In government, the right hand truly doesn't know what the left hand is trying to throttle, writes Helena Wasserman.
Listen, I'm not easily shocked. I've watched Devilsdorp twice in 24 hours, and only needed a couple of stiff drinks to fall asleep. In fact, I think all of us, as a nation, have become quite hard to astound after a decade of state capture revelations, municipal horror stories and Eskom woes. We've seen it all.
Turns out, not yet. This week brought a staggering turn of events, ineptitude on a scale that signals alarming disregard for taxpayers and the financial services industry.
On Wednesday, the Department of Social Development gazetted the new Green Paper on Comprehensive Social Security and Retirement Reform. It seeks to establish a new social safety net, which will ensure that all South Africans will get a pension, disability and life cover.
Its key proposal is a new National Social Security Fund (NSSF) - a government-managed fund, which will provide retirement, disability and unemployment benefits.
All South Africans will have to pay up to 12% of their earnings – up to a maximum amount of R2 760 a month - into the fund. In return, you will get a small pension, disability benefits, a flat-rate funeral benefit and income protection benefits, including an unemployment benefit.
(Those who earn less than R22 320 per year won't have to contribute to the fund – the government will subsidise their contributions.)
The proposal means that your first R2 760 in retirement savings (and other long-term insurance cover) will not go to a retirement fund or other private-sector product – it will be paid into the government-backed fund.
This will have a devastating impact on South Africa's investment industry.
Alexander Forbes, South Africa's biggest pension funds administrator, reckons it will lose 60% of its members. The majority of pension fund members don't contribute more than R2 760 - and therefore will solely be invested in the government scheme.
The government's "hijacking" of this savings will also have serious consequences for South Africa's capital markets.
This is because the Green Paper proposes that 75% of contributions to the NSSF will be paid out directly as pensions to other members - only 25% will be invested for the long term.
Currently, if you belong to a pension fund, 100% (minus fees) of the money you contribute is invested to be paid out to you when you retire.
Because only 25% of contributions will be invested in shares and bonds, this will throttle the money that flows from retirement funds into capital markets - leaving South Africa even more dependent on foreign investments, which we are already struggling to attract.
Unintended consequences
The proposal also comes at a time when large pension funds are gearing up to invest in South African infrastructure, following proposed changes to pension laws. The Green Paper will significantly diminish what is available to fund these large long-term investments in roads, dams and telecommunication.
Year after year, in one "ease of doing business" survey after another, South Africa's sophisticated financial industry and capital markets are rated world-class, among the only bright spots in a dysfunctional landscape. The new proposals may successfully wreck both.
Also alarming: The 12% contribution may just be a start. The state pension you will receive from the NSSF will be "defined benefit" – meaning that you will be guaranteed a pension related to your accumulated contributions. This raises big concerns. If the payments made by members do not match the guaranteed benefits, the fund will have to hike contribution percentages in decades to come to avoid a funding squeeze (when a larger percentage of its members retire and there aren't enough young workers to adequately support their payments). To keep up with funding these defined benefits, the 12% of your salary will have to be hiked to a higher percentage in coming years.
And because the government will underwrite the fund, taxpayers will have to foot the bill if the money runs out.
Then, there's the problem of verifying what informal sector workers, who may not be paying income tax, are earning. By default, they will end up being classified as earning less than R22 320 per year. So in the end, government will pay most South Africans' contributions – at a massive cost to the fiscus (read: taxpayers).
There are so many other unintended consequences, but perhaps the most obvious: if you think the country has a low savings rate now – try when you force South Africans to put their money in a fund run by the same government who brought you state capture and load shedding.
Doing it via the PIC – which also doesn't have a sterling corporate governance track record - won't be much help. I have no doubt that many South Africans will do their utmost to find ways to circumvent NSSF contributions.
But wait, there's more
Here's the Green Paper's other big idea: a universal income grant paid to all South Africans – no matter how rich you are. The state will claw back the grant payment by hiking your tax rate.
"Administratively, it is a lot easier for SARS to recoup the grant paid to a wealthy individual with a technical adjustment to the tax brackets than for Sassa to interview millions of applicants to determine whether the applicant qualifies based on income," reads the Green Paper.
Here, as well, the unintended consequences are truly staggering - including that it will kill any attempts to widen the income tax base. It will give South Africans strong incentives to stay out of the income tax net at all cost. After all, if SARS doesn't know about you, it can't claw back the monthly cash payment.
Also, everyone who is currently not paying income tax, but earning a living in the informal sector, will now get a monthly cash payment from the government – money that could have been diverted to those without any income.
False alarm
Now, as it turns out, the Green Paper was not approved by Cabinet, and Treasury says it's not official government policy. It looks like the Department of Social Development (DSD) pulled the trigger on this ill-advised document without sanction.
That the DSD could go ahead and gazette a Green Paper which goes against Treasury's raft of new proposals on retirement reform, shows a lack of government coordination at best, and total state ineptitude, at worst. The right hand truly doesn't know what the left hand is trying to strangle.
More importantly, the fact that Treasury and the Presidency let the damaging proposals – which could cost the private sector billions, and trigger a tax revolt - fester for days, without any comment, tells you everything you need to know about its commitment to keeping taxpayers happy.