Withdrawn but not dead
The recent the publication of the Green paper on Social Security and Retirement reform, introduced on 18 August 2021 and withdrawn on 31 August 2021 has caused despair with many taxpayers, already overtaxed and fed up with non-delivery of basic services from government – so let’s unpack it and dissect it, and more importantly look at what you can do to mitigate some of the dangers to your future wealth. (Please excuse the length of this article but it is an important topic that could substantially effect your future plans – if it is ever shoe-horned through). So that you know I am not feeding you BS (I am so sick of negative, fear mongering hype), I have given the page numbers of sections I refer to. You can find the paper HERE (or drop me an email and I’ll send it to you).
Lindiwe Zulu appears to have gone out on a limb with the publishing this report, and it may not have had the support from the top echelons of government. Lindiwe Zulu’s contrarian move could be a sign of new ANC factional fights to come. The ‘rest’ of the government has been quick to distance itself from the publication, and there are questions about it’s legal status w.r.t the constitution (ditto with the NHI). The Green Paper on the NHI (which in my opinion is a far bigger threat to taxpaying South Africans) started in 2005, was promoted to White paper in 2011, put in front of parliament in 2017 and 2019 but is a long way from being implemented. The Taylor Report which is the basis of most of this new Green Paper came out in 2002 (and is frankly the closes thing you’ll see to outright communism, let alone socialism).
A Green Paper is a green paper is “a tentative government report and consultation document of policy proposals for debate and discussion.” It is often a place that hairbrained schemes go to die. We can only hope that that will be fate of both this proposal and the NHI.
This Green Paper covers 2 things, social security and retirement. Current RSA Budget for Social Security includes the Old Age grant, which is why they were lumped together in this paper. The other obvious reason for lumping them together is for the govt to get their hands on even more taxpayer’s money.
In 1997 the Social Security budget was R14.3Bn, it is now R335.3Bn. From 1996 to now the number of South Africans on social grant has increased from 7% of the population to 31%, or 18 million people. There are around 5 million “assessed” taxpayers (many of those below the tax threshold) – so each taxpayer is subsidizing more than 3 people on social grant.
The table above shows you how the govt spends most of your tax, also HERE.
Alarmingly, 68% of all the tax collected from individuals is paid by people earning over R500k pa – which is 17% of the tax base – or 800,000 people – 1.6% of the population. That is also the portion of the tax base most likely and able to emigrate.
As a scientist by training, I like to see the numbers, the data, the Statistics– but they are always suspiciously missing from this sort of proposal. Even the NHI White paper doesn’t go into the hows and how-muchs of the proposed tax. (When I started to do some of my own projections on the NHI it was mind-boggling.)
It is difficult to estimate what that 10-12% is going to look like because the tax level is going to be capped at the UIF level of R276,000 per annum, so the ‘contribution’ will be around at least R30,000 per annum for most of us. It appears that this will be a tax deduction.
- This is going to be a ‘Defined Benefit’ (DB) scheme. Just to clarify for those of you that aren’t familiar with pension schemes, a Defined Benefit guarantees an income, usually based on the number of years worked, increasing at inflation (sometimes) for as long as you live but leaves nothing behind for non-spousal beneficiaries. The alternative is ‘Defined Contribution’ – the most common method used in the private sector who abandoned ‘Defined Benefit’ years ago because it creates a huge liability in the fund when the payouts can’t meet the demand. These ever-growing “holes” in DB pensions are created because people are living years, even decades longer than planned. In the UK and US specifically they have used govt bonds as the primary investment mechanism – and these bonds are now only yielding 1 or 2% (and occasionally are even negative). In RSA we do not have that low-yielding bond environment. 5 Huge pension fund deficits are a global crisis in waiting (theconversation.com).
- The Green Paper admits that new entrants (and taxpayers) are going to have to fund pensioners ‘to start with’. This is what is happening in the UK and US – which is great until you have fewer and fewer new entrants into the job market because the birth rate is declining, but everyone is living longer. We know this wont end well, and successive governments just kick the can down the road to make it someone else’s problem.
- The bundling of the ‘retirement’ benefit with other ‘benefits’ like ‘disability and funeral’ benefits so there is no transparency, then there is the added funding of the BIG – basic income grant (everyone gets a salary from the day they’re born). When you have a ‘Defined contribution you can monitor on month-to-month basis what your contributions are, how much is going to fees and what your capital is.
- The govt is going to fund this folly further by scrapping the tax rebates, and medical aid rebates. (I have expected the med aid ‘tax credit’ to die for a few years now). Which will increase the tax you pay.
- At least you’ll get a bit of a pension – right? Not so fast… it doesn’t seem like it (Page 14). ‘Means testing’ will only be phased out as their coffers can fill and afford it. (Like, never?). At best you’re only probably going to get 40% of the R276,000 pa level anyway after working all your life. Worryingly, this extra tax is not just going to fund ‘retirement’ (which sounds perfectly reasonable) but is also going to be used to fund the BIG Basic Income Grant.
- Consider that the second highest tax rate in RSA is 40%, this proposal adds another 10%, and NHI contributions probably the same, making the proposed individual tax rate of 60%. Then there is 15% VAT, Petrol levy, Sin Tax and a whole lot more of hidden taxes. The government has Champagne Swedish aspirations on a beer budget.
- One ‘interesting’ sentence in the Greenpaper goes “Government should subsidise the contributions of low-income workers to minimise disruptions”. Believe me, the private sector employers are going to be pressurized to fund it from their own coffers – and with any luck Unions will tell the government to get lost.
- The sentence: “A simplified contribution arrangement for self-employed individuals and informal workers will also be established.” Is a hint to how you can bring down your ‘income’ over time.
- On Page 16 there is the suggestion that current pension funds are going to get more regulation and “Workers earning above the tax threshold will be encouraged to contribute to such a supplementary pension and insurance plan in addition to their NSSF contributions to ensure adequate provision in the event of death or disability and an adequate income in retirement.” On page 16 the other ‘suggestion’ is that workers earning above this level be compelled to join the company fund or the NSSF default fund (the PIC look-alike). This has been mooted for over a decade already.
- Defined Benefit will ‘replace’ your salary dependent on the number of years you have worked, but considers 40% of that income a good benchmark (Page 41). Really? Could you retire on 40% of your current salary (before tax, and it will be taxed). This gives us some indication that a chunk of that 10-12% of your salary is going to go to things other than your retirement – BIG (Basic Income Grant), more grants, disability, UIF, RAF etc. This is not saving; it is just more tax and throwing you a bone. Throughout the paper Lindiwe (pg 39) rabbits on about the ‘high cost’ of pension funds. I am the first to admit that high fees are problematic in any kind of investment, but decent pension fund trustees should already be mitigating that (but they are poorly chosen, unqualified and unmotivated to do so).
What can you do to prevent potential future impact on your wealth?
You have probably got many years to make adjustments to your plans, especially since it has now been withdrawn, but the sooner the better.
• Get a proper long term financial plan in place. Ideally get a professional to help you with this – but I do realise that if you’re just starting on your wealth accumulation journey you may not be able to get help, but you can get a lot of help online.
• You need to think hard about your future – especially things like emigrating, becoming a global citizen and most importantly working for yourself. If you try and make changes on the fly or when an opportunity presents itself, you are more likely to impact your long-term wealth.
When you work for yourself, you have more control over your income and the deduction of your expenses. Work-from-home needs to evolve into working-for-myself, or at very least ‘freelance’. The last 18 months should have given you a taste of that. Your planner – who probably works on a commission/fee only basis themselves – will be able to guide you on how to do this. The modern Financial Planner is not a product-pushing, hard-sell insurance salesman, but has evolved to being more of a financial coach and should give you advice in every aspect of your wealth, not just in areas where he can flog you a product.
• Diversify your pockets of savings and investments. Take advantage of tax breaks but suck-up paying tax and CGT to ensure some of your wealth is flexible. Don’t voluntarily pay more into your company pension. Rand denominated offshore is great, but fully offshore using your annual allowance is often better. I have written about this extensively so won’t repeat myself.
• Reading between the lines, we are probably going to see ‘forced preservation’ of pension and preservation funds. This has been mooted for years and is strongly opposed by Unions.
• Unpopular opinion: Saving and investing for retirement should only be one of your buckets of investment and used for that objective, so don’t throw a hissy fit that you can’t use this for something else (emigrating, starting your own business, new mags for the car). From the start of your working career, try and have different buckets with different objectives. Endowments only make sense if they are low cost (not on an insurance platform) and your marginal tax rate is over 30%.