Reforms to our social security system

Feb 15, 2007 | Newsletters



Mangosuthu Buthelezi’s Weekly Newsletter to the Nation

My dear friends and fellow South Africans,

When I was listening to President Thabo Mbeki on Friday speak about reforms to our social security system, my mind went back to a visit my wife, Irene, and I made to Sweden in 1963. On that visit, we were taken around some of the "cradle to grave" (a term originally coined by President Franklin D. Roosevelt) programmes in Stockholm.

Irene and I could only gasp at the wall-to-wall provision of social security which has been the norm in Scandinavian society for several generations. Nearly half a century on, the welfare state is still a near-sacred concept in Sweden, even though the new-centre right government elected a few months ago has called for the fine-tuning of the system with small, pro-business adjustments rather than dismantling it altogether.

Crossing the North Sea, Britons have also enjoyed the safety-net of a welfare system (if not a veritable smorgasbord) since the end of the Second World War. The Beveridge Report of 1942 attempted to make insurance the basis for a comprehensive, universal scheme covering all the main social needs. Britain’s welfare state largely survived intact, albeit leaner, following Mrs Thatcher’s economically reforming governments.

Today, Tony Blair, like the New Democrat administrations of Bill Clinton, has (quite successfully) blended the free-market reforms of his Conservative predecessors with the Left’s pursuit of social justice at the expense of uninhibited economic growth. A new political consensus has come to pass.

Here in South Africa, we are faced with a gigantic challenge to provide even a minimalist universal safety net. The scale of this challenge was deftly charted in Professor Sampie Terreblanche’s seminal work, A History of Inequality in South Africa 1652-2002, which examined the "incomplete transformation" since 1994: the problems of poverty, health, land and hunger.

Professor Terreblanche provided empirical evidence that absolute levels of poverty were worse now than during apartheid. The central question, he posed was whether poverty could have been better addressed by the state-centred approach of classical European social democracy rather than by building a "new black elite" wedded to a neo-liberal policy framework.

I personally believe that given the resource constraints on our fiscus, the path of European social democracy is not an affordable – even if desirable – option, but by the same token, we cannot rely solely on the free market dictum that a rising tide lifts all boats.

The tide is simply not rising fast enough in South Africa. I see this every time I drive between my home near Ulundi and Durban as people walk miles by the roadside desperately try to sell their produce. It is a heartrending scene that is repeated throughout countless hamlets across the country.

As readers will be aware, I am of the view that accelerated economic liberalisation is the most important part of the equation to grow the economy to create jobs and put an end to poverty.

The privatisation of state-owned enterprises, which the government has no business owning, are but a few prime examples, that spring to mind.

State-owned airlines (such as SAA) and diamond mines (like Alexkor) require constant re-capitalisation at taxpayers’ expense. Then there is indirect state control of and interference with listed companies through the Industrial Development Corporation (as in Sasol and Barloworld) or even direct control as in Telkom.

The other part of the equation is that whilst the business of government is not the government of business, destitution is the business of government.

Mr Mbeki’s announcement last Friday that further reforms would be made to our system of social security with a view to creating an earnings-related contributory scheme was therefore, of course, welcome.

This would be done to ensure that all South Africans would become members of a common social insurance system, like in Britain and Scandinavia, while making provision for individuals to continue with private retirement and insurance arrangements.

While conceding that in-depth consultation with all social partners would be required, the President stated that some of the elements of this system would need to include continuation of the minimum benefits currently provided for in the social grants system, a wage subsidy for low-wage earners and a social security tax to finance basic retirement savings and death, disability and unemployment benefits.

But this, I fear, is not enough for the millions of people, whom I have just mentioned, who are trapped in absolute poverty and many of whom are part of the so-called "lost generation", with little prospect of finding meaningful employment. For one, it takes several years for the proposed reforms to bear fruit.

In 2002, the same year as Professor Terreblanche’s book was published, the universal, non-means tested Basic Income Grant (BIG) of R100 a month was the most eye-catching of a raft of measures proposed in the Taylor Report.

To recap the BIG briefly, every South African resident would be able to claim the BIG, but families could be encouraged to claim together to reduce delivery costs. Recipients of other grants such as disability or old age grants would not receive this grant. In the case of children under the age of 18, it would be paid out to the caregiver.

For those of us on the centre-right, BIG does not pose an ideological conundrum. The grant, interestingly, is a progressive negative expenditure tax, which derives its intellectual impetus from the new right: Milton Friedman and the Chicago School of Economics.

The BIG could be financed by increasing indirect taxes: a grant combined with indirect tax increases (VAT) is equivalent to a progressive expenditure tax above the break even point, and a progressive anti-poverty grant for those below it. The net tax burden of financing the BIG by raising VAT by 7.4% would be about R15 billion (in 2002 figures). The IFP would support this financing regime.

By contrast, the net tax burden would be R52 billion by raising company tax and R23-30 billion by raising income tax (calculated in 2002). These last two options, obviously, are unsustainable and would have a baleful effect on the economy. Others have argued that the grant be financed simply by cancelling the second part of the arms deal.

The BIG would have a significant impact on poverty by wiping out destitution. The poorest – everyone outside the income tax net – will get the full benefit of the grant. Those with an average basket of goods, are better of is expenditure is under R1024 (calculated in 2002).

The big question is whether the BIG might create a dependency culture and dampen people’s aspirations; a refrain from Left and Right these days. I don’t think so. The low level of the grant is unlikely to prove to be a disincentive for people to find work that pays more than the grant.

Another reason why I would support the BIG as an at least stop-gap solution is the plight of children orphaned by HIV/Aids: an iceberg like phenomenon that is likely to have a profound effect upon public policy programmes over the next decade. The number of children orphaned by the pandemic is estimated to increase to around two million by 2010.

The BIG is obviously not tailored to the problem of Aids orphans and child-headed families, but I believe it would alleviate their plight and ease the burden which is increasingly falling to grandparents and their meagre pensions.

President Mbeki, to my disappointment, ruled out the BIG at the weekend. His government has said the BIG is too expensive. Like the war on HIV/Aids, we cannot not afford, I argue, now to implement BIG. The cost savings of not implementing the BIG in the short term are likely to be eclipsed by the social consequences of not doing so in the medium and long term.

There are times in politics when pragmatic judgement overrides policy and ideological preferences; when issues do not neatly fit into our paradigm or worldview. This is one of them. It is time and worth the effort to "think the unthinkable" on this issue.

Yours sincerely

Mangosuthu Buthelezi

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