If South Africa were a group of 10 friends aged 15 to 64, it would look a lot like this:

• 3 of the group would be economically inactive (students, stay-at-home moms, etc).
• 2 would be unemployed (they’d probably be young, female, or both).
• 1 would be a discouraged work seeker who’s given up looking for a job.
• 1 would be informally employed.
• 3 would be formally employed.

That last trio – the formally employed – largely fund the four-tier social system that supports the other seven. That’s a massive problem. So how do we solve it in a country that has, according to National Treasury’s 2023/24 estimates, 7.1 million individual taxpayers and 27.78 million people receiving social grants? ‘The numbers don’t add up,’ says Stephen Walker, Head: Actuarial Consulting at Old Mutual Corporate Consultants, ‘and our official unemployment rate of 32.9% (Q1, 2024) – or 41.9% if you take the broad unemployment rate, which includes disgruntled job seekers – makes this a serious problem.’

Before one can start to fix the social system, one first has to understand its structure. Using the International Labour Organisation’s model, South Africa’s social system has four tiers.

Tier 1: Social assistance

Non-contributory social protection/poverty alleviation. Provides minimum level of benefit.

South Africa’s Old Age Grant is the main source of income for nearly three-quarters (73%) of the over-60s. In April 2024, people aged 60 to 74 received R2 180 a month, while those over 75 received R2 200 a month. ‘These non-contributory pensions often support entire households and are essential in South Africa,’ says Walker. There is talk of making the current means test for the Old Age Grant universal (in effect removing the means test), which would align with the mooted Universal Basic Income Grant (UBIG). The government has extended the Social Relief of Distress (SRD) Grant, introduced during the Covid-19 pandemic, until 2025. Funding has been provisionally allocated for this until 2027.

Tier 2: Social insurance

Contributory national social security retirement fund. Seeks to replace a portion of income. Usually state-run.

Tier 2 retirement benefits do not exist in South Africa. An employee could claim unemployment benefits via the Unemployment Insurance Fund (UIF) for a limited period. Similarly, the Compensation for Occupational Injuries and Diseases Act (COIDA) provides compensation for disability caused by occupational injuries or diseases contracted by employees in the course of their employment. The Road Accident Fund (RAF) provides compensation for road users who sustain injuries in motor vehicle accidents. However, these benefits are far too limited to be considered appropriate retirement solutions.

Tier 3: Supplementary employer arrangements

Mandatory retirement provision, usually through employer-sponsored fund. Usually private sector.

‘South Africa’s occupational retirement fund space is quasi-compulsory in that it is not compulsory for employers to offer retirement benefits,’ says Walker, ‘but if they do, it needs to be compulsory for all qualifying employees.’ Only about 50% of employed South Africans are members of a retirement fund. ‘The reasons for this include affordability, lack of buy-in from employees and the rigid nature of our current pension law, which is extremely onerous for SMEs,’ says Walker.

Tier 4: Supplementary employer arrangements

Voluntary additional retirement savings. Usually flexible and discretionary in nature.

South Africans can supplement the other three tiers through discretionary retirement savings. This is predominantly done through individual retirement annuity funds. This is the only source of retirement savings available for informal workers, the self-employed and seasonal workers.

Fixing the social system

There’s a temptation to look abroad for social systems that South Africa could adopt or emulate. That is instructive... but only to a point. ‘South Africa has unique challenges,’ says Walker. ‘We have the highest unemployment rate and highest income inequality in the world, with a Gini coefficient in the mid-60s. That leaves a very small group of taxpayers supporting a very large social system.’ The imbalance between South Africa’s taxpayer base and its social grant recipients (remember the three friends supporting the other seven) raises urgent questions around the sustainability of the country’s social system. So, too, does the fact that South Africans are, on average, living longer.

‘This means that the Old Age Grant will have to stretch even further,’ says Walker. It’s worth noting that not all seven friends will be dependent on government grants. Some – like children, retired parents or stay-at-home spouses – may be supported by the three who are formally (or the one who is informally) employed. The idea is not necessarily to get everybody employed; it’s to ensure that when people are dependent on social systems, those systems are efficient and working well.

Still, tough questions must be asked. Looking at Tier 1, Walker points to the proposed Universal Basic Income Grant (UBIG). ‘Do we need it?’ he asks. ‘And if we do, can we afford it? Will it get people into employment, or are there better ways of accomplishing that?’

Health is another area of deep concern. ‘South Africa has a public health system,’ says Walker. ‘Why aren’t we looking to fix that rather than introducing National Health Insurance (NHI)? The problem is not necessarily that our health system needs more money; it’s the administration of that money, and ensuring the resources reach the people on the ground who need the support. Introducing a new system isn’t going to fix that.’

That, then, is the heart of the problem: rather than trying to reinvent the wheel of South Africa’s social system, the focus should be on fixing what exists. ‘Old Mutual’s view is that we should improve what we have already,’ Walker concludes. ‘Our economy has high unemployment, low average salaries and – in many cases – poor administration of the existing social system. Those are the areas we need to focus on first.’

* This article originally appeared in the Old Mutual Mindspace Thought Leaders Forum special issue. Read the full publication here.