Speech by Deputy Minister of Social Development, Dr Jean Swanson-Jacobs, at the Institute of Retirement Funds Annual Conference 2007.

Programme Director,
Executive members and,
Leadership of the Institute of Retirement Funds,
Distinguished guests,
Ladies and gentlemen:

Let me express my appreciation for this singular honour and opportunity to join you at this annual conference. It is indeed a pleasure for me to share with you some thoughts on the current debate on Social Security Reform, with a particular focus on the reform of the retirement system.

South Africans agree that we face a range of challenges of which the unacceptable levels of chronic poverty and destitution, suffered by millions of our people, are perhaps the most daunting. Linked to these levels of poverty is the scourge of HIV and AIDS which is ravaging parts of our society. Millions of our people still lack access to basic services such water, sanitation and electricity. Given the multi-dimensional nature of poverty, it is not strange that there is a high correlation between the manifestation of poverty and inequality, the disconcerting levels of crime, and alcohol and drug abuse that costs us billions of rands in social costs.

These ongoing challenges have demanded that we think afresh about how to provide universal and adequate social protection. In the challenging context of persistent and stubborn poverty, inequality, deprivation such as we have inherited, the growing consensus in government was that social security was essential to sustaining social and economic development. Amarthya Sen, the well known development economist and Nobel Laureate, makes a poignant point when he argues that, the reason why people in the rich and developed countries of the United Kingdom and continental Europe do not starve, is not because they are rich, but because of the comprehensiveness of their social security systems.

The Department of Social Development was tasked to lead the process of an inquiry into a system of comprehensive social security system in 2001.

Government has subsequently adopted a framework of comprehensive social security that covers three pillars.

Pillar one encompasses the provision of income support, or social assistance and the social wage, otherwise referred to as the basket of free basic services that include free water, sanitation, electricity, free education, housing and healthcare.

The second pillar is a system of mandatory social insurance. For those who can afford to, there must be arrangements for contributions to risk assurance such as unemployment, old age, sickness, injuries, diseases, disability, and income support for dependents in the event of the breadwinner's death.

The third pillar involves voluntary choices for additional retirement savings and top-up healthcare, over and above the first and second pillar arrangements.

Ladies and Gentlemen:

Let me briefly outline the progress that the government has made in the realm of social security over the last decade or so, and then I shall, at a strategic level, talk about remaining gaps and the envisaged response by government.

Since 1994, the democratic government has worked to enhance solidarity, individual and social well-being, social justice, and equality. We have perhaps, of all countries, made the most rapid progress in the expansion of a social assistance system. It took most countries decades just to build social assistance provision. More than 12,9 million South Africans currently receive income support or social assistance benefits. In 1997, the government, removed the racial child maintenance system, provided to less than 70 000 children, and introduced the child support grant. To date more than 8,6 million children living in households with no or little income, receive a child support grant.

Over 2,2 million of our older persons receive the old age pension, which is well targeted and often support other members of their households. In respect of those living with physical, mental and other incapacities, we provide the disability grant to more than 1,4 million people.

The democratic government can be credited with perhaps the most rapid response to addressing the legacy of social backlogs. In this regard the Provision of the Social Wage which encompasses water, electricity and sanitation stand out as major achievements. Included here is the access to primary healthcare to all those who are vulnerable and lack income. The roll out of the policy of no fee schooling is advancing.

Ladies and Gentlemen, we can also record, albeit in a limited fashion progress in the second pillar. Here we count the expansion of the Unemployment Insurance Fund (UIF) to domestic and farm workers as a significant advancement, over and above the determination of decent minimum wages by the Minister of Labour.

The prohibition that government has placed on the risk selection by medical schemes has led to increases in medical scheme membership, and more significantly, the setting up of the Government Employee Medical Scheme will provide a solidarity pool which, overtime, will provide for an additional 250 000 people and their families.

The strengthening of the capability of the Medical Schemes Council as an independent regulatory body has strengthened consumer protection, strengthening both the second and third pillar achievements.

Ladies and Gentlemen:

While we must recognise the progress we have made as a country, government is aware of the remaining gaps which, if not addressed, pose threats to our hard won freedom and democracy.

In respect of the first pillar, we need to find innovative and sustainable measures to support significantly more people of working age, who are unemployed, and for who work opportunities through the Expanded Public Works Programmes proves limited. Here we count the youth who must make the transition from education to employment, vulnerable caregivers of dependent children who perform a social function without receiving income and the millions who have in recent years become unemployed as the labour market continues to render their skills obsolete.

Government's intervention, namely the Accelerated and Shared Growth Initiative for South Africa (AsgiSA), driven by the Deputy President, and the Joint Initiative on Priority Skills Acquisition (JIPSA) programme should considerably respond to the needs of unemployed, vulnerable individuals. Moreover, for unemployed people, government continues to develop strategies to link social grants to poverty alleviation, sustainable livelihoods and other economic opportunities.

Ladies and Gentlemen:

Government is on record for pointing out the gaps in our second pillar of social security, social insurance, and the remaining inadequacies. A sizable proportion of people are excluded from unemployment insurance such as civil servants and foreign contract workers, while the benefits itself may not be sufficient to maintain people until they get to the next job. Millions of our people also do not have access to savings schemes for retirement, health insurance, death and disability benefits, occupational injuries and diseases.

The inherited values and spirit of Ubuntu encompass the idea of social solidarity. Also in the context of almost every religion or faith there is to be found social teaching of solidarity as "a firm and persevering determination to commit oneself to the common good; that is the good of all and of each individual, because we are all really responsible for each other." The basis of solidarity is mutual obligation. This is mainly expressed through reciprocity, or exchange. "Balanced reciprocity" occurs where people make a direct return for the things they receive. Often, though, reciprocity is "generalised"; there is no simple balance, but people give because they have received something in the past, or because some future reciprocity is possible.

This spirit of solidarity and risk pooling must be core to the social insurance reforms we are embarking on. Before I outline some of the key recommendations, let me list some of the gaps in the current system of retirement provisions.

Over 6 million working South Africans do not contribute to retirement savings and will over time become dependent on the state provided old age pension. For those who do qualify, the quality of benefits accrued proves to be insufficient.

The generous subsidies provided to middle and high-income groups are not only unfair and inequitable, but results in a regressive tax regime. Contrary to popular and fallacious assumptions, subsidies do not incentivise savings. This was proved by World Bank research and local empirical studies.

The charge costs of retirement products in South Africa are the highest in the world and reduce savings.

Many retirement savings products do not provide adequate disability, survivors and post-retirement medical benefits.

Although our legislative instruments are deemed to be amongst the best internationally, our ability to ensure compliance is compromised.

The members of the Inter-Ministerial Committee, having considered the shortcomings in the current system, will have to apply their collective minds to a number of policy options for reforming the pensions system.

There is general agreement that the means test to the old age grant creates problems of perverse behaviour not to save in order to get the benefit. In addition, the means test creates a poverty trap, is often not properly applied and is inefficient. There is agreement that we either need to remove the means test in its entirety, or increase the income threshold significantly.

There is general agreement that the country should introduce a mandatory retirement savings scheme that provides the employed from a certain income level to save for retirement. It is being debated to what extent we should have defined benefits and defined contribution savings schemes. This is an important debate as the decisions we make today will affect our future as well as that of generations to come. The issue of retirement savings scheme is of profound economic, social and political significance. It remains important that, whatever the design, the importance of risk pooling, risk sharing and a level of redistribution remains important for schemes to ensure social solidarity.

Notwithstanding a world-class regulatory system, we must acknowledge that scandals, such as the Fidentia debacle, are indicative of shortcomings in our oversight of pension funds. We would abdicate our responsibility if we leave people, who put away a share of their hard-earned savings, entirely at the potential risks of fund failures, fraud, corrupt practices, poor governance and risky investment decisions. We should have a framework that, in its simplest form, is aimed at achieving simple, standardised, low cost pension savings products and consistency across providers.

The approach to regulate and supervise the pension fund market may have to differ considerably from the approach used in the country today. We are in need of a new supervisory philosophy that is proactive and comprehensive, with more regulatory independence and an enhancement of the capabilities of the current regulatory structures.

The Committee will have to debate the extent to which we should introduce minimum product standards, with significantly reduced administration charges that are often the main reason for the low returns on savings. We need structural interventions such as centralised collections, doing away with the commission structures and upfront, clear disclosure of services standards which must be monitored by a supervisory authority.

There is general agreement that a debate is required in respect of the provision of tax expenditure subsidies to middle and high-income groups. The proposals on the table range from a total removal of the subsidies to proposals to cap them at a certain level. This is a complex issue. While the research suggests that there is no evidence to support the notion that tax subsidies provide incentives for savings, we must acknowledge that most countries in the world provide them.
The emerging consensus is that a review is needed on the matter of tax subsidies.

In view of the withdrawal and decrease in benefits over the last 15 years, government recognises the need to provide for ancillary risk cover with the retirement package such as disability and survivors' benefits. In addition, a part of the debate will have to include the need for post retirement healthcare contributions, as the evidence indicates that those in retirement are finding it difficult to finance the increasing escalation in healthcare costs. From about 85% to 95% of companies do not provide for healthcare facilities during retirement, in stark contrast to the extent to which many companies carried this risk before 1992.

Government will discuss the extent to which employees must save a part of their income to ensure a prescribed minimum benefit package during retirement. It is an unfortunate reality that, during retirement people must cover increasing healthcare costs at a time in their life when they have significantly reduced income.

Ladies and Gentlemen:

The discourse on retirement reform will have to be underscored by guiding principles. As we engage in the debate, we need to make sure that we work towards the extension of social insurance coverage to all members of the population. The theoretical basis for retirement savings is not, and I underscore, it is not to ensure that we have a pensions industry, but rather that we ensure protection against poverty in old age, during disability or on death of the wage earner for all members of the population. Whether government or the private sector provides it is another debate. We must be committed to the provision of an income, and replacement of lost earnings as a result of voluntary or involuntary retirement for all those who have contributed.

The income that we thus want to ensure must adjust to take account of inflation and, at least to some extent, of the general rise in living standards. A final principle requires the creation of an environment for the development of additional voluntary provisions for retirement income. Government is therefore committed to the existence of a vibrant and competitive private pension fund industry that is accessible and benefits from the economic growth of this country.

Ladies and Gentlemen:

In closing, let me make the point that, given the profound economic, social and political implications of social insurance reforms, we should as a collective ensure debate extends beyond those with vested interests. In fact whether the benefit system is arranged to a flat rate nature, earnings related or based on cumulative contributions is neither here nor there. However, the process of collective discussions, engagement, and consensus is a matter of considerable significance. While many governments have in the past, such as Chile, adopted unilateral approaches to making choices about their systems, South Africa has to build on its rich cultivated tradition of public consultation, which eliminates the risk or the desirability of unilateral government action on a matter as important as pension reform. Government remains committed to an inclusive process of public consultation and debate.

I thank you.

Enquiries:
Lakela Kaunda
Tel: 012 312 7653
Cell: 082 782 2575

Selwyn Jehoma
Cell: 084 515 4592

Issued by: Department of Social Development
7 September 2007