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Portfolio Committee on Social Development Budget Hearings: Social Security. Presentation by the Department of Social Development 09th March 2007. Presentation outline. Legislative Developments, Pending Regulations and policies Overview of the Comprehensive Social Security System

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Portfolio Committee on Social Development Budget Hearings: Social Security

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    1. Portfolio Committee on Social DevelopmentBudget Hearings: Social Security Presentation by the Department of Social Development09th March 2007 "Building a caring society. together"

    2. Presentation outline • Legislative Developments, Pending Regulations and policies • Overview of the Comprehensive Social Security System • Retirement Reform "Building a caring society. together"

    3. Comprehensive Social Security • PROGRAMME OBJECTIVE: • To enhance the human well-being of all through measures that address income poverty through adequate incomes throughout a person’s life-cycle, including equity and efficiency of benefits • Focus on • Policy and Legislative Development focusing on • Social Assistance • Social Insurance • Social Assistance Implementation Support "Building a caring society. together"

    4. Legislative Developments, Pending Regulations and policies "Building a caring society. together"

    5. Comprehensive Social Security Legislation and policies • Social Assistance • Disability Benefits • Develop policy to address needs of people with chronic diseases • The policy will provide distinction between people with disabilities and people suffering from chronic illnesses • To provide for needs of these category of our client group • Develop tools to facilitate uniformity in assessing disability • Children Benefits • Revise policy on comprehensive social security for children to address needs of all vulnerable children up to the age of 18 • Consolidation of services to children • Outcomes of the study of perverse incentives "Building a caring society. together"

    6. Comprehensive Social Security Legislation and policies • Social Assistance • Re-engineering of the Social Relief funds • Consolidation of social relief funds into one institutional framework • Social Insurance • Draft legislation to effect reform of retirement provisions "Building a caring society. together"

    7. Overview Of The Comprehensive Social Security System "Building a caring society. together"

    8. Package of services • Income poverty: the child support, old age are measures to support unemployed & poor households/individuals • Service poverty: Healthcare: Primary & secondary education water and sanitation, electricity, housing • Asset poverty: access to productive and income-generating assets (such as land and credit); access to social assets (such as community infrastructure) • Special needs: measures to assist the disabled, foster care grant, child dependence grant • Social insurance: UIF, RAF, COIDA, etc, private retirement/ life assurance funds, private medical schemes in their regulation (including risk equalization and employer mandates) "Building a caring society. together"

    9. Government’s 3 pillar social security framework • Government adopted the concept of comprehensive social protection in 2004 • Pillar 1: social assistance and the social wage • Pillar 2: social insurance - those can afford must contribute in a system based on social solidarity to protect against unemployment, sickness, disability, old age and death • Pillar 3: voluntary contributions for benefits over and above pillars 1 & 2, e.g. additional retirement annuities "Building a caring society. together"

    10. Progress on Pillar 1: Social Assistance • Number of social assistance grant beneficiarieshas grown from about 2,5 million in 1997 to 12 million today • Budget for grants now amounts to R61 billion p.a. • Old age grant beneficiaries now over 2,1 million (plateau) • children beneficiaries now 8,2 million • Disability now cover 1,3 million • Foster beneficiaries exceeding 300 000 (fastest growing) • Setting up Social Security Agency for an effective and efficient national grants administrative system • Shift of the function from provinces to national was effected. • The implementation of a new service delivery model and a system integrity programme have been initiated with a view to improve delivery "Building a caring society. together"

    11. Progress on Pillar 1: Social wage • Social assistance complimented with the provision of: • Education, free to those who are in non-fee paying school areas, The illiteracy rate declined from 25% in 1994 to 4% today • Free health care to certain vulnerable categories, Our research indicates that 94% beneficiaries now live within 10km of a health facility • Potable water, which was available to only 59% in 1994, is now provided to 83% of population • Access to electricity is now available to about 75% of population, compared to below 50% prior to 1994. • Public Works Programmes set in place to create jobs to respond to the plight of the poor. "Building a caring society. together"

    12. Existing and New initiatives • Government has been working towards expanding Public Works Programmes (EPWP): in both infrastructure and services sectors • Currently over 300 000 people benefit from these the EPWP towards a target of 1 million job opportunities within five years • A new initiatives is to link beneficiaries of social grants to poverty alleviation and economic opportunities. • The economic opportunities include access to education, skills development, entrepreneurial and employment opportunities "Building a caring society. together"

    13. Pillar 1 - Challenges • PC-SOCDEV need to note that there are gaps in the social assistance programme in respect of vulnerable persons between 14 and 60 years (65 for men) who fall outside of social assistance programme. • Already government is exploring measures to support vulnerable children between the ages of 14 and 18 years; • We are developing measures to support people with chronic conditions • Although government is on target to achieve MDG’s in respect of water, sanitation and electricity, there are service delivery challenges "Building a caring society. together"

    14. Progress on Pillar 2: Social insurance • The area of social insurance cover: • Retirement provisions • Social health insurance • Road Accident fund • Unemployment • Compensation occupational injuries and diseases on duty "Building a caring society. together"

    15. Retirement Provisions • The Department of Social Development completed a thorough review of retirement provisions. The findings indicate that: • Only 6 out of 12 million employed persons contribute to some form of retirement savings, using more than 13 500 funds • The system is fragmented, inadequate, prohibits portability, • It punishes those who wish to transfer benefits, • System excludes low-income people, • Costs for products are the highest in the world and benefits do not always provide value for money. • The Cluster is proposing the removal of the means tests for old age grants, a mandatory system of retirement savings, with disability and death benefits, and provision for post-retirement medical contributions and consolidation of administration of social security "Building a caring society. together"

    16. Social Health Insurance "Building a caring society. together"

    17. Coverage in Medical Schemes by Household Income Source: Based on Census 2001 "Building a caring society. together"

    18. Health: Problems with Current Pillar 1 Subsidy for Healthcare Lower income groups receive least subsidy Income too high for fully-subsidised public sector health care. But income too low for tax expenditure subsidy. Higher income groups receive most subsidy "Building a caring society. together"

    19. Health: private sector • Currently the subsidy framework reinforces gross inequity by subsidizing it, and permits significant risk-selection • Full elimination of the above requires: • Implementation of the REF (underway) • Restructuring of medical schemes’ benefit arrangements to achieve community rating • Expansion of Prescribed Minimum Benefits • Shift of competition away from risk-selection and product design, to price and the quality of coverage "Building a caring society. together"

    20. Healthcare • Removal of point-of-service means test • Implement an explicit minimum benefit framework – applicable in both the public and private sectors • Both should be made explicit in legislation with norms and standards in the public sector and prescribed minimum benefits in the private sector • Implement universal minimum entitlements • In-kind for non-contributors • Contribution subsidy for medical scheme members "Building a caring society. together"

    21. Healthcare • Create autonomous public hospitals (full decentralization) • Implement a risk equalization fund to make provision for income and risk-related cross-subsidies • Implement an environment for low-income group risk-pooling in the private sector • Introduce a coherent price setting framework for “out-of-network” tariffs • Introduce structural reforms in the private sector to deal with provider market concentration and its cost consequences "Building a caring society. together"

    22. Road Accidents Funds "Building a caring society. together"

    23. Road Accidents • The Road Accident Fund has completed policy review and proposals to move to a no fault based system. • Consultations are currently underway with a view to finalise policy proposals for a new system • System a hybrid based on liability insurance and some social law principles • No advantages of a social insurance system are incorporated in the design • The no-fault system needs to be implemented as all alternatives are inefficient • No logic to the application of a fault-based system in the allocation of benefits INCLUDING “socially reprehensible behaviour” "Building a caring society. together"

    24. Road Accidents • There is no logic in withholding benefits from families and dependants where “socially reprehensible behaviour” occurred • The costs of healthcare and associated loss of support will fall on someone • Discrimination should only be permitted to anti-selection; this is not the case even with socially reprehensible behaviour "Building a caring society. together"

    25. Road Accidents • Shift to benefit system • Principle of indemnification of certain costs should be followed: • Medical costs – no limit (fund needs to negotiate arrangements to limit its liability) • Must have ‘no-balance billing’ tariff schedule • Should provide for designated service providers • Needs to sort out its liability relative to that of medical schemes (can have significant efficiency improvements if this is done) • Funeral costs – fixed payment to ceiling • Life-enhancement benefits – related to degree of assessed impairment • Loss of income benefits should continue but be paid out on a periodic basis only • Common law right to damages is incorrectly dealt with by Satchwell (in our view) • will result in transfer to imperfectly functioning insurance system • consideration should be give to compulsory third-party insurance for this component, distinct from other benefit determinations, paid for through the tax system • fixed benefits should be paid for using the petrol tax "Building a caring society. together"

    26. Compensation for Occupational Injuries and Diseases "Building a caring society. together"

    27. Compensation for Occupational Injuries and Diseases • Requires a comprehensive review • Governance and administration • Fragmentation • Governance framework problematic • Coverage incomplete – some workers excluded • Revenue – more efficient revenue collection system required – shift to SARS? • Medical compensation: Benefit framework correct – but cost saving measures are required • No regional co-ordination "Building a caring society. together"

    28. Compensation for Occupational Injuries and Diseases • Right to claim compensation limited to 12 months • appears unfair given that many people do not know their rights • obligation to inform should be placed on COIDA, otherwise no time limitation? • this right also nonsensical in cases of chronic diseases linked to employment • Need specialised tribunal for disputes in relation to all occupational injuries and diseases • Need to co-ordinate rehabilitation and return-to-work approaches "Building a caring society. together"

    29. Unemployment Insurance • The expansion of coverage to domestic and farm workers has been a great success, bringing 1 million persons into the net • Unemployment insurance as provided in South Africa is an important social insurance mechanism, particularly for low-income people. • However, as it stands it will make little impact on the consequences of the unemployment problem as manifested in South Africa today. • The system is essentially compensatory; • very little preventive measures are in place. • It is doubtful whether the Fund itself can be employed to serve the wider ambit of minimising unemployment and the creation of unemployment alleviation schemes "Building a caring society. together"

    30. Unemployment Insurance • There are serious gaps as regards coverage in terms of the present UIF system. • The unemployment insurance scheme does not cover: • Persons who are receiving certain other payments, even though they may have to contribute to the Fund; • Civil servants, • Non-citizen fixed-term contract workers; • Those in atypical employment (independent contractors, dependent contractors and the self-employed); and • The informally employed (in particular those who perform unpaid care work) and those in long-term unemployment. "Building a caring society. together"

    31. Conclusion on CSS • Great achievements, excellent progress … but there are challenges! • Good progress was made in expanding the social assistance grants provision and basic services, but have to do more • high levels of unemployment and responding to the plight of able-bodied men and women is a challenge • Reform of retirement provision require fostering solidarity among South Africans and ‘distribution from high income earners to low and no-earnings groups’. • Advancing the resolutions on a national health insurance system for South Africa has become critical. "Building a caring society. together"

    32. Retirement Reform "Building a caring society. together"

    33. Overview of Presentation • Background • International Overview • South African Situation • Key Recommendations • Processes required to move forward • Recommendations "Building a caring society. together"

    34. Background • A high level overview of South Africa’s retirement system was presented to the Cluster and Cabinet • Cabinet approved that the Cluster set up a task team, undertake and present the findings of a review; and report to Cabinet • A Task Team was constituted and work completed by end of June 2006 • The review covers the following: • An overview of international developments; • A SA situational analysis; • Assessment of Treasury proposals; and • Key recommendations for reform "Building a caring society. together"

    35. International Context Developed Countries • The main threat to traditional PAYG systems centred on aging, which altered the dependency ratio between working and retired populations. • Government carries the risk of long-term arrangements established with small younger demographic profile; "Building a caring society. together"

    36. International Context Developing countries • Learning from the mistakes of industrialised countries, have shifted risk from Governments –resulting in under-provision • Have used privatizations of retirement arrangements to develop capital markets • Possibility of “over-shooting” and excessive transfer of risk onto individuals • Cluster members also undertook benchmark visits and shared our proposals "Building a caring society. together"

    37. International trends • Developed country reforms were non-structural (parametric) • Developing countries’ reforms were more structural • Three general models of structural pension reform focused on in Latin America relate to: • the full replacement of the public by a private system; • or the public sector system is reformed, with the private sector introduced as competition; and • the public system is not closed down; continues to offer a basic pension along with a private system offering a supplementary pension. • Retirement systems will involve one or all of the potential (re) distribution issues of: life-cycle transfers from an individual in youth to their old-age; from young people to those who are retired; from males to females; and from rich to poor. "Building a caring society. together"

    38. Objectives for Strategic framework • Objectives identified for a SA system: • Poverty elimination through ensuring a minimum level of income; • Ensure sufficient diversification of income sources and benefit provision to mitigate economic, investment & governance risks • Ensure the achievement of reasonable income replacement; • Ensure adequate Government underwriting and risk sharing occurs; • A fair subsidy framework in allocating public resources & benefits; • Ensuring retirement income linked to working life earnings; • Ensuring citizens have access to appropriate survivor benefits; & • Ensure all income earners have access to a reasonable facility to make provision for post-retirement medical scheme contributions. "Building a caring society. together"

    39. South Africa Situation analysis "Building a caring society. together"

    40. SA Historical context • The SA retirement system has evolved exclusively from a fully privatized arrangement based on occupational and individual forms of cover. • The absence of a mandatory tier of the South African contributory system therefore makes it unique from an international perspective. • Furthermore, the absence of any form of state provision (or delivery) of an earnings-related retirement system is unusual. • The system is fragmented, not in line with social security principles, and as a 2nd pillar it behaves like a 3rd pillar "Building a caring society. together"

    41. Assessing retirement coverage • South Africa has close on 14 000 retirement funds with 9.9 million membership, with 8.7 million active members • The figures include participation in more than one fund (a double count of 1.3 is estimated), they are an inaccurate reflection of total participation. • The total number of contributors to retirement funds is 6 million. • Since the total potential contributors are 11.3 million (excluding agricultural & unspecified workers in the LFS), the total number of employed non-contributors could be as high as 5.4 million. • The majority of these South Africans will become dependant on social assistance. • Roughly 6 million people could make a contribution toward their retirement. "Building a caring society. together"

    42. Coverage Quality & Replacement Rates • Almost all pension funds vary significantly from “normal” pensioner ratios due to distortion in participation and employment practices. • Very high pensioner ratios could be explained by low retirement ages, early retirement & reduced labour force. • Public sector funds different, which is in all likelihood due to its positive mandatory nature • Replacement rates refer to the income received or “replaced” by retirement income from a pension fund. • There is a distinct, detectable drop in incomes as people go into retirement, roughly of the order of 50% or more • In some parts of the industry replacement rates could be as low as 23.9% with high administration costs "Building a caring society. together"

    43. Administration costs • The administration costs of retirement funds charge impact significantly on the final value of retirement payouts • A recent appraisal by Rusconi of retirement fund administration costs of the private industry in South Africa revealed very high charges and low value for money. • The review exposed the fact that cost ratios for “most policies” range between 26.7% and 43.2%. • Poor transparency and a resulting lack of price competition are amongst the key reasons for these high administration costs. The evidence suggests that in South Africa virtually all pension fund members pay charges way in excess of international norms. Costs are systematically higher for smaller funds. • A pre-condition for a properly functioning market of any form is that the price is transparent, thereby providing a basis for the choice of alternative service providers. "Building a caring society. together"

    44. Subsidy framework • Government subsidizes retirement provisions from general tax revenue to fund old age grants and through Tax Expenditure Subsidies (TES’s) for individuals contributing to private retirement arrangements. • TES’s are heavily biased in favour higher-income individuals and raises significant equity and efficiency questions • The effective contribution subsidy for retirement provided was estimated at R32 billion in 2005. • Combining both the contribution subsidy and the subsidy on retirement investment earnings comes to R28.5 billion or 1.9% of GDP. Were the old age pension to be universalized, i.e. the means test removed, the total cost of the grant would be valued at approximately R27.7 billion (2005). "Building a caring society. together"

    45. Subsidy Framework • If the subsidy to private retirement were removed entirely and replaced by this allocation, coupled with a mandate (rather than an incentive) to join a retirement fund, Government would save R20.3 billion annually and potentially improve on existing levels of private participations • The key conclusions of international World Bank economists are that no basis exists for using the tax system to encourage private savings. • “Even with the incentive, people may not save enough”, and “The best way of being paternalist is mandating minimum retirement savings, either through state provision… or compulsory contributions...” (Whitehouse, 2001). "Building a caring society. together"

    46. Post-retirement Medical scheme contributions • Many people face a significant decline in income in retirement and those who rely on retirement savings to participate in a medical scheme end up being disappointed. • In the past many employers supported their post-retirement group, but in the past 10 years many have begun to remove this support, either they reneged promises or removed the benefit. • The central social security consideration is the continuation of effective employer subsidies into the post-retirement period. • There is also a need to protect the contributions of dependants in the case of the death and disability of the employee. • The arrangements used by employers to pre-fund post-retirement medical scheme obligation are fragmented, lack transparency, and are generally not transferred when employees change employment. • In the absence of a more effective arrangement, the existing declining trends in protection will persist "Building a caring society. together"

    47. Governance • Given the large number of funds, regulatory oversight is virtually impossible and currently ineffective • Many of the regulatory problems identified in the market can be traced back to: • Poor governance arrangements; • Permitted conflicts of interest amongst: financial advisors to individuals, employers and trustees, employers and administrators; and consultants to trustees and employers; • The findings by Regulator of serious issues of unfair practices are only the tip of the iceberg. Many members just do not complain • Whereas regulatory action may currently focus on the easy cases: massive fraud; fund collapses; etc. the less visible but potentially far more devastating losses pass below the radar "Building a caring society. together"

    48. Key Recommendations • The means test leads to a poverty trap, It affects the well-being of woman very negatively. • The Subsidy to higher income groups lacks defendable rationale and thus require public debate. Its removal will save R20 billion. • A mandatory contributory system should be introduced to ensure minimum levels. Contributors will be all taxpayers, mandated from an age agreed upon. • Contributions should be set at a percentage of pre-tax income to achieve replacement rates of 40%. • Two tiers of mandatory contribution should be considered: 50% for a pay-as-you-go (PAYG) defined benefit and 50% defined contribution. The PAYG tier should be formula-based, with automatic adjustments in benefits through time if the ratio of contributors to beneficiaries changes. "Building a caring society. together"

    49. Key Recommendations • A Government Sponsored Retirement Fund (GSRF) should be introduced. This should be made the default retirement provider unless an employer opts out. An employer should be permitted to opt out if they participate in an accredited retirement fund. • Accredited retirement funds that meet specified governance standards, must be compelled to over time reduce administration costs to 15% for services or below before consideration. As in many countries, the private schemes will be made up of large funds that can achieve sufficient economies of scale to meet the target. • The retirement policy should incorporate ancillary benefits including: • Post-retirement medical scheme contributions • Death; • Survivors benefits; and • disability cover must be offered. "Building a caring society. together"

    50. Recommendations It is recommended that the PC: • Note the gaps and weaknesses in the current system of retirement provisions in SA. • Note that provincial arrangements exists in provision of retirement, including local governments, and provincial Cabinets may require a discussion on this matter • Note that consultations are underway with Treasury, Health and Labour in the Cluster; • Notes that further work be undertaken in refining the key recommendations. "Building a caring society. together"