Funding social security
17 February 2011

This article first appeared in The Business Times

Social security reform is a touchy subject for many South Africans but there is evidence from other emerging-economy countries that the system can work well if properly managed.

The case in point is Singapore, though that country's story is not without heartache — it suffered through financial crises in 1985 (recession) and 1997 (the Asian crisis). When its economic growth shrank to only 0.4% in 1998 from 10% in 1989, the government decided to improve long-term economic and social development.

A study by Vasoo and Lee in 2001 highlighted that the importance of housing workers was stressed by the Singapore government from the outset; the potential for the Central Provident Fund to support economic development was also recognised.

The fund was originally intended to benefit the elderly but its role was extended to permit the withdrawal of savings for other purposes, the most important of which being the purchase of a home. The Singapore economy has enjoyed a housing boom driven by the fact that more than 80% of Singaporeans live in dwellings built by their government. The story has a happy ending, too, as Singapore is again growing at 10%.

Ernie Lai King, at law firm Deneys Reitz, said this week that one announcement on Budget Day might be about social security: a “super provident fund” approach could be followed that mimicked the successful one in Singapore.

But industry professionals do not see moves to a social security fund happening before 2014.

President Jacob Zuma indicated in his state of the nation speech last week that the government wanted to spur the social security idea.

Zuma said a position paper should be expected from the government this year so that changes can be debated with industry and the most appropriate fund mechanism can be determined.

However, experience shows that this is easier said than done, and too many specifics remain unclear. The first paper on this topic was delivered in 2007 and the new retirement paradigm was about the introduction announced last year, but the government realised there is more to the debate because it is broader than the pension fund industry and encompasses other social security benefits, such as unemployment insurance and grants.

Zuma spoke specifically about the introduction of a funs and how pensions funds would link to it.

But Roman Burger, head of investment strategy at LibFin Investments, said more thought was needed.

Burger said a "quick win" would be to merge the administrative functions of different institutions in different ministries that perform largely similar functions, such as the Unemployment Insurance fund and the Road Accident Fund.

“It will be easier for the man in the street to go to one place to receive these benefits, and there must be cost efficiencies.”

Burger said there are pressing problems about old age grants that need to be looked at.

The other hot topic is the move to introduce national health insurance. Lai King said the idea of national health insurance was “not going away” and it would be helpful if a clarifying announcement about it were made.

“Initial comments are that medical aid schemes will fall away and there will be a national health super medical aid scheme for all citizens,” he said.

Tax experts have questioned the 14-year time-line for launching national health insurance, indicating that it could take longer to perfect the system. AJ Jansen van Nieuwenhuizen, head of tax at Grant Thornton, Johannesburg, said the proposed national health insurance for 2012, which has to be funded, would affect tax increase decisions significantly. He said there was still a lot of uncertainty around how the system would be funded.

It looks like the move to national health insurance will be gradual, with reengineered primary healthcare the first port of call. A big stumbling block could be top ups and whether the insurance is compulsory. Current health expenditure will certainly come under the microscope on Budget Day, with most people asking: “Where will the money come from?”