Date: 29/11/2010
Source: The Presidency
Title: SA: Manuel: Address by the Minister of National Planning, at the Conference of the International Social Security Association, Cape Town

Chairperson
Honourable Ministers
Distinguished Delegates
Ladies and Gentlemen

It is a great privilege to be able to be with you today, and I am delighted that the International Social Security Association elected to hold this prestigious forum in South Africa and in Cape Town. It is not just that we can offer you the most beautiful setting in the world to reflect on some of the most challenging policy issues of our time, but it is also a great opportunity for us as South Africans to learn from international experience as we consider further reforms to our own social security, income support, retirement funding and health insurance arrangements.

You have brought an exciting programme and a formidable array of speakers together, and I look forward to learning more of the content and outcomes of your discussions in the days ahead.

Having served for some time as Minister of Finance, I am, of course, profoundly conscious of the immense gap between what we would like to achieve in social security and income support, and what we can realistically afford to achieve in the time-span of a government. In my new portfolio I have the unusual privilege in politics of being able to think beyond the next five years to the next decade, and so I am also mindful of the very long-run dynamics of social security systems. I have a few thoughts I would like to share with you, including preliminary reflections on our own social security reform project – but please note that this is very much work in progress: our reform roadmap still has many options and details to work out.

I need to begin with a point that seems obvious once it is stated, but is perhaps not sufficiently acknowledged. Social security arrangements have immense power to do good – in reducing risks to households and smoothing otherwise traumatic social and economic transitions, and in supporting a fairer distribution of income and opportunity. And so, quite rightly, social security occupies a very large share of the public finances of developed countries, and a growing and important share in the finances of most developing economies.

But social security arrangements also have immense power to do damage – when they promise too much, or are too inflexible, and hence contribute to fiscal unsustainability and perhaps financial crisis, and also when their rules are unfair and hence contribute to social discontent and unrest.

It is imperative that policy intent, policy content and policy context be explored openly and transparently. As Amartya Sen poignantly reminds us in his foreword to Duncan Green’s book, “From Poverty to Power”

The Classic view that poverty is just a shortage of income may be well established in our minds, but ultimately we have to see poverty as unfreedoms of various sorts: the lack of freedom to achieve even minimally satisfactory living conditions. Low income can certainly contribute to that, but so can a number of other influences such as the lack of schools, absence of health facilities, unavailability of medicines, the subjugation of women, hazardous environmental features, and lack of jobs (something that affects more than the earning of incomes). Poverty can be reduced through expanding these facilities, but in order to guarantee that, what is needed is an enhancement of the power of people, especially of afflicted people, to make sure that the facilities are expanded and the deficiencies removed.

So, intent, content and context are vital to the choice between charity and empowerment.

Indeed, when we bring housing and health financing arrangements into the wider definition of social security, as these are areas of public policy that are also strongly driven by demographic and labour market trends, then we are covering territory that accounts for half of the government finances of many jurisdictions and often over half of the income of 50 per cent of a country’s people.

And these are areas of public revenue and expenditure in which rules rather than discretion are the norm. For very good reason we do not want to see our social security institutions subject to the frequent variation of governments or policy change.
But rules do not mean that the financing and expenditure balances are either constant or risk-free and so these are areas of public finance in which intelligent analysis, and projections well into the future, are critical inputs into the policy process.

We know that governments are not always good at taking expert advice, and the advice is often varied and conflicting and sometimes plain wrong, and politics doesn’t always offer a convenient opportunity for reflection on awkward advice, and so things can go wrong. This may be rapid, may take the form of a panic or crisis, but there is invariably a preceding gradual decay, until the costs and disruption associated with restoring sustainability are both politically and financially non-trivial.

There is currently an interesting debate in the USA, inspired by the views articulated by David Stockman, who was President Ronald Reagan’s Budget Director. He has argued forcefully that the approach of Republicans against the taxation of the wealthy goes against the grain of the policy foundations. The costs of maintaining this system will be the fiscal undoing of the USA, he says. He has called on President Obama to stare down the Republicans in Congress and take the correct decision. Not that my view matters, but I do concur with David Stockman. But then if these issues are true for the revenue side, they should also hold for the expenditure side of the budget, especially if policy choices exercised will have long-run effects.

It also needs to be said that wilful misrepresentation and fraud, even within large government-sponsored agencies established on the most noble and uplifting intent and mandate, have played their part in bringing on crises and financial collapse. Greed, arrogance and incompetence have played havoc with ordinary people’s wellbeing, both in poorly governed private schemes and corporations and in statutory social insurance arrangements.

It’s a little unusual for a keynote address, but I am minded, Chairperson, to suggest that we should pause for a minute of silent reflection on this unarguable truth: that social security arrangements have both immense power for good, and also the extraordinary capacity to do damage.

Many of you will know that the South African Government published the findings of a committee of inquiry into a comprehensive system of social security in 2002, and its recommendations, although largely accepted, have only partially been implemented over the intervening eight years.

We know that it is important to get things right, and possible to get things badly wrong, in implementing these reforms. And so a great deal of work over the past years has gone into analysing options and ensuring that our reforms are well-founded and appropriately sequenced.

We have given priority to the needs of children. By far the largest reform of the past decade has been the phasing in of a child support grant as part of our social assistance system – means-tested, and of moderate value, it now goes to the parents or caregivers of over half of all South African children.

In several countries, grants of this kind have been accompanied by conditions aimed at improving household and parental care – participation in health promotion and education, for example. We have been mindful of the administrative capacity challenges of these approaches and so this is not a strong feature of our arrangements, but it is an aspect that we are keen to reinforce.

We have a well-established social assistance grant for the elderly and for disabled people, paid for from general revenue, and we have a wide range of partnerships with welfare organisations and non-profit agencies involved in care and social services. Social assistance and social protection, including unemployment insurance and compensation for occupational injury and road accidents, has been a large and fast-growing component of our public finances for more than a decade.

But South Africa does not have a standard, statutory, contributory pillar for retirement and survivor benefits. So this is our major reform challenge.

We have well-established private and occupational retirement funds, and a large savings, life insurance and fund management industry. In thinking through the options for social security reform, we have to work through its implications for the existing industry, of some 9 000 active funds which cover well over half of all employed people.

There is an intriguing sense in which South Africa’s reform challenge is the opposite of that facing many other countries – we have to build a contributory social security pillar in the presence of well-established voluntary arrangements. Many other countries are looking for ways of containing the unsustainable commitments of their social security systems while encouraging more widespread participation in supplementary and voluntary arrangements.

There is an ongoing debate about the balances that need to be struck between the adequacy of retirement benefits (especially to retain a lifestyle equivalent to that enjoyed during the working life); the adequacy of worker contributions (especially since contributions are deferred income that cannot be spent immediately); the return on investments (given the significant shift to defined contribution schemes and mediocre trusteeship) and of fiscal choices in the medium term, especially as the population ages.

In looking at international experience, it is striking how many mature systems are unnecessarily complicated by the overlapping interactions of successive waves of institutional and statutory reform. Perhaps the United Kingdom is something of an outlier in this, but it is very hard to find anyone who can give a coherent explanation without having to check half a dozen recent regulatory updates of exactly how the British retirement funding system works…

We want to keep things simpler in South Africa, and at the same time we know that it is important to incorporate appropriate “levelling mechanisms” or adjustment parameters that will allow the retirement funding and statutory survivor benefits system to adjust to changing life expectancy and mortality trends, shifts in dependency patterns and unpredictable trends in employment and income distribution. So there is a need to combine simplicity and understanding with appropriate mechanisms to deal with complexity and change.

Is this asking too much of the analysts and actuaries?

I don’t think so. Good analysis and actuarial estimates can surely be made explicit and accessible, in ways that politicians, union leaders and business decision-makers can make sense of them. Making the analysis accessible is part of the responsibility of doing the job properly and being honest about its implications; to speak the truth means to speak clearly.

Institutional arrangements are sometimes thought to be peculiar to local circumstance and the intricacies of local legal traditions – this is true, no doubt, but let’s not neglect varying international experience with institutions and their effectiveness because of this. It may not lend itself quite so tidily to differential calculus, but the organisational arrangements that make for better accountability and more transparency, the decision rules that contribute to good governance and effective representation of stakeholders, also need to be subject to scrutiny and evidence.

There is no escape from this in South Africa’s circumstances – you will find that we are somewhat obsessed by governance and institutional arrangements, which has its own frustrations but is no doubt ultimately for the good.

We also have to confront some difficult regional and cross-boundary issues in social security design in Southern Africa. Let me illustrate by way of a simple metric – using the same study and 2009 data, Lesotho had a Per Capita GDP in Purchasing Power Parity of $ 1 700; Swaziland of $ 4 400; Zimbabwe of $ 200 and South Africa had $ 10 100. Given the fact that our borders are porous, why would the poor remain in abject poverty? How high a differential can be maintained between the different sovereign social security systems? What does this portend for development in the SADC region?

The ISSA is an excellent forum through which progress can be made in dealing with the international aspects of social security reform. Would I be exaggerating if I suggested that in other regions of the world, these are issues of greater importance than is typically acknowledged in public debate?

The Eurozone’s current financial difficulties are not unrelated to the limited progress that has been made over the years in harmonisation of social security and pensions arrangements; international labour market reform faces hurdles at least as difficult in this area as in any of the more direct aspects of labour protection and industrial relations management.

By way of conclusion, Chairperson, I need to draw attention to a stark and formidable challenge we face in South Africa, which is to create more jobs and reduce unemployment while also improving protection of workers’ rights and their income security. If there is a keynote theme in social security reform, it surely has to resonate with this policy challenge. Throughout the world, in very varied circumstances, and in many different institutional settings, we have to find ways of expanding employment and economic opportunity while also reinforcing income protection and security of family welfare. Let us not for a moment pretend either that this is easy, or that these endeavours can be addressed in a few countries alone.

I wish you well in your deliberations.

Thank you.