Abstract
This Selected Economic Issues paper examines economic developments in South Africa during 1993–94. After a cumulative fall of 3.5 percent between 1989 and 1992, GDP at market prices grew by 1.1 percent in 1993. The major contribution to growth came from the turnaround in the inventory cycle, with positive investment in inventories recorded for the first time since 1989. Private consumption expenditure remained subdued in 1993, rising by only 0.5 percent; by contrast, public consumption grew by 1.8 percent in 1993.
IV. Fiscal Implications of the Social Assistance System
1. Introduction
South Africa’s social assistance system provides significant poverty relief for the elderly, for persons with disabilities, and for poor children; but it lacks a notable social assistance program for the unemployed. 1/ Reflecting the priorities of the apartheid period, the social assistance system was shaped largely by the priorities of whites, and eligibility rules discriminated against nonwhites, but in particular against blacks. With effect from September 1993, however, racial disparities in respect of social assistance payments were eliminated. Thus, social assistance spending has been one of the fastest growing expenditure categories in recent years and is projected at 3 percent of GDP in the 1994/95 budget. 2/
As in other areas of expenditure, fundamental reform may be needed to realign the social assistance system with changed priorities. However, reform discussions have barely begun. 3/ The RDP White Paper, for example, only calls for improving the delivery and targeting of the present elements of the social assistance system. Accordingly, this chapter focuses on the fiscal viability of existing social assistance programs, in particular, on the social pension system and the child grant system.
Government-backed pension systems have come under increasing strain throughout the world. 4/ Nevertheless, a recent report on South Africa’s pension system, the Mouton Report (1992), recommended preserving the present social pension system as the first tier of a future two-tier pension system, where the second tier would rely on private market-supplied pension schemes. However, the Mouton Report did not address the issue of the long-term fiscal sustainability of the social pension system, an issue that has an important bearing on the need for timely reform. As regards child grants, the fiscal implications of the present system deserve close attention because take-up rates of formerly discriminated population groups could rise significantly putting potentially unsustainable spending pressures on the social assistance budget.
Section 2 describes the quantitative and institutional characteristics of the social assistance system against the backdrop of the overall social safety net. Section 3 provides demographic information. Section 4 analyzes projections of trends in spending on social pensions over the period 1995-2030 based on a long-run simulation model. Section 5 draws on available information on child grant take-up rates for different races to gauge the fiscal consequences of equalized access to child grants.
The main conclusion for the social pension system is that South Africa’s present system does not represent a budgetary “time bomb.” According to the baseline projection results, spending on social pensions may rise from about 1½ percent of GDP in 1995 to 2 percent of GDP in 2010 and further to 3 percent of GDP in 2030. Thus, over the next 15 years, the combined revenue increases or expenditure cuts needed to avert an increase in the budget deficit due to the dynamics of social pensions amount to about ½ percentage point of GDP. To illustrate, an increase of the VAT rate by 1 percentage point increases budget revenue by about ½ percentage point of GDP. Alternative simulation scenarios indicate that spending on social pensions could well be kept below the baseline projection results if the qualifying age for men and women is equalized at 65 years and/or if unemployment falls significantly over the projection period. The comparatively favorable fiscal outlook for South Africa’s social pension system mainly reflects the small present share of elderly persons in the total population combined with slow population aging over the projection period, and the assumption that increases in pension rates are modest, rising no faster than average nominal wages.
By contrast, the analysis of the child grant system suggests that significant fiscal pressures may emerge, even in the short run, if the currently very low take-up rates among blacks rise rapidly. Illustrative calculations indicate that if take-up rates for blacks increase to the level of present take-up rates for coloureds, spending on child grants could increase by 1 percent of GDP. Thus, while, the need for fundamental reform of the social pension system may not be pressing, at least from a narrow fiscal perspective, a reconsideration of the child grant system--its reform or its financing--may be required to avert unsustainable expenditure pressures on the social assistance budget.
2. Characteristics of the social assistance system
Social assistance expenditure in the 1994/95 budget is projected at 3 percent of GDP (Table 12), equivalent to about 9 percent of total government expenditure. Expenditure data on different social assistance programs are sketchy, owing mainly to the extraordinary opaqueness of the administration system. 1/ In particular, there is no breakdown of social assistance spending available for the former homelands. 1/ The available data indicate that social pensions constitute by far the most important assistance program, accounting for about 50 percent of total spending, followed by disability pensions with a spending share of about 15 percent.
South Africa: Social Assistance Expenditure in 1994/95 Budget
Cape, Natal, Orange Free State, Transvaal.
Bophuthatswana, Ciskei, Transkei, Venda.
Gazankulu, Kangwane, Kwandebele, Kwazulu, Lebowa, Qwaqwa.
Parent and child grants but excluding foster care and special care grants.
Includes war veteran pensions, foster care and special care grants, payments to welfare organizations, community services, and drug treatment centers.
South Africa: Social Assistance Expenditure in 1994/95 Budget
| Former provinces 1/ |
Former TBVC states 2/ |
Former self- governing territories 3/ |
Total | ||
|---|---|---|---|---|---|
| (In millions of rand) | |||||
| Social pensions | 3,396 | … | … | 6,500 | |
| Disability pensions | 1,375 | … | … | 2,200 | |
| Child support grants 4/ | 683 | … | … | … | |
| Other 5/ | 970 | … | … | … | |
| Total | 6,424 | 3,506 | 3,700 | 13,630 | |
| Memorandum item: | |||||
| (In percent of GDP) | |||||
| Social assistance expenditure | 1.4 | 0.8 | 0.8 | 3.0 | |
Cape, Natal, Orange Free State, Transvaal.
Bophuthatswana, Ciskei, Transkei, Venda.
Gazankulu, Kangwane, Kwandebele, Kwazulu, Lebowa, Qwaqwa.
Parent and child grants but excluding foster care and special care grants.
Includes war veteran pensions, foster care and special care grants, payments to welfare organizations, community services, and drug treatment centers.
South Africa: Social Assistance Expenditure in 1994/95 Budget
| Former provinces 1/ |
Former TBVC states 2/ |
Former self- governing territories 3/ |
Total | ||
|---|---|---|---|---|---|
| (In millions of rand) | |||||
| Social pensions | 3,396 | … | … | 6,500 | |
| Disability pensions | 1,375 | … | … | 2,200 | |
| Child support grants 4/ | 683 | … | … | … | |
| Other 5/ | 970 | … | … | … | |
| Total | 6,424 | 3,506 | 3,700 | 13,630 | |
| Memorandum item: | |||||
| (In percent of GDP) | |||||
| Social assistance expenditure | 1.4 | 0.8 | 0.8 | 3.0 | |
Cape, Natal, Orange Free State, Transvaal.
Bophuthatswana, Ciskei, Transkei, Venda.
Gazankulu, Kangwane, Kwandebele, Kwazulu, Lebowa, Qwaqwa.
Parent and child grants but excluding foster care and special care grants.
Includes war veteran pensions, foster care and special care grants, payments to welfare organizations, community services, and drug treatment centers.
The key component of social assistance, the social pension system, was introduced as a noncontributory system in the 1920s to protect the standard of living of elderly whites. Access to the system was gradually extended to other race groups, and, since September 1993, discrimination on the basis of race has been removed. The qualifying ages for a social pension are 60 years for women and 65 years for men. Actual receipt of an old-age pension is tied to a means-test, which, effective October 1, 1994, establishes the following relationship between annual social pension amount (P) and annual income level of applicant (Y):
Applicants with annual incomes up to the income threshold of R 1,080 receive the maximum pension of R 4,680 a year. If annual income exceeds R 1,080 but remains below the income exclusion level of R 4,680, a clawback rate of 100 percent applies at the margin. 2/ If an applicant is married, the income of the spouse will be added to the applicant’s income, and, to determine the means-test income, the sum of the two incomes will be divided by 2. Accordingly, an elderly couple may receive up to double the maximum old age pension even if the annual income of one of the spouses exceeds the income threshold of R 1,080. Social pension beneficiaries also receive free medical treatment, including hospitalization and medication, at provincial hospitals.
Relative to available measures of minimum living standards, the maximum social pension appears to be sizable. For example, estimates of low-income household subsistence levels in urban areas for a family of six (two adults and four children) as of March 1994 averaged to about R 11,600 a year, and the cost component allocated to children accounted for about 50 percent of total costs. 3/ Thus, these data indicate that, for example, a household consisting of two persons collecting social pensions will have income well in excess of household subsistence levels. Indeed, the data are consistent with the common observation that intergenerational linkages assure that the benefits of social pensions extend beyond the immediate recipients. Also, in many cases, social pensions are reported to provide the only reliable income stream and source of access to credit for typical three-generation rural families.
The present social pension system exhibits several flaws. First, the present means-test causes a classic poverty trap because it discourages efforts to provide for retirement and/or to earn income during retirement at relatively low income levels. 1/ Second, the different qualifying ages for women and men are inconsistent with the Interim Constitution’s provision against discrimination on grounds of gender. Third, the administration of social pensions has been described as lacking sufficient resources to ensure efficient and equitable delivery. 2/ And fourth, the purchasing power of social pensions may vary between urban and rural households.
The means-test for persons applying for disability pensions is identical to that for social pensions. Disability pensions are payable to beneficiaries below retirement age. Disabled persons above retirement age may apply for a social pension. Child support grants are paid out in two forms, a parent grant to the mother (the maximum is R 4,680 a year) and child grants (the maximum for each child is R 1,452 per year). Thus, child support grants are also relatively generous if compared with the data on household subsistence levels reported above, in particular if recipients live in rural areas. The means-test for child support grants is identical to the old-age pension means-test except that the full household income is used to determine the grants. The last feature of the means-test adds a perverse incentive--on top of usual disincentives to work and save--to form single-parent families.
The social assistance system is supplemented by two major social insurance funds. 3/ The Unemployment Insurance Fund (UIF) provides insurance for most formal sector employees against temporary earning losses from unemployment, illness, and maternity payable at 45 percent of weekly earnings for up to six months. The Workmen’s Compensation Fund offers insurance against earning losses from work injuries. Since June 1994, children aged below six years, lactating mothers, and pregnant women are targeted to receive free health care benefits. This new program added a major categorical transfer in kind to the social safety net, the cost of which has not yet been fully ascertained.
3. Demographic background
Demographic structure is an important determinant of social assistance spending. Moreover, changes in demographic structure over the long run may entail significant expenditure pressures. Table 13 shows population data for South Africa for the period 1990-2030 taken from the World Bank’s World Population Projections 1994-95. On the projections in Table 13, population growth in South Africa will slow from a little over 2 percent a year in the 1990s to about 1 percent a year toward the end of the projection period. The old-age dependency ratio, defined as the ratio of over-65-year-olds to persons of working age (15- to 64-year-olds), stood at 7 percent in 1990 and suggests that South Africa’s social assistance system presently supports a relatively small elderly population, as is the case in most developing countries. In contrast, old-age dependency ratios in industrial countries typically amount to about 20 percent, roughly three times the estimate for South Africa. At the same time, South Africa’s old-age dependency ratio is projected to remain stable until about 2010. After 2010, owing to falling fertility levels and rising life expectancy, the old-age dependency ratio is projected to rise to 12 percent by the year 2030.
South Africa: Demographic Projections, 1990-2030
South Africa: Demographic Projections, 1990-2030
| 1990 | 1995 | 2000 | 2010 | 2020 | 2030 | |||
|---|---|---|---|---|---|---|---|---|
| Total population (thousands) | 37,959 | 42,514 | 47,248 | 56,701 | 64,921 | 72,448 | ||
| Age groups as a percentage of total population | ||||||||
| 0 to 14 years | 39 | 38 | 35 | 33 | 28 | 24 | ||
| 15 to 19 years | 11 | 10 | 10 | 10 | 9 | 8 | ||
| 20 to 39 years | 30 | 30 | 30 | 32 | 33 | 33 | ||
| 40 to 59 years | 15 | 16 | 17 | 18 | 20 | 23 | ||
| 60 to 75 years | 5 | 5 | 5 | 6 | 7 | 9 | ||
| 75 years and above | 1 | 1 | 1 | 1 | 2 | 3 | ||
| Old age dependency ratio | 7 | 7 | 7 | 8 | 9 | 12 | ||
| 65 and above × 100 | ||||||||
| 15 to 64 years | ||||||||
| Youth dependency ratio | 68 | 65 | 61 | 52 | 42 | 36 | ||
| 0 to 14 years × 100 | ||||||||
| 15 to 64 years | ||||||||
| Fertility rate | 4.1 | 3.7 | 3.3 | 2.5 | 2.1 | 2.1 | ||
| Life expectancy at birth | 61 | 62 | 65 | 68 | 70 | 73 | ||
| (both sexes) | ||||||||
| Net migration rate | -- | -- | -- | -- | -- | -- | ||
South Africa: Demographic Projections, 1990-2030
| 1990 | 1995 | 2000 | 2010 | 2020 | 2030 | |||
|---|---|---|---|---|---|---|---|---|
| Total population (thousands) | 37,959 | 42,514 | 47,248 | 56,701 | 64,921 | 72,448 | ||
| Age groups as a percentage of total population | ||||||||
| 0 to 14 years | 39 | 38 | 35 | 33 | 28 | 24 | ||
| 15 to 19 years | 11 | 10 | 10 | 10 | 9 | 8 | ||
| 20 to 39 years | 30 | 30 | 30 | 32 | 33 | 33 | ||
| 40 to 59 years | 15 | 16 | 17 | 18 | 20 | 23 | ||
| 60 to 75 years | 5 | 5 | 5 | 6 | 7 | 9 | ||
| 75 years and above | 1 | 1 | 1 | 1 | 2 | 3 | ||
| Old age dependency ratio | 7 | 7 | 7 | 8 | 9 | 12 | ||
| 65 and above × 100 | ||||||||
| 15 to 64 years | ||||||||
| Youth dependency ratio | 68 | 65 | 61 | 52 | 42 | 36 | ||
| 0 to 14 years × 100 | ||||||||
| 15 to 64 years | ||||||||
| Fertility rate | 4.1 | 3.7 | 3.3 | 2.5 | 2.1 | 2.1 | ||
| Life expectancy at birth | 61 | 62 | 65 | 68 | 70 | 73 | ||
| (both sexes) | ||||||||
| Net migration rate | -- | -- | -- | -- | -- | -- | ||
The demographic data in Table 13 also highlight the large share of young persons in the population. The youth dependency ratio, defined as the ratio of persons younger than 15 years to persons of working age, is estimated at 68 percent in 1990, almost 10 times the size of the old-age dependency ratio. While the youth dependency ratio is projected to decline over the long term, it will nevertheless exceed the old-age dependency ratio by large margins over the projection horizon.
Long-run population projections are surrounded by considerable margins of uncertainty. In South Africa’s case, migration and the effects of AIDS on mortality rates could cause significant deviations from the population scenario summarized in Table 13. The Mouton Report (1992, pp. 71-75) discusses estimates showing that the impact of AIDS could slow medium-term population growth significantly. According to the estimates, the effects of AIDS on the population structure would mainly affect the sizes of the working-age and young-age populations but have only a small effect on the size of the elderly population. The main impact of AIDS, as far as the social assistance system is concerned, may well occur at the level of the child grant and foster care system. As regards the migration factor, the population scenario in Table 13 is based on the technical assumption of zero net migration.
4. Fiscal implications of the social pension system
The model used for projecting social pension expenditure is described in Appendix II. The basic macroeconomic assumptions underlying the projections are summarized in Table 14. The real GDP growth projections are based on a Cobb-Douglas production function. Real GDP growth is driven by balanced growth in employment and capital plus an assumed rate of multi-factor productivity growth of 1 percent a year. 1/ The employment growth projection derives from the working-age population projection combined with assumptions on labor force participation rates and unemployment rates. In the baseline scenario, the proportion of the labor force without formal employment is kept constant at a level of 45 percent over the projection horizon. An alternative scenario with declining unemployment is also considered below. The rate of inflation is projected to remain constant at an annual rate of about 8 percent. As the share of labor in output is assumed to remain constant, nominal per worker wage growth is equal to the inflation rate plus the rate of multi factor productivity growth. Average social pension benefits are assumed to be indexed to the average nominal wage, although one scenario explores the implications of indexing social pension benefits instead to price inflation.
South Africa: Macroeconomic Assumptions, 1995-2030
(In percent)
Proportion of labor force without formal employment.
South Africa: Macroeconomic Assumptions, 1995-2030
(In percent)
| 1995-00 | 2000-10 | 2010-20 | 2020-30 | |
|---|---|---|---|---|
| Inflation rate | 8.0 | 8.0 | 8.0 | 8.0 |
| Nominal wage growth | 9.0 | 9.0 | 9.0 | 9.0 |
| Real GDP growth | 3.7 | 3.5 | 3.1 | 2.6 |
| Employment growth | 2.7 | 2.5 | 2.1 | 1.6 |
| Unemployment rate 1/ | 45.0 | 45.0 | 45.0 | 45.0 |
| Labor force participation rate | 75.0 | 75.0 | 75.0 | 75.0 |
| Population growth | 2.1 | 1.8 | 1.4 | 1.1 |
Proportion of labor force without formal employment.
South Africa: Macroeconomic Assumptions, 1995-2030
(In percent)
| 1995-00 | 2000-10 | 2010-20 | 2020-30 | |
|---|---|---|---|---|
| Inflation rate | 8.0 | 8.0 | 8.0 | 8.0 |
| Nominal wage growth | 9.0 | 9.0 | 9.0 | 9.0 |
| Real GDP growth | 3.7 | 3.5 | 3.1 | 2.6 |
| Employment growth | 2.7 | 2.5 | 2.1 | 1.6 |
| Unemployment rate 1/ | 45.0 | 45.0 | 45.0 | 45.0 |
| Labor force participation rate | 75.0 | 75.0 | 75.0 | 75.0 |
| Population growth | 2.1 | 1.8 | 1.4 | 1.1 |
Proportion of labor force without formal employment.
Six scenarios were simulated for the period 1995-2030. The results of the simulations are summarized in Table 15. The baseline scenario assumes that the existing social pension system remains unchanged over the projection horizon. The portion of elderly persons eligible for a social pension is also kept constant, a conservative assumption given positive per capita GDP growth over the projection period. On the other hand, it is conceivable that the number of poor old persons in the population will grow more quickly than the number of persons with adequate retirement means. The projections assume that these two effects on the eligibility ratio cancel out. The take-up ratio of the system is projected to increase over time, reaching 100 percent in 2010, as administration of old-age pension benefits becomes more efficient and equitable. While a take-up ratio of 100 percent is likely to overstate actual take-up by some margin, it appears to be prudent to base the projections on the assumption that full take-up is reached over time.
South Africa: Social Pension Expenditure Projections, 1995-2030
In percent of GDP.
Assumes linear decline of unemployment rate--that is, proportion of the labor force without formal jobs--from 45 percent to 25 percent over 1995-2005.
South Africa: Social Pension Expenditure Projections, 1995-2030
| 1995 | 2000 | 2010 | 2020 | 2030 | ||
|---|---|---|---|---|---|---|
| Baseline assumptions | ||||||
| Eligibility ratio | 80.0 | 80.0 | 80.0 | 80.0 | 80.0 | |
| Take-up ratio | 85.0 | 95.0 | 100.0 | 100.0 | 100.0 | |
| Annual budgetary social pension cost 1/ | ||||||
| Scenario 1: Baseline projection | 1.6 | 1.9 | 2.1 | 2.4 | 3.0 | |
| Scenario 2: Elimination of means-test | 2.0 | 2.3 | 2.6 | 3.1 | 3.7 | |
| Scenario 3: Equalizing retirement age at 60 years | 1.9 | 2.2 | 2.5 | 2.9 | 3.4 | |
| Scenario 4: Equalizing retirement age at 65 years | 1.2 | 1.4 | 1.6 | 1.9 | 2.4 | |
| Scenario 5: Declining unemployment rate scenario 2/ | 1.6 | 1.6 | 1.6 | 1.8 | 2.2 | |
| Scenario 6: Indexation of pensions to price inflation | 1.6 | 1.8 | 1.8 | 1.9 | 2.1 | |
In percent of GDP.
Assumes linear decline of unemployment rate--that is, proportion of the labor force without formal jobs--from 45 percent to 25 percent over 1995-2005.
South Africa: Social Pension Expenditure Projections, 1995-2030
| 1995 | 2000 | 2010 | 2020 | 2030 | ||
|---|---|---|---|---|---|---|
| Baseline assumptions | ||||||
| Eligibility ratio | 80.0 | 80.0 | 80.0 | 80.0 | 80.0 | |
| Take-up ratio | 85.0 | 95.0 | 100.0 | 100.0 | 100.0 | |
| Annual budgetary social pension cost 1/ | ||||||
| Scenario 1: Baseline projection | 1.6 | 1.9 | 2.1 | 2.4 | 3.0 | |
| Scenario 2: Elimination of means-test | 2.0 | 2.3 | 2.6 | 3.1 | 3.7 | |
| Scenario 3: Equalizing retirement age at 60 years | 1.9 | 2.2 | 2.5 | 2.9 | 3.4 | |
| Scenario 4: Equalizing retirement age at 65 years | 1.2 | 1.4 | 1.6 | 1.9 | 2.4 | |
| Scenario 5: Declining unemployment rate scenario 2/ | 1.6 | 1.6 | 1.6 | 1.8 | 2.2 | |
| Scenario 6: Indexation of pensions to price inflation | 1.6 | 1.8 | 1.8 | 1.9 | 2.1 | |
In percent of GDP.
Assumes linear decline of unemployment rate--that is, proportion of the labor force without formal jobs--from 45 percent to 25 percent over 1995-2005.
In the baseline scenario (Scenario 1), social pension expenditure, which starts at a level of 1.6 percent of GDP in 1995, rises to 2 percent of GDP in 2010 and further to 3.0 percent of GDP in 2030. Thus, most of the projected increase in old-age pension expenditure takes place after 2010, reflecting the acceleration of population aging toward the end of the projection period.
Scenario 2 assumes that the present means-test is eliminated. Equivalently, the eligibility ratio increases to 100 percent starting in 1995. Elimination of the means-test increases old-age pension expenditure by about ½ percentage point of GDP in 1995, and additional annual social pension costs of about 0.7 percentage point of GDP accrue by the end of the projection period. Scenario 3 is based on the assumption that the retirement age for men and women is unified at the age of 60 years in 1995. With men in the 60- to 64-years age group also eligible for an old-age pension, the costs of the system would increase by about ¼ percentage point of GDP. Scenario 4 assumes equalization of the retirement age at 65 years. The cost reduction effect is slightly larger than the cost increase in the second scenario, because the female cohort of 60- to 64-year-olds is larger than the comparable male cohort. Finally, Scenario 5 considers the effect of a decline in the unemployment rate. Unemployment is assumed to decline linearly to a rate of 25 percent over 1995-2005 and to remain constant thereafter. Declining unemployment is associated with higher employment growth and, accordingly, higher real GDP growth. The lower unemployment rate is assumed not to affect other baseline assumptions. Scenario 5 indicates that higher GDP growth could have a sizable effect on the cost burden of the social pension system. By 2010, social pension expenditure is about ½ percentage point of GDP below the baseline scenario. Scenario 6 illustrates that indexing social pension benefits to price inflation instead of nominal wage growth could dampen costs considerably, at least after 2010.
The scenarios in Table 15 assume that the average old age pension benefit remains constant as a percentage of the average wage over the entire projection horizon. But even relatively small one-time adjustments of the social pension relative to the average wage could result in sizable increases of the short- and long-term fiscal costs of the system. For example, increasing social pensions by 5 percent relative to average wages increases the costs by some 1 percentage point of GDP in the short run and 1½ percentage points of GDP in the long run.
5. Fiscal implications of child grant system 1/
Until the recent removal of racial discrimination, payments of child support grants were largely restricted to the nonblack part of the population. As a consequence, take-up rates for child support grants by blacks are currently very low. It is likely that take-up rates by blacks will rise quickly, and, given the relative generosity of child grant benefits, significant fiscal pressures on social assistance spending could result. Unfortunately, gauging the fiscal consequences of a rise in take-up rates by blacks is hampered by poor data. Nevertheless, rough calculations appear to indicate that the current system is not fiscally viable.
Table 16 presents estimates of expenditure on child support grants based on available data on take-up rates in 1993 but reflecting 1994 population projection data and grant amounts as of October 1994. Under these assumptions, total expenditure on child support grants would amount to about R 1.1 billion, or 0.2 percent of GDP. However, as Table 16 indicates, this estimate is premised on the assumption that take-up rates of blacks remain extraordinary low relative to those for coloured and Asian persons.
South Africa: Estimated Costs of Child Support Grants Based on 1993 Take-up Rates
In thousands; projections for 1994.
Number of grants per thousand of population based on van der Berg (1994, Table 2.3).
In millions of rand.
South Africa: Estimated Costs of Child Support Grants Based on 1993 Take-up Rates
| Whites | Asians | Coloureds | Blacks | All races | ||
|---|---|---|---|---|---|---|
| Population 1/ | 5,184 | 1,035 | 3,449 | 31,430 | 41,098 | |
| Population aged 0-14 years as a percent of total | 22 | 31 | 34 | 41 | 38 | |
| Take-up rates 2/ | ||||||
| Parent grants | 2 | 15 | 19 | 1 | 3 | |
| Child grants | 5 | 26 | 49 | 4 | 8 | |
| Number of grants | ||||||
| Parent grants | 9,850 | 15,111 | 65,186 | 34,574 | 124,720 | |
| Child grants | 25,920 | 27,013 | 169,846 | 110,006 | 332,286 | |
| Expenditure 3/ | 83.7 | 109.9 | 551.0 | 321.5 | 1,066.2 | |
In thousands; projections for 1994.
Number of grants per thousand of population based on van der Berg (1994, Table 2.3).
In millions of rand.
South Africa: Estimated Costs of Child Support Grants Based on 1993 Take-up Rates
| Whites | Asians | Coloureds | Blacks | All races | ||
|---|---|---|---|---|---|---|
| Population 1/ | 5,184 | 1,035 | 3,449 | 31,430 | 41,098 | |
| Population aged 0-14 years as a percent of total | 22 | 31 | 34 | 41 | 38 | |
| Take-up rates 2/ | ||||||
| Parent grants | 2 | 15 | 19 | 1 | 3 | |
| Child grants | 5 | 26 | 49 | 4 | 8 | |
| Number of grants | ||||||
| Parent grants | 9,850 | 15,111 | 65,186 | 34,574 | 124,720 | |
| Child grants | 25,920 | 27,013 | 169,846 | 110,006 | 332,286 | |
| Expenditure 3/ | 83.7 | 109.9 | 551.0 | 321.5 | 1,066.2 | |
In thousands; projections for 1994.
Number of grants per thousand of population based on van der Berg (1994, Table 2.3).
In millions of rand.
To illustrate the potential fiscal pressures if take-up rates rise, an alternative calculation was performed assuming that take-up rates of blacks rise to that of coloureds. Under this assumption, the costs of the child grant system would increase to R 5.4 billion, about 1 percentage point of GDP higher than the costs reported in Table 16. This much higher estimate of child grant costs may nevertheless represent a lower limit for actual cost increases because coloured families, on average, have fewer children and higher incomes than black families.
It is not clear whether the authorities in circumstances of a much higher take-up of child support grants would seek simply to finance the cost by cutting expenditure elsewhere, or would choose to reform the child support system. Reform options would include reducing benefit levels, tightening the means-test, or lowering the qualifying age for children (currently, child grant benefits may be claimed up to age sixteen), or a combination of these options. At the same time, expanding nutritional programs for children could provide an alternative means of achieving at least some of the objectives of the child grant system at significantly lower cost.
Were a new social assistance scheme for unemployed persons to be introduced, it would likely cause even greater fiscal stress than that currently threatened by the child grant system. For example, assuming that there are 3 million persons not covered by the UIF, that the take-up rate for unemployment grants is 80 percent, and that the payment of a monthly unemployment grant benefit is equal to the present parent grant of R 390 per month, the annual cost would amount to R 11.2 billion or 2.5 percent of GDP, almost the size of the present total social assistance budget.
6. Conclusion
The analysis of this chapter brings out quite clearly that allowing significant take-up of child grants at present grant rates would lead to considerable pressure on the budget. On the other hand, the demographics are such that the present social pension system is probably affordable in the long-run. Finally, given the large number of unemployed and the likelihood of high take-up rates, the fiscal scope for introducing a social assistance scheme for unemployed persons appears to be extremely limited.
APPENDIX I South Africa: Elements of Social Safety Net
(As of November 1, 1994)
1. Old-age, disability, survivor pensions
Coverage: Noncontributory benefits for all residents.
Source of funds: General budget revenue.
Eligibility conditions: For old age benefits, age limits are 60 years for women and 65 years for men. For disability benefit, permanent incapacity for self-support or blindness. For survivor benefit, care for dependent children by surviving or deserted spouse. Special survivor benefit for maintenance of orphaned child.
Benefits: Based on means-test, old age pension of up to R 390 per month or R 4,680 per year. Maximum old age pension is paid up to an annual income of R 1,080. For annual income above R 1,080 and up to R 4,680 the clawback rate of the means-test is 100 percent (80 percent for blacks). Income of spouses is cumulated and divided by 2. An aged couple may therefore receive up to double of R 390 a month. Constant-attendance allowance of R 64 for handicapped persons. Disability and survivor pensions are based on the same means-test and may amount to up to R 390 a month.
2. Child support grants
Coverage: Noncontributory benefits for all residents.
Source of funds: General budget revenue.
Eligibility conditions: Insufficient earnings to maintain child. Application restricted to women. Grants apply until a child reaches the age of 16 but may apply for two additional years of schooling.
Benefits: Based on means-test, parent’s allowance of up to R 390 a month and child allowance of up to R 121 a month. Identical means-test as for old-age pensions except that a husband’s income is added to applicant’s income.
3. Unemployment, sickness, and maternity benefits
Coverage: Compulsory insurance system for employees earning R 63,648 a year or less. Scheme excludes domestic servants, homeworkers, and temporary workers who are employed for less than 8 hours or less than one full working day in any calendar week.
Source of funds: Employee and employer contributions of 1.0 percent of insured’s earnings. Government contribution of 25 percent of contributions paid by employees and employers with a maximum of R 7 million per year.
Eligibility conditions: For unemployment benefits, 13 weeks of contribution during last 52 weeks, capable of and available for work, and proof of efforts to obtain work. For sickness benefits, 13 weeks of employment during 52 weeks preceding the date on which a period of sickness is deemed to have commenced. For maternity benefits, 13 weeks of employment during 52 weeks preceding expected date of confinement or date of birth as the case may be.
Benefits: Unemployment benefits of 45 percent of weekly earnings, payable up for up to 26 weeks. Sickness and maternity benefits of 45 percent of weekly earnings, payable for 26 weeks.
4. Work injury benefits
Coverage: Compulsory insurance scheme operated by public carrier for employees earning R 55,068 a year or less. Scheme excludes domestic servants and casual workers.
Source of funds: Employer pays insurance premium varying with risk.
Eligibility conditions: No minimum qualifying period.
Benefits: Temporary disability benefits of 75 percent of earnings up to R 4,589 a month. Permanent disability pension equal to 75 percent of earnings up to R 4,589 a month. Widow/widower pension of 40 percent of pension of deceased. Medical benefits provided for maximum of two years.
5. Free health care benefits
Coverage: Children younger than six years of age, lactating mothers, and pregnant women. Old-age, disability, and survivor pensioners. Insured workers qualified for unemployment, sickness, and maternity benefits.
Source of funds: General budget revenue or medical insurance for those on medical aid.
Eligibility conditions: See information on coverage under items 1 and 3.
Benefits: Free medical treatment, including hospitalization and medication, at provincial hospitals.
6. Miscellaneous other benefits
Foster care grants for children of R 274 a month. Special foster care grants of R 390 a month for disabled children. Nutritional programs administered largely through nongovernmental organizations and school feeding programs.
APPENDIX II Description of Social Pension Projection Model
Social pension expenditure (SPEt) is, the product of the average annual pension benefit (Bt) and the number of pension beneficiaries (NBt):
The average monthly pension benefit in the first year of the projection period, 1995, is assumed to amount to R 426, a figure derived from the assumptions of about 1.5 million old age pension beneficiaries and estimated social pension expenditure of R 7.5 billion in 1995. After 1995, the social pension is assumed to be indexed to nominal wage growth (ΔWt/Wt):
In Scenario 6, pensions are indexed to price inflation (ΔPt/Pt) instead of nominal wage growth.
The number of pension beneficiaries is estimated as the number of old persons (ONt) that have reached retirement age multiplied by the proportion of old persons eligible for a means-tested old-age pension (ELt) times the proportion of eligible old persons who actually collect the pension (TUt):
The product of eligibility ratio and take-up ratio in 1995 is projected to amount to about 0.7 in 1995, calculated as the ratio between pension beneficiaries (1.5 million) and the number of old persons who have reached retirement age (2.1 million). The take-up ratio is assumed to reach about 0.85 in 1995, an assumption that determines the eligibility ratio at about 0.80 in 1995.
To project real growth of the economy, a Cobb-Douglas production function is used. Using a growth-accounting framework, real output growth (Δ:Yt/Yt) can be written:
where Lt is employment, Kt is the capital stock, γ denotes multi factor productivity growth, and α and β: are the shares of output received by labor and capital, respectively. In the simulations the labor share is fixed at 0.70 and the capital share at 0.30. Employment is derived as the product of the working age population (WNt), the labor force participation rate (LFPRt), and the employment rate (1-Ut), where Ut is the unemployment rate:
Over the projection horizon, labor force participation rate and unemployment rate are fixed at 75 percent and 40 percent, respectively. An alternative scenario with declining unemployment is also considered.
Finally, assuming a constant capital-labor ratio ((ΔLt/Lt)=(ΔKt/Kt)), the growth rate of the average nominal wage is given by:
where ΔPt/Pt is the exogenous inflation rate.
References
Bos, E., Vu, M.T., Massiah, E. and Bulatao, R.A, World Population Projections 1994-95 (Baltimore: John Hopkins University Press, 1994).
Lund, F., “State Social Benefits in South Africa,” International Social Security Review, Vol. 46, (No. 1, 1993), pp. 5–25.
The Mouton Report, Report of the Committee of Investigation into a Retirement Provision System for South Africa (Johannesburg, November 1992).
Van der Berg, S., “Issues in South African Social Security,” Background Paper prepared for the World Bank (University of Stellenbosch, August 1994).
World Bank, Averting the Old Age Crisis, A World Bank Policy Research Report (Oxford: Oxford University Press, 1994).
The state-run Unemployment Insurance Fund (UIF) pays unemployment benefits to insured formal sector workers for a duration of up to six months. The majority of the unemployed, however, have no employment history.
Between 1990/91 and 1994/95, average total expenditure growth is estimated at 14 percent, while average growth of spending on social assistance is estimated at 22.5 percent.
A survey of issues is provided by van der Berg (1994).
See the recent World Bank study, Averting the Old Age Crisis (1994).
Lund (1993, p. 6) reports that in 1993 there were 17 different social assistance administrations, which in turn were coordinated by 3 separate administrations.
The new regional dispensation consolidated the former provinces and homelands into nine provinces. The 1994/95 budget was drawn up on the basis of the old regional dispensation because the administrations of the new provinces are still in a formative stage.
The clawback rate is only 80 percent for blacks.
Based on data compiled by the Institute of Planning Research, University of Port Elizabeth, Fact Paper No. 96, March 1994.
van der Berg, 1994, pp. 35-39.
Lund, 1993, p. 19.
Expenditure of social insurance funds was about R 2.2 billion (0.6 percent of GDP) in 1993/94.
The implicit assumption of a constant instead of an increasing capital-labor ratio is clearly unrealistic for a typical developing country. On the other hand, South Africa’s capital-labor ratio is already relatively high and may not increase substantially over the projection period.
This section partly draws on van der Berg (1994).