF will execute the policies as set out by the Board operating the Fund according to law.

“All board members must be fit and proper and have the time, expertise and resources to undertake the duties of a board member. While the individual board members may be nominated by a particular stakeholder constituency, the board member is not a representative of that constituency. It is envisaged that once on the board, the obligation of the board member will be to focus on the best interest of the Fund and its members regardless of the views held by the nominating constituency.”