A contributory pension system, subsidised for poor South Africans, will impact both poverty and inequality, Parliament has heard – driving “forced savings” and helping people build assets that can be invested.
Speaking to Parliament’s Standing Committee on Finance (SCOF) on Tuesday, Marek Hanusch, a senior economist for the World Bank’s global practice for macroeconomics, shared the organisation’s proposed model to address poverty and inequality. The model is based on research in the World Bank’s book An incomplete transition: Overcoming the legacy of exclusion in South Africa, published in April 2018.
According to Hanusch, a contributory pension fund as a form of redistribution will empower poor South Africans to build assets, if it is subsidised.
“We agree that building assets for poor people in South Africa is extremely important,” he said. “A contributory pension is one way of doing it.”
According to the research, only one-third of SA’s 32 million working-age people are covered by an occupational pension scheme. This means the unemployed, informal workers and those who are not part of the labour force are not covered.
The elderly, however, can draw a pension in the form of a grant, not as an asset.
The contributory pension fund would positively contribute to economic growth, as it is a “forced saving” that can only be accessed at pension age, Hanusch explained.
The asset can then be invested, in the JSE, for example.
The research suggests that if such an asset were invested in the JSE, it would provide broad-based empowerment and give all South Africans a stake in corporate South Africa, as recipients of the pension could access dividends.
The World Bank proposes that voting rights be delegated to pension fund managers – those from historically disadvantaged backgrounds – so that they could have a say in shareholder decisions.
The asset could later be used to support small businesses and other unlisted companies, Hanusch added.
It would be funded with property taxes, Hanusch explained.
“In many countries, municipalities finance themselves mostly through property taxes,” he said.
SA’s property taxes are not particularly high, compared to other countries that are part of the Organisation for Economic Co-operation and Development (OECD). If they were to increase, then government would have to reduce other taxes, Hanusch explained.
Essentially, property tax would be a tax on the legacy of wealth. And the tax would be used to build wealth for SA’s poor, Hanusch said.
The World Bank’s research also argues that the tax would redress inequality. It would provide incentives to have home sizes make better use of space, addressing challenges of SA’s spatial economy.
The World Bank warned that this tax must be phased in incrementally, so as not to overwhelm the middle class, especially those who still want to acquire property.
Further, there must be an agreement with municipalities, so that a portion of the tax can go towards national expenditure, the World Bank said.