The one blight on the Budget
Treasury pleads “information overload” on slim Social Security Tax details
THE ONE BLIGHT on Finance Minister Trevor Manuel’s otherwise well-balanced Budget was the vague but worrying proposal to impose a mandatory, earnings-related social security tax on all wage earners by 2010.
However, the part that got taxpayers shaken and stirred was the revelation that the proposed tax could swallow as much as 18% of a person’s salary.
Although the 2007 Budget Review acknowledges that the appropriate rate and composition of a social security tax would depend on the benefits it’s to finance, it does seem to indicate that Treasury is considering a tax rate of between 13% and 18%.
“International practice indicates that a rate of between 13% and 18% on an ‘add on’ basis would be required to finance retirement savings, disability and death benefits, unemployment insurance and administrative costs,” says the Review.
Efficient Group chief economist Dawie Roodt says a rate of 18% sounds “way too high”.
The other worrying aspect is the vague wording of the proposal. While it could mean that Treasury is seriously considering imposing a tax of 18%, Ishmail Momoniat, deputy director-general of Fiscal Regulation and Tax Policy at the National Treasury, says the numbers are “merely indicative”.
However, his answer as to why such a farreaching fiscal proposal was released with so little detail makes for interesting reading.
“We were worried that there would be information overload,” he says. “There was just too much information for people to handle. The Finance Minister will be releasing a discussion paper at Nedlac’s offices in Rosebank tomorrow which will give greater detail [Friday, 23 February 2007].”
Another titbit from the Budget Review appears to indicate that the proposed tax would only apply to people earning less than R60 000 a year.
“The basic social security funding arrangement could be limited to earnings below the present Standard Income Tax on Employees threshold of R60 000 a year,” says the Review, though it does indicate that mandatory retirement tax could be levied up to a higher earnings threshold.
However, Momoniat says this is not the case. “The social security tax will apply to all working people but will only apply up to the decided threshold,” he says. In other words, if the threshold is R60 000 then people earning above that amount will only pay social security tax on the first R60 000.
But Momoniat did stress that details of the tax are still at the proposal stage. “We will also be putting in several transitional arrangements to ensure that people do not take too much of a hit on their disposable income.”
A further proposal is that people earning less than R45 000 a year will receive a wage subsidy from Government to offset their mandatory social security tax payments.
Workers earning up to R15 000 a year will receive a subsidy equal to one-third (33,33%) of their annual wage (ie R5 000).
As this far exceeds the 18% mandatory social security tax, it implies that the wage subsidy, which will take the form of reimbursement to the employer implemented as a rebate in the PAYE system, will essentially subsidise the employment of low-income earners.
“That situation would effectively subsidise low-income employment and it’s hoped that this will stimulate greater employment in the economy,” a Treasury official told Finweek.
The subsidy for people earning between R15 000 and R45 000 a year will equal R7 500 minus one sixth of their annual wage.
Estimates of the cost of this subsidy are between R20bn and R30bn a year depending on its coverage – roughly the cost of one Gautrain each year.