Free Market Foundation: State-Run Fund an ill-considered idea, will add to economic woes

24 August 2021

The Department of Social Development’s Green Paper on Comprehensive Social Security and Retirement Reform will, if adopted, result in the most harm for those it is ostensibly intended to benefit. The Free Market Foundation (FMF) calls on government to urgently reconsider any proposals that increase the state’s power over citizens’ financial affairs and urges all South Africans to resist the proposals contained in the Paper.

The Paper proposes the establishment of a National Social Security Fund (NSSF). All employers and employees will initially be obliged to contribute up to 12% of their earnings up to a certain ceiling – currently proposed as earnings of R276 000 per year. Therefore, those who earn more than R276 000 a year will pay a maximum of 12% of R276 000 a year – around R33 100, or R2 760 a month.

The Paper goes on to explain that the first 10% of the contribution will go to the mandatory fund and the next 2% will go towards unemployment insurance. In many cases, that would leave the average formal sector earner paying a 38% marginal tax rate, unheard of at this level of income in the world. The increase in taxes at this level of income would result in debt defaults, a collapse in consumer spending, and a  host of further economic disasters.

FMF Deputy Director Chris Hattingh said, “On the one hand, the Paper contains rhetoric that is aimed at punishing higher-income earners and therefore wealth creation itself. On the other hand, the proposals will punish low-to-middle-income citizens and dependents, by forcing them to rely on a state-run fund – which will never deliver returns to the level that people could attain through private sector options.”

Government’s ideological policy choices over the last 20 years have wrought widespread devastation on the country’s economy, currency and, most importantly, people’s lives. Already government policies have resulted in higher water and power prices. The total collapse of passenger rail has also meant lower income workers must spend even more on transport too.

They also cannot invest as much over the long-term, lowering the level of capital available for investment and business-creation, and making it more difficult for them to leave a good financial legacy for their children and grandchildren. This proposal of a state-run fund will simply encourage those who are able to save in the form of pensions, to explore pension and investment options outside of the country.

Hattingh added that, “A government that truly respects citizens’ agency and financial wellbeing would acknowledge the fiscal harm that has been caused by its myriad plans and schemes over the last 20 years. It should be within citizens’ power to decide where they wish to invest their hard-earned income – regardless of their economic class.”

Policies that force citizens to invest in inefficient, corruption-prone, low-return state funds are anti-poor and regressive. In fact, they create more poor people rather than increasing income. A government that truly understands individual human action and dignity respects citizens’ right to do with their income as they deem best.

The FMF wants to highlight that all the social compacts, investment drives, and infrastructure schemes are dead in the water in the absence of sufficient capital investment and formation. Going forward, the government should do all it can to show individuals and businesses that this is the optimal environment in which they should invest. Without more investment, business formation, and entrepreneurial activity, ever-increasing poverty will be South Africa’s future. Policy proposals such as those contained in the Green Paper will only encourage yet more capital flight from South Africa to other countries.

After a decade of state capture, more than a year of devastating lockdowns, and in the context of a 42%+ unemployment rate, the FMF reiterates that now is the optimal time for government to adopt an ideological shift: Abandon ideas and proposals that further increase the state’s power over citizens, and instead implement pro-economic freedom reforms that will result in positive and radical economic growth and transformation for all.

Issued by FMF, 24 August 2021