Tax hike proposal paused — Government backpedals on universal pension and basic income grant

The Minister of Social Development, Lindiwe Zulu, has withdrawn the Green Paper on Comprehensive Social Security and Retirement Reform that her department published on 18 August.

Zulu withdrew the paper by issuing a notice in the Government Gazette published late on Tuesday evening.

She gave no reason for the withdrawal, but the paper was met with heavy criticism from analysts, members of the public, and South Africa’s business community.

The paper proposed a substantial hike in income taxes to fund a basic income grant, 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.

For the state-run pension scheme, the paper called for a mandatory contribution of between 8% and 12% of worker salaries, up to a maximum of R2,760 per month.

While labour unions have shown their support for the introduction of a basic income grant — and called for one to be implemented from 2022 — National Treasury has warned that the plan is unrealistic.

Deputy finance minister David Masondo said that South Africa couldn’t afford it as we don’t have the economic growth of countries with working social security funds.

Treasury director-general Dondo Mogajane said that South Africa’s debt to gross domestic product is one of the largest in the world.

He explained that major drivers of South Africa’s debt were expenses like the high public service wage bill and the constant bail-out of state-owned enterprises.

Some of these bail-outs are R10.5 billion for SAA, R3.2 billion for Denel’s guaranteed debt, R5 billion for the Land Bank, R15 billion of National Student Financial Aid Scheme debt, and R4.6-billion for the South African National Roads Agency Limited to compensate for the non-payment of e-tolls.

Tax hikes

The green paper proposed creating a mandatory pension and insurance system called the National Social Security Fund (NSSF).

It proposed funding this social security net 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.

For the basic income grant, the paper proposed a further 10-percentage point hike in income taxes to fund universal basic income set at the food poverty line.

According to the latest data from Stats SA, the food poverty line in South Africa is R585 per month.

The paper argued that although the increase in income taxes may seem astronomical, 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.

“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 the vast majority of the population,” the paper argued in favour of the tax hike.

“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.”

The paper went 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 stated.

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

Deputy finance minister David Masondo warned that the Department of Social Development’s aspirational goals is not affordable.

“We have to ask ourselves what are the preconditions for a social security grant proposed in these reforms,” said Masondo.

“As a country, we should sequence our current economic priorities, and we should not confuse our aspirations with what is possible economically.”

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