Implication
The government is proposing reforms to the retirement industry. As things currently stand, these reforms may offer retirement and risk benefits to low-income earners, particularly if they use either auto-enrolment or a National Social Security Fund. However, the government needs to clarify and simplify the interplay between retirement savings and the OPG to encourage low-income workers to save. They should also explicitly deal with the complexity introduced by gender-specific annuity rates to reduce old-age poverty among women.
The government should consider removing the means test for access to the OPG, given the disincentive to save for low-income earners and the administration costs of the means test. This would mean that all South Africans above the age of 60 would qualify for the OPG. This could be made fiscally neutral by varying the income tax threshold for older South Africans with other sources of income, so that their income tax increases by the value of the OPG.
A top-up savings plan for individuals appropriately incentivised through tax or co-payment by the government, where the proceeds are exempt from the means-test, could improve the long-term savings culture among low-income earners.
It is also critical that careful consideration is given to the income threshold if workers earning above a certain income are to be auto-enrolled into retirement funds. This threshold should not unnecessarily exclude low-income earners who should save for retirement. For people with earnings close to the poverty line, however, a government-sponsored wage subsidy may be required to prevent the retirement funding contribution creating hardship.
Currently, products available to individuals are not cost-effective for low-income earners and employers may need to include lower-income earners on the occupational funds if they are not catered for by the government. Consideration of how to treat expense allocations for different members will be critical to ensure that lower-income earners are not bearing too high a share of these expenses. As illustrated previously, low-income earners do not always benefit from saving for retirement and so workers who are better off not saving for retirement should not be forced to join the employer fund.
The risk-benefit needs of high- and low-income earners are very different, as are the premiums that each group could be charged. Managing the benefits package and cross-subsidies will be a key issue.
National Health Insurance may improve healthcare delivery in the public sector, but this is a long term project and employers will need to address the healthcare needs of their low-income workers for the foreseeable future. In the absence of any changes to the PMB package, access to alternative products and hospital cash plans should help to meet the healthcare needs of these employees to some extent.