A green paper has just been published by the Department of Social Development which proposes to force all South Africans to pay 12% of earnings into a state managed fund.

The new  National Social Security Fund will aim to enlarge the country’s social safety providing for retirement, death, disability and unemployment benefits.

Employees will initially have to contribute up to 12% of earnings to a proposed ceiling of R276 000 per year. This is a maximum R33 120 or R2760 per month. 

Those who earn less than R22 320 per year won’t have to contribute. 

People earning above the ceiling will probably have to split their contributions between the mandatory fund and continue with less contributions with a private – sector fund. 

The questions the paper raises:

Can we afford it?

With the devastation that the COVID19 pandemic has created, can indebted South Africans who can’t  afford to save find the extra.

Will private sector funding diminish?

If an employee cannot afford the extra they will have to reduce their current contribution to the pension fund. Making way for the compulsory contribution to the state fund first. This will have a marked impact on the future growth of private sector funds.

How well will the fund be managed?

As it will be a state managed fund will this be competently managed given the track record of the state owned enterprises and the corruption and fraud that has been exposed over the years. Credibility and competence is certain a question.

Where will the fund be invested?

Is the fund going to be soundly invested for the future? It will be a defined benefit fund which will guarantee future pensions at retirement based on length of memberships and contributions made. This type of fund has to be financially sound and viable resting on reliable investment strategies. 

The proposal will be challenged in many ways from many sectors. Being a green paper it will probably take some years before it comes into law. Whilst intentions to provide better benefits for South Africans are much needed. The funding and management of such fund needs to be ruthlessly evaluated and scrutinised to ensure that it actually delivers.

So National Treasury are working out a way to access your retirement fund in an attempt to help those that are financially destitute in the aftermath of the COVID19 epidemic. 

The current position

If you leave your employment you can cash in on your pension or provident fund. It comes with a tax penalty giving you an exemption on the first R25 000 and then punishing you on a scale above. 

Retirement annuities left behind

So, if you are self employed you would have to set up a retirement annuity as a provision for your future pension. If you went out of business you cannot cash in. There is a clear discrepancy. 

Preservation is the target 

Treasury is aiming to encourage you to preserve your retirement funding. The main incentive is the tax deductibility of up to 27,5% of contributions against your taxable income. National Treasury is aiming to close the access to retirement funding when leaving your employment. Aligning with the position of the retirement annuity.

COVID19 exposes a real problem

Whilst providing for your retirement one day is a sound strategy and should be encouraged in every way there is a dichotomy that COVID19 has brought forward. Immediate needs are more important than the future. 

If you are in a position where you have lost your income and you have expenses to meet like your bond and you have money in your retirement annuity, how do you ever reason with losing your house? How do you justify not being able to access long term savings when you have dire needs for the short term?

Kick the can down the road

The normal argument is accessing your retirement savings now leaves you with a long term problem down the road. COVID19 has taught us that things are not normal and now is more important!! 

Retirement funding should be an option

We should be given the option to access our retirement funding at our discretion. Yes, educate the pros and cons but leave the decision to the owner of the fund, If they are coming to take my house away and I have a retirement fund which can save me and perhaps leave me with a contingency fund whilst I try to find a new source of income. I would rather take my chances now and deal with the long term consequences later. Who knows where we will end up with this pandemic.