Social Security Provisions in South Africa

1.         Introduction

                        

The World Labour Report of 2000 issued by the International Labour Organisation defines Social Security as follows:

“Social Security is the protection which Society provides for its members through a series of public measures:

• To offset the absence or substantial reduction of income from work resulting from various contingencies (notably sickness, maternity, employment injury, unemployment, invalidity, old age and death of the breadwinner);
• To provide people with Health Care; and
• To provide benefits for families with children.”

South Africa has an extensive network of Social Security provisions with 13m South Africans benefiting directly through state sponsored grants and millions others either benefiting or standing to benefit from other social security safety nets.  This unit examines the Social Security provisions provided by the state to its citizens as well as other benefits that accrue to members during hardships by virtue of their employment or resulting from road accidents.

A summary of the operation of the following Funds is also provided:

a)                 Occupational Injuries Compensation Fund

b)                 Road Accident Fund; and

c)                  Unemployment Insurance Fund.

2          Challenges

The South African economy has both first and third world elements. The third world or subsistent economy is informal and poor. The informal economy can be defined as that beyond state control: untaxed, unregulated and not using formal legal or accounting systems. It includes subsistence farmers, micro-scale traders and manufacturers, and many domestic workers.

The disadvantages of the informal economy are obvious. Efficiency is low as the division of labour is much more difficult and economies of scale impossible. Access to credit and insurance is limited by the absence of records and formal dispute resolution mechanisms. The latter is also associated with violence. Literacy is of less value, and is therefore encouraged less in the young, which also means that skills are less likely to be passed on. The smaller tax base limits the ability of governments to develop infrastructure and provide social services.

South Africa's very high income inequality is driven largely by the differences between the larger incomes in the formal sector and the very low cash incomes and the very low value of subsistence production. Those employed in the formal sector largely provide for their own insurance and retirement needs, albeit encouraged by tax concessions and a degree of compulsion (in the case of workers' compensation and unemployment).

The informal sector, by definition, precludes formal pension and insurance arrangements. Outside formal organizations, wage related contributions cannot be collected; money cannot be securely invested, and structured payouts cannot be managed. Informal institutions such as burial societies do provide some limited protection but are limited in the security they can supply (See Thomson and Podel (2002)

While formal systems have clear advantages over informal arrangements, they place significant demands on participants. If the demands cannot be met, the costs and the disruption of attempting to create formal systems may outweigh the advantages. Large numbers of unclaimed life insurance policies and pension benefits, and ongoing reports about the difficulties faced by illiterate and poor people in claiming state benefits illustrate this point.

There are also unstable smaller employers on the fringe of the informal sector.  These employers, and their employees, are reluctant to contribute to formal arrangements because of their uncertain future, and the expense of contributing on behalf of lower income individuals.[1]

The difficulty of collecting contributions makes unfunded (pay as you go) benefits much more efficient for the informal sector, even if they cannot be justified on the grounds of needs or the desirability of redistribution.

3.         Social Welfare Benefits

3.1.      Background

In the 2009/10 financial year approximately R85 bn (or 3.5% of GDP) is expected to be spent on government grants that are to be paid to about 13 million South Africans. The provision of old age grants formally began in 1927 when the Old Age Pension Act introduced pensions for Whites and Coloureds and excluded citizens of other race groups. Coloureds then received 60% of the pensions payable to Whites. In 1946 the Smuts administration extended benefits to Africans on a means tested basis at 10% of the benefits payable to Whites. Race based discrimination of benefits ended in 1993 just before the election of South Africa’s first democratically elected government in 1994.

With widespread poverty, a skewed income distribution and one of the highest levels of HIV in the world, the South African Government now uses grants as part of its broader poverty alleviation strategies. Whilst there is debate on the type and level of benefits payable, government grants are too much of a political “hot potato” to contemplate wholesale changes.

The benefits are payable on a pay-as-you-go basis where current government revenue is used to pay current grants. As such monies are not set aside to provide for future potential shocks such as increased longevity of pensioners.

The South African Social Security Agency Act of 2004 provides for the establishment of the South African Social Security Agency (SASSA) to administer and pay the benefits.

3.2.      Current Type and Level of Benefits

Government grants are payable to permanent South African citizens on a means test basis. In order to satisfy the means test the applicant must have a lower income and asset level than prescribed from time to time.

The table below provides details of the current* type of grants payable, the monthly level as well as brief description.

           

	Grant	Monthly	Payments
		Level
1	Old Age	R 1,010	Women aged 60 and over
			Age for men phased in from 65 to 60 over 2008 to 2011
2	Disability	R 1,010	Disabled persons below the age qualifying for old age pensions
3	Child Support	R 240	Payable to primary caregiver of a child below an age specified
			by the Minister from time to time.
4	Grant in Aid	R 240	Additional grant to persons with severe mental or physical
			impairments such that they require regular attendance
5	Care Dependency	R 1,010	Paid to parent or foster parent of children between the ages of 1
			and 18 who suffer from severe mental or physical disabilities
6	Foster Care	R 680	Payable to foster parents in respect of children for whom the
			courts deem are in need of  care and compensates for costs
7	War Veterans	R 1,010	Must be over 60 or be disabled and have fought in the First or
			Second World Wars or the Korean War

* 2009/10 budget year

Each year the Minister of Finance announces adjustments to the level of grants. The adjustments depend on the strength of the government's finances at the time, but have been somewhat greater than inflation in recent times. The take up rate varies from grant to grant with the highest take-up rate being for State Old Age Pensions. Disability grants on the other hand are problematic in that they require medical assessments. Other factors influencing the take-up rate of the grants include accessibility to the SASSA offices (which may impact rural communities) and the need for formal Identity Documentation.

3.3.      Current Scale of Benefits

3.3.1   Number of Beneficiaries

The following are the number of beneficiaries per category of benefit as per the 2009 Budget Review.

	Beneficiaries by Type of Benefit
	Apr-05	Apr-06	Apr-07	Apr-08	Apr-09	% growth
Grant					(estimated)	(annual)
Old Age	2,093,440	2,144,117	2,195,018	2,218,993	2,324,615	2.7%
War Veterans	3,343	2,832	2,340	1,963	1,649	-16.2%
Disability	1,307,551	1,319,536	1,422,808	1,413,263	1,404,884	1.8%
Foster Care	252,106	312,614	400,503	443,191	487,510	17.9%
Care Dependency	88,889	94,263	98,631	101,836	105,909	4.5%
Child Support	5,661,500	7,044,901	7,863,841	8,195,524	9,061,711	12.5%
Total	9,406,829	10,918,263	11,983,141	12,374,770	13,386,278	9.2%
No of beneficiaries split by Province
Eastern Cape	1,743,007	2,094,642	2,244,303	2,291,898	2,507,094	9.5%
Free State	596,083	678,522	723,698	755,665	808,438	7.9%
Gauteng	1,165,679	1,318,981	1,406,445	1,451,967	1,571,129	7.7%
Kwazulu Natal	2,149,969	2,498,888	2,931,722	3,033,463	3,275,005	11.1%
Limpopo	1,412,882	1,640,032	1,751,512	1,798,859	1,956,601	8.5%
Mpumalanga	704,070	836,451	901,386	925,171	1,006,932	9.4%
Northern Cape	188,578	213,512	232,102	307,095	259,279	8.3%
North West	777,722	888,065	1,001,629	980,018	1,118,912	9.5%
Western Cape	668,839	749,170	790,344	830,634	882,888	7.2%
Total	9,406,829	10,918,263	11,983,141	12,374,770	13,386,278	9.2%

3.3.2.  Costs of Providing Social Grants

The following are the total rand costs of providing social security grants and this is further expressed as a percentage of GDP.

Social Grants Expenditure as a % of GDP
	2005/06	2006/07	2007/08	2008/09	2009/10*	2010/11*	2011/12*
	R Mn	R Mn	R Mn	R Mn	R Mn	R Mn	R Mn
Social Grants	50,708	57,032	62,467	71,161	80,380	88,125	95,237
SASSA Administration	3,324	3,819	4,551	4,610	5,135	5,589	6,047
Total	54,032	60,851	67,018	75,771	85,515	93,714	101,284
% of GDP	3.4%	3.4%	3.2%	3.3%	3.5%	3.5%	3.4%
* Projected

4.         Occupational Injuries Compensation Fund

4.1.      Legislative Framework

The Compensation Fund compensates workers who get injured or contract diseases as a result of their employment but does not pay for pain and suffering. Compensation Legislation can be traced back to 1914. In 1941 the Worker’s Compensation Act was passed and included the establishment of a Workman’s Compensation Commissioner. This stopped private compensation agreements between workers and companies.

The Compensation Fund is covered by the Compensation for Occupational Injuries and Diseases Act (COIDA) and the Compensation for Occupational Injuries and Diseases Amendment Act of 1997. The Act increased the pool of lives to also include office workers, including professional staff. All employers must be registered with either the Compensation Fund or a designated insurer.

The designated insurers are Federated Employers Mutual who cover employees in the construction industry and Rand Mutual Assurance Company which covers employees in the mining industry. Both are mutual companies. Employers exempted from paying contributions include the National Government, Provincial Government and the Greater Metropolitan Councils.

Workers injured prior to 1 March 1994 are covered by the Workman’s Compensation Act. The current Act also states that the employer has to pay the employee benefits for the first three months after the contingency but is re-imbursed by the Fund.

4.2.      Contributions and Benefits

The rate of contribution is calculated per industry sub-class and takes into account the expected claims from that particular industry. The Compensation Fund can apply loadings to employers to incentivise these employers to reduce claims. The Compensation Fund and FEM use the same tariffs but Rand Mutual determines its own tariffs based on actuarial assessments. Employers contribute but employees do not have to contribute.

The following benefits are covered:

a)                 Temporary Disability

b)                 Permanent Disability

c)                  Death

d)                 Medical Expenses; and

e)                 Additional Compensation.

The benefit for temporary disability is normally 75% of the income prior to the disability payable for the duration of the disability. For permanent disability the compensation will vary with the severity of the disability. For permanent disability that is deemed less severe, the compensation is normally 15 times the monthly earnings. For the most severe permanent disability, the compensation is a pension of 75% of income prior to injury.

For deaths, a surviving spouse is entitled to a lump sum equal to two times the monthly pension to which the employee would have been entitled to if 100% disabled and a pension equivalent to 40% of the pension to which the employee would have been entitled if 100% disabled. In addition each child is entitled to 20% of the pension if the employee was 100% disabled. There is an overall cap on the pension payable. All reasonable medical and transport costs arising from the accident are payable. Compensation is based on the salary prior to the contingency.

Domestic workers, members of the South African National Defence Force and South African Police Services cannot claim from the Compensation Fund. In addition the following exclusions apply:

a)                 Claims which are made more than 12 months after the accident or diagnosis of the disease;

b)                 Claims where the worker is off sick for three days or less

c)                  Claims resulting worker’s own misconduct; and

d)                 Claims where the worker refuses medical treatment.

5.         Road Accident Fund

5.1.      Legislative Framework

The Road Accident Fund Act of 1996 governs the claims arising from motor vehicle accidents.

The Motor Vehicle Assurance Act of 1942 made it compulsory for motor vehicle owners to take out Third Party Motor Vehicle Insurance. The object of this legislation was to ensure that a victim of a road accident who sought compensation for damages could rely on the State to make good these damages – rather than suing an individual wrong-doer who may not have the financial means or insurance to compensate the victim. The Road Accident Fund took over the Motor Vehicle Accident Fund in 1997 through the Road Accident Fund Act of 1996.

The Road Accident Fund of 1996 governs the broad framework of the RAF. Section 3 provides for the establishment of the Road Accident Fund which has as its objective:

“The payment of compensation in accordance with this Act for loss or damage wrongfully caused by the drivers of motor vehicles.”

The determination of liability is based on the following broad principles:

a)         The system of compensation is Fault Based. The RAF is only obliged to pay compensation if an injury or death is due to the negligence or wrongful act of the driver or owner of a motor vehicle. Thus the basis of compensation is for the claimant to demonstrate that he or she was not at fault or negligent in any  way.
b)         The compensation is for losses suffered as a result of bodily injury or death – it does not cover losses to property such as those to the motor vehicle or goods carried.

c)         Only accidents covered within the border of South Africa are covered.

d)         The type of damages or losses is described by the RAF Act.

The Road Accident Amendment Act of 2005 was gazetted on 21 July 2008. The provisions of the Amendment Act were suspended after a successful challenge in the Transvaal Division of the High Court of the Republic of South Africa. The Amendment Act has retained the fault based mechanism even though the Road Accident Fund Commission headed by Judge Kate Satchwell recommended that a no-fault system be implemented.

5.2.      Benefits and Contributions

Prior to 1986 motorists had to purchase Third Party Insurance cover. From 1986 onwards, the collection of premiums for the Road Accident Fund was via a flat levy on fuel purchased. The levy has changed from time to time. A particular disadvantage of this mechanism is that the revenue for the RAF is a function of fuel purchased. There is however the administration simplicity of collection of monies via the fuel levy. The RAF has been running deficits over many years and government has from time to time injected money into the RAF.

The Road Accident Fund provides the following benefits:

a)                 Special Damages (Pecuniary Loss)

• Past and future hospital, medical and related expenses;
• Past and future loss of earnings;
• Past and future loss of support; and
• Funeral expenses

b)                 General Damages (non-pecuniary loss)

• Loss of amenities of life, pain and suffering, disability and disfigurement.

6.         Unemployment Insurance Fund (UIF)

6.1.      Legislative Framework

The Unemployment Insurance Fund (UIF) which provides temporary financial assistance during unemployment and other limited contingencies is governed by the Unemployment Insurance Act of 2001 which took effect on 1 April 2002.

This Act established the Unemployment Insurance Board and set out its functions and also designated the Unemployment Insurance Commissioner. The Unemployment Insurance Contributions Act of 2002 dealt with the employer’s obligations to contribute to the Unemployment Insurance Fund.

6.2.      Contributions and Benefits

The Unemployment Insurance Fund assists workers in the formal sector with financial assistance for the following contingencies:

a)                 Unemployment Benefits – employees can claim if they have been dismissed or retrenched but not on voluntary resignation;

b)                 Illness Benefits – employees can claim if they are sick for two weeks;

c)                  Maternity benefits – employees can claim benefits during maternity leave;

d)                 Adoption Benefits – employees can claim if they legally adopt a child younger than two years and leave work to care for the child, and

e)                 Death benefits - the spouse or child of a deceased member can claim benefits from the Fund. 

Employees contribute 1% of their salaries to the UIF and employers contribute a further 1% of salaries. Benefits and contributions are capped based on a salary ceiling. It is the employer’s responsibility to ensure that employees are registered with the Fund and also to deduct these contributions and pay them over to the UIF. The contributions are mainly collected by SARS. All workers who work a minimum of 24 hours per month (except public servants) must contribute to the UIF.

Employees can claim benefits for up to 238 days if they have contributed for at least four years; otherwise they may only claim 1 day for every 6 days that they worked. For maternity claims, this can be up to 121 days. There is a cap on the benefits – this is 58% of the salary earned. Workers must claim within six months of the date they stopped working and no tax is paid on the benefits received. The Unemployment Insurance Fund may at its discretion extend the period of the benefits.

A criticism often leveled at the UIF is that a substantial portion of informal workers are excluded from participation in the Fund and that the benefit period of six months is regarded as being too short to provide meaningful benefits. Those earning above the ceiling would only receive partial protection. Potential reforms include the extension of the period of payment of benefits to a year.

Benefits payable from the UIF are tax free in the hands of the recipient.

7.         Health Care

Government expenditure on public health care is expected to exceed R80 bn in 2009/10. The South African Health Review (2008), calculated that expenditure on public health care as 3,5% of GDP and a further 5% on private health care. The same publication reports that less than 20% of South Africans have private health insurance, but the private sector accounts for some 25% of hospital beds and - based on a relatively small sample - finds that over 40% of people using medical services use the private sector. "The major reasons given for dissatisfaction with the public sector facilities were long waiting times, staff attitudes, prescribed medication not being available and shortages of staff (doctors / pharmacists). Long waiting time was noted in both public and private sector facilities."

Government funded health care is given by local clinics and public hospitals. The strains of under-funding, which occur even in the developed world, are aggravated by South Africa's budget constraints and by the high prevalence of AIDS and unnatural deaths (violence and road accidents), which are both amongst the highest in the world. The Health Review reports that they account for 25% and 8% of deaths respectively, and it is likely that they account for a significantly greater proportion of the load on the health care system.

8.         Topical Issues in Social Security Provision

As with many elements of South African society, social security is widely debated and subject to a variety of reform possibilities. The entire system was recently subject to a Parliamentary Committee of Inquiry (Taylor, 2002) and its Subcommittee reports (2002).

8.1 A Basic Income Grant (BIG)

One of the main Taylor recommendations, which remains currently topical is the call for the extension of Social Security Grants to include a BIG, which if implemented would be payable at a flat rate to all citizens who would not need to meet any specific eligibility criteria. Unions and other interest groups see the lack of any specific grants to impoverished adults including those who are unemployed as one of the major shortcomings of the existing arrangements.

A minority view from the Taylor Committee was that the amount of BIG that could be affordable was too small to be a desirable option.

8.2 Pensions

The age at which men are eligible for State Old Age Pensions is being reduced from 65 to 60 over a three year period to bring it in line with the age at which women qualify for State Old Age Pensions. In some ways this goes against international trends of Governments wanting to increase retirement ages to counter the impact of demographic shifts such an increasingly aging population and increased longevity of pensioners.

8.3 Retirement Fund Reform

Retirement Fund Reform proposals if implemented will have a fundamental impact on the broader provision of Social Security Benefits. The National Treasury Issued a Discussion Paper “Retirement Fund Reform – A Discussion Paper” in December 2004. After deliberation, The National Treasury released its second discussion document in February 2007 entitled “Social Security and Retirement Reform – Second Discussion Paper” The broader objective of these reforms is poverty alleviation through increased savings. The Department of Social Development has published a variety of Feasibility Studies considering these and other options.

Some of the major provisions of the proposed Retirement Fund reforms are as follows:

a)                 The establishment of a National Social Security Fund (NSSF) and compulsory participation for all employees up to a yet to be determined threshold level;

b)                 Mandatory supplementary contributions to an occupational retirement fund or individual savings vehicle above the threshold level ;

c)                  The NSSF would also provide a moderate level of death and disability benefits;

d)                 Compulsory preservation of retirement fund savings;

e)                 Compulsory annuitisation at retirement whereby most of the accumulated retirement fund savings would need to be taken as income at retirement as opposed to a cash lump sum as is currently the case with Provident Funds; and

f)                   The provision of a wage subsidy to encourage lower earners to save for retirement

The Government’s blue print suggests that an increasing number of South African’s should ideally provide for themselves in retirement and thereby become less reliant on the State for benefits.

There is however a current debate on whether the State Old Age Pension should be universally provided or should still be subject to the means test. The arguments against the means test made in Asher (2006b) were accepted by the Taylor Committee. Gluckman (2009) makes a case against a national retirement scheme.

8.4 The Accident Funds

The Taylor Committee also recommended that it be investigated whether the Road Accident Fund and workers' compensation arrangements should be abolished. The benefits that they provide for accidental death and injury are also required for natural causes of death and disability as a consequence of illness. Such cover could be provided by private insurance and public social security arrangements.

9.         Conclusion

In addition to employment related benefits and those provided by the Road Accident Fund, South Africa has an extensive network of government sponsored Social Security benefits that provides a safety net against extreme poverty. Research indicates that poorer households benefit tangibly from government grants. The government needs to balance the needs of poorer communities against fiscal constraints whilst addressing inefficiencies and fraud.

In the short to medium term, it is unlikely that social security benefits would be reduced or eliminated. On the contrary benefits have been extended in the past few years and government is unlikely to have the political will to re-consider existing benefits.

Bibliography

Actuarial Society of South Africa Social Security and Retirement Reform Seminar 2008  http://www.actuarialsociety.org.za/Publications/Social-Security-and-Retirement-Reform-Seminar-2007-636.aspx

Asher A (2003) Chapters 8 “Retirement and Old Age” (with Marius Olivier) p 231-299, and 20: “Finance and Tax” p 595-618, in Social Security – a Legal Analysis ed MP Olivier, N Smit & E R Kalula, Butterworths, Durban

Asher A (2006a) Pensions in Africa, in Oxford Handbook of Pensions and Retirement Income, ed: G. L. Clark, A. Munnell, M. Orzsag, Oxford University Press.

Asher A (2006b) Means Tests: an evaluation of the justice of imposing high rates of claw-back on those of modest means. Presented to Institute of Actuaries Financial Services Forum. http://www.actuaries.asn.au/IAA/upload/public/fsf06_paper_asher_means%20tests.pdf

Gluckman D (2009) Retirement Reform for Dummies http://www.actuarialsociety.org.za/Portals/1/Documents/842eafb9-1932-4aad-bedf-daa35c1bfe4a.pdf

South African Health Review (2008) Health Systems Trust  http://www.hst.org.za/uploads/files/chap16_08.pdf

Taylor V et al (2002) Transforming the Present - Protecting the Future. Report of the Committee of Inquiry into a Comprehensive Social Security System for South Africa, Department of Social Development, Pretoria

Taylor subcommittee reports (2002) can be found at:  http://www.sarpn.org.za/CountryPovertyPapers/SouthAfrica/taylor/

Thomson RJ  & DB Posel (2002) The Management of Risk by Burial Societies in South Africa South African Actuarial Journal 2: 83-127

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[1]    This section taken largely from Asher (2006a)