South Africa: Saving For Retirement: A Social Security Dilemma

"… no legal right to social security benefits and benefits are part of government spending program, no different in the eyes of the law than corporate welfare or farm subsidies".
See: Flemming v. Nestor ¹

In South Africa, courts have in other similar social security decisions like the Soobramoney v. Min. Health, KwaZulu-Natal ² case upheld and concurred with the ratio decidendi provided in Flemming v. Nestor decision. Further in Flemming v. Nestor, the court had held in obiter that "the right to social security (benefits) is in one sense earned, for the entire scheme rests on the legislative judgment that those who in their productive years were functioning members of the economy may justly call upon that economy in their later years, for protection from rigors of the poor house as well as from the haunting fear that such a lot awaits them when journey’s end is near"³. In South African context and in many other countries, this obiter refers to pay-as-you-go system.

In both the above decisions, courts have clearly express that there is no real right to social security and to engraft upon it a concept of "accrued property rights" as referred to in "Vested Rights in Social-Security Benefits"⁴, would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands. This and other factors to be raised later, justifies the underlying subject matter of this article, the significance of saving early for retirement.

In this article it will be argued that the ever-growing dependency ratios on social security benefits and low levels of personal savings, pose an imminent threat to the economic survival of the country. Furthermore, it will be argued that saving early for retirement could eliminate or limit the heavy burden laid on the social security grant system. In this article, it is acknowledged that there are certain disparities in the economies of developed and developing countries. On these premises, this article will critically evaluate socio-economic issues, such as rocketing statistics of unemployment and its consequences, in relation to the need to save early for retirement. It will conclude with recommendations to the entire industry such as the need to widen the access to retirement savings to low and sporadic income earners, design and encourage retirement education. It is the assumption of this article that these recommendations are feasible with minor additions and simplification to the National Savings Fund (NSF) proposed by the National Treasury in its recent Retirement Fund Reform Discussion Document⁵. These and other objectives of this articles, will be achieved and articulated in the following surveys:

The socio-economic and cultural rights are an important subject matter of every developing community, because they shape and develop the identity of that community. In South Africa, the significance of these rights has been modeled by inclusion in various sections of the Constitution⁶. In relation to saving for retirement, the interpretation and conceptualization of these rights contained in the Constitution presents problems. These problems have been prompted by public’s misconception of the social security program. Many communities believe that the state is factually and legally obliged to provide lifetime support. In real sense and as alluded in Flemming’s ruling above, the right to support by the state is not real and as held in Sobramoney v Min Health, KwaZulu –Natal⁷, it is dependent on availability of states resources to realize such right. Furthermore, the right to social security as submitted in "Socio-Economic Rights in South Africa"⁸ is subject to the limitation clause contained in the Constitution Section 36.

It is apparent from the Sobramoney case above that socio-economic rights are not automatic and to realize them, is conditional upon the availability of states resources and adequate access to such resource. In comparison with the private retirement industry, it will be unrealistic and factually impossible to realize such rights if people are not encouraged to save early and adequately for their retirement. It is therefore important that if people do not have a real and automatic right to state support, they be encouraged or sometimes compelled to save for their retirement. The question that has thus far remained unanswered, is who has the responsibility to educate the public to save for their retirement? The answer to this question falls beyond the ambit of this article, but for clarity purposes the responsibility to educate the public on issues pertaining to saving for retirement is arguable on the basis of principles of corporate governance related to the entire retirement industry.

In order to realize the need to save for retirement, it is significant that the rates of employment be stable. A conventional wisdom holds that the ever-increasing unemployment rates are the barriers to access to saving for retirement in various communities.

In a more recent controversial report issued by Statistics South Africa⁹, the unemployment rates in SA are reflected as being stable. However, when compared with other countries, the numbers of unemployment in the country are unpleasant. If the statistics were a true reflection of employment rates in the country, it will be correct to argue that the reason why the country has such low numbers of people who save for their retirement, is due to low incomes in both public and private sectors or the retirement industry is not doing enough to encourage and instill the culture of savings in the country.

In lieu of the fact that social security benefits are nothing but part of government spending program, the rapid increase of the ageing population and increasing numbers of early retirements more burden has been placed on the fiscal of the country. Amongst other things, this will result in huge tax hikes and limitation of other government social programs. The following recommendations are made:

RECOMMENDATIONS TOWARDS SAVING FOR RETIREMENT

The Retirement Funds Reform document proposes the formation of the NSF, a new savings vehicle that is aimed at encouraging people to save and arguably, to increase access to retirement savings for low income earners. It is no doubt that the idea behind the formation of this saving vehicle was well thought, but it would have been reasonable and ideal if the access to it was open to all South Africans and that the favourable tax conditions proposed under it, were applicable to everyone regardless of income status. It is further the assumption of this article that if the NSF was to be designed on the basis of "equal and general access", the culture of saving for retirement will be instilled in many minds of South Africans. As an alternatively to restricting the NSF to low income earners, this article propose that the NSF be opened to everyone, but its contributors be divided into certain classes or categories. However, if the NSF is opened to a certain class of people, it will arguably amount to discrimination or favoritism and many people will be discouraged to save for their retirement.

Lastly, it is recommended that the entire industry needs to be active in promoting and encouraging retirement fund education, inter alia, educating the public about the significances of saving early for retirement. Society at large needs to be encouraged to prepare for their retirement and be advised that social security benefits are just part of government spending program and conditional upon the availability of states resources. Therefore, a culture of personal savings needs to be encouraged to start at an early age.