Big tax hike to fund universal basic income in South Africa — and a mandatory pension system

The Minister of Social Development, Lindiwe Zulu, has published the Green Paper on Comprehensive Social Security and Retirement Reform.

The paper proposes increasing income taxes to fund a Basic Income Grant (BIG) and mandatory contributions to a state-run pension scheme.

To fund the lowest level of its proposed universal basic income grant, the Department of Social Development said a 10-percentage point increase on income taxes would be needed to raise R200 billion.

“At face value, these amounts appear to be astronomically high and even impossible to propose, however the microsimulation on the redistributive impact on society suggest that the reform is not as large and has net benefits for vast majority of the population,” the paper states.

“For the majority of the population, depending on the level of the transfer, it is likely that the benefit received will be larger than their increase in taxes.”

It said that the wealthiest would only see a slight reduction in income on average, and the impact of this may be reduced if the tax hike is phased in over time.

However, the 10-percentage point income tax hike would only fund the lowest level proposed for the Basic Income Grant, which is at the food poverty line.

Depending on the government’s objectives, the green paper proposes the following options for the BIG:

• Reduce hunger — R585 per month, grant value set near the food poverty line.
• Reduce poverty — R840 per month, grant value set around the lower-bound poverty line.
• Improve people’s standard of living — R1,268 per month, start the grant value at the upper-bound poverty line.

The paper goes further, saying that government should strive to achieve a basic income for all South Africans of at least R7,500 per month using a combination of the grant and labour.

“Studies done on a decent standard of living suggests income of around R7 500 per person, per month,” the paper states.

“This is an aspirational value that government should strive to achieve through a mix of transfers, labour and economic policies.”

Mandatory government pension fund

In addition to the Basic Income Grant, the green paper also proposes creating a mandatory pension and insurance system called the National Social Security Fund (NSSF).

This will be funded with payroll contributions ranging between 8% and 12% of earnings, with the following thresholds in place:

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

Financial Mail money editor Giulietta Talevi has warned that messing with people’s pensions is a good way to start a middle-class revolution in South Africa.

“For a nation that has seen hundreds of billions of rands which were meant to be spent on citizens siphoned away into the pockets of the rent-seeking predatory elite, you couldn’t blame South Africans for suspecting this is just another raid on their rapidly diminishing wealth,” Talevi said.

Trade union Solidarity announced on Thursday that it would fight the green paper. It warned it would result in legal action if the proposals in the paper are implemented in formal legislation.

Solidarity said that South African workers are already overtaxed and tired of paying more taxes for fewer and fewer services.

“Workers in South Africa are tired of seeing their hard-earned money being wasted by the state,” said Dirk Hermann, chief executive officer of Solidarity.

“At best, the state is just inefficient and clumsy, but more often, funds like this and the NHI is simply an excuse for looting and corruption.”

Apart from the new tax proposals, Hermann said the country’s tax rate is already high, and ordinary people have to incur expenses for which they are already taxed.

“On top of that, tax money is still looted at a large scale,” he said.

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

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