APPENDIX I South Africa: Elements of Social Safety Net
(As of November 1, 1994)
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.
Bos, E., Vu, M.T., Massiah, E. and Bulatao, R.A, World Population Projections 1994-95 (Baltimore: John Hopkins University Press, 1994).
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).
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.
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.
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.