South Africa proposes a mandatory pension system – here’s how much it wants you to pay

Minister of Social Development, Lindiwe Zulu, has published a Green Paper on comprehensive social security and retirement reform for public comment.

It includes a mandatory pension and insurance system among the proposals.

The department said that the absence of a statutory arrangement providing pensions and insurance is the most obvious gap in South Africa’s social security system.

“Such an arrangement must be mandatory, should provide adequate but affordable benefits, and should pool risk across the workforce. It should be designed to interact with non-contributory social assistance as well as contributory arrangements, both statutory and voluntary,” it said.

The department said that the design of a new social security system must consider the varying needs and risks of different groups during the life cycle, including death, loss of income/ support due to old age, disability and long-term unemployment.

“Consideration should be given to the changing world of work and experiences of informally employed and informal sector workers – and those in an atypical work environment such as gig economy and platform workers.”

The Green Paper notes that those who live long beyond their salary-earning years need an adequate income in retirement, but those who die young require assurance that their dependents will be provided for.

“Those who suffer accidental injuries and lose their capacity to work need a replacement income – and in some cases compensation- while those who lose their jobs through the vagaries of economic and industrial trends need to be assisted in finding alternative work and meeting interim income needs.”


Social security fund

The government proposes a mandatory social insurance scheme, called the National Social Security Fund (NSSF).

The NSSF would fill a significant gap in South Africa’s social security arrangements, and it would complement social assistance programmes, social insurance funds and private arrangements, the department said.

The NSSF would also provide pensions to formal, informal, and self-employed workers who reach retirement, disability benefits to those who are physically unable to work, and survivor benefits to their dependants should they not live until retirement, the paper states.

Contributions to the pension and risk-benefit components of the NSSF would be pooled, sharing risk across all contributors, it said. A mandatory pension payroll contribution worth between 8% and 12% of earnings is proposed to be met by employees and employers, at the establishment of the NSSF.

There will be both a floor and a ceiling to contributions. It is proposed that:

  • Workers earning less than R20,000 per year should not be obliged to contribute to the NSSF, though they will continue to contribute to the UIF.
  • Workers earning more than the ceiling of R276,000 per annum or R23,000 per month, at present will not be obligated to contribute on income above that level.

Retirement

According to the document, at retirement, a worker who contributed to the NSSF will receive a pension calculated according to a formula based on lifetime wages, length of service, and an accrual rate to determine what proportion of average earnings (up to the contribution ceiling) the worker would receive for every year worked.

This is commonly known as a defined-benefit (DB) pension plan.

The defined-benefit design means that workers with equivalent contribution records will receive the same pension as investment risk is carried by the system. A worker’s pension should represent a fair return on contributions during his or her career, considering that risk benefits are also a claim on these contributions.

According to the document, a pension income should grow at the rate equivalent to wage inflation to ensure that the income received is equivalent to the average national income.

South Africa’s population is expected to stabilise at about 60 million, the number of people aged over 60 will increase to nearly 8 million in 2065

The design of the NSSF enables workers who have worked a full career to achieve an income in retirement of at least 40% of their earnings over the course of their career, the department said.

“However, workers will not achieve this replacement income through the NSSF alone: for lower-income workers, the old-age grant will continue to contribute to income in retirement, while higher-income earners will need to make supplementary contributions during their careers if they are to achieve an adequate retirement pension.”

The figure below shows how the composition of workers’ retirement income will change according to their career average earnings.

The proposed system is designed to provide a worker with 30 years of contributions to the NSSF, and average career earnings of up to R90,000 per annum with a minimum replacement rate of 40% in retirement without contributing to a supplementary scheme.

If such workers wish to receive a higher replacement rate, they will need to contribute to an approved supplementary fund, over and above mandatory contributions to the NSSF, the department said.

 

Disability and survivor benefits

In addition to financing a retirement pension, the social insurance system must provide for income security if workers do not reach retirement age or are unable to work, the Green Paper said. Workers who are unable to work until retirement age will qualify for benefits to meet basic income needs.

If a worker becomes permanently disabled, they will receive an income based on their salary as at the time the accident occurred or last year of employment where applicable. Income support will also be paid to a worker’s dependents if they die before retirement.

The NSSF would pay a survivor benefit based on not only the worker’s salary but also the number of dependants that the worker leaves behind.

The benefit will be paid out for each child until they reach age 25 or complete their education, so, the younger a deceased worker’s children, the longer the benefit would last. Surviving spouses would receive a benefit related to the salary of the deceased spouse.

Recipients of the disability benefit will be eligible for a pension if they reach retirement age.


Unemployment insurance

Unemployment insurance will continue to be credit-based with credits accrued at a faster rate. The UIF has also extended the benefit for unemployed workers who remain out of work after the exhaustion of their 238 credit days. This will be worth 20% of their income and will last for a maximum of four months.

It will be subject to conditions associated with the government’s labour activation and employment service reforms.

The paper states that for atypical workers, self-employed or informal workers who do not meet the definition of contributor in terms of the UIF Act, incorporating these workers into social insurance schemes such as the UIF to alleviate the hardship endured by them and their families should be treated as a matter of critical importance.


The green paper is out for public comment. Submissions close on 10 December 2021.


Read: Warning over major retirement change for South Africa

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South Africa proposes a mandatory pension system – here’s how much it wants you to pay