SA proposes mandatory contributions to welfare fund

South Africa should impose compulsory levies on companies and workers to create and capitalise a public social welfare fund, the Department of Social Development proposed.

All employers and workers should contribute as much as 12% of their earnings to set up a fund that could provide unemployment, retirement and disability benefits, the department said in a so-called green paper on social security and retirement reform. Levies should be mandatory for those earning at least R276 004 ($18,190) a year, the current ceiling for unemployment insurance contributions, and the government should subsidise low-income workers’ dues, the department said.

While elements of the proposal date back more than a decade, riots that erupted last month and claimed 354 lives have reinvigorated those calling for the state to increase support for the vulnerable. South Africa is one of the world’s most unequal nations, a legacy of the apartheid system that disadvantaged the Black majority and ended in 1994.

A move to impose additional levies could hasten an exodus of high earners from South Africa. It would also mark a significant change from ex-Finance Minister Tito Mboweni’s February budget, which reversed a decision to raise an extra R40 billion in taxes, granted inflation-beating tax relief for individuals and signaled a full percentage point cut in corporate taxes in the next fiscal year.

Enoch Godongwana, a former labour unionist and head of economic policy for the ruling African National Congress, who replaced Mboweni as finance chief on August 5, told investors last week that he doesn’t envision significant budgetary policy changes.

The social development department also suggested that welfare grants be made universally available to all regardless of income or assets, and that funding be secured by changing the structure and quantum of tax rebates, and possibly introducing new subsidies and additional taxes. It could take as long as two years for the proposals to become law if they’re adopted.

A basic income grant of R1 306 a month, an inflation-adjusted upper-bound poverty line for South Africa, could push the country’s debt burden through 100% of gross domestic product within two years and may trigger credit-rating downgrades, according to Michael Kafe, an economist at Barclays Bank Plc.

South Africa’s debt assessments are at the lowest levels since it first obtained credit ratings 27 years ago. The International Monetary Fund warned last month that deviations from the National Treasury’s projection that debt will peak at 88.9% of gross domestic product in the 2026 fiscal year could put public finances on an “explosive path.”