UIF: No ‘Big Bang’ needed for impact to be felt
Sometimes quick results are not the best. The economy would be better served if government’s proposal to slash contributions towards t he Unemployment Insurance Fund (UIF) was not such a “Big Bang approach”, says Rob Cooper, tax expert at Sage VIP.
Currently, an employer and it s employees each contr i bute 1% a month of the remuneration paid to t he employee. When an employee earns more than R14 872 per month, a maximum of R148.72 per month is paid by employers and their employees to the UIF for protection against loss of i ncome due to unemployment, maternity leave, il lness or the death of a breadwinner.
Should f i nance minister Nhlanhla Nene have his way, t his a mount will drop to a maximum of R10 per month from 1 May* for a period of one year, should Treasury’s proposal be approved. Treasur y ’s aim with this plan is to provide much-needed support to the economy by putting about R15bn back into the pockets of workers and employers.
A smaller and more permanent reduction to the monthly limit is more rational and will have a lesser, but still positive, impact on the economy, says Cooper, who also serves as director of legislation updates and proposed legislation.
“In principle, I understand what the government is t r ying to do. In essence they want to put back money into the economy without incurring more debt. That is a good thing, but what happens after a year? Will the government just expect everyone to go back to the way things were? It will have a negative impact on employers and employees if government decides to i ncrease contribution payments after a year,” explains Cooper.
The UIF currently has a surplus of more than R72bn. Contributors who become unemployed should benefit from the payout of the funds, which are essential l y drawn f rom the surplus. “Reducing the monthly l imit to R1 000 will have the result that the surplus will be channelled back to employed contributors and to employers, and not to unemployed contributors.”
There is also no law or policy that forces employers to use the extra funds at their disposal to create more jobs or provide more t raining for t heir employees. “Nothing is mentioned in the proposal that states that employers must now use these rands that they save to hire more people. They can use this money at their own discretion. They might make more prof its this year, or payout higher dividends.”
Loane Sharp, an economist at the Free Market Foundation, agrees that this proposal will not be able to assist t he millions who are unemployed. People who contribute to the f und have job security, which means they are unlikely to l odge claims, says Sharpe. “By contrast, i ndividuals who make up our countr y ’s high unemployment rate of about 25% cannot access this fund.”
The multibil l i on- r a nd s ur plus of t he UIF has accumulated since April 2002, when new l egislation was i ntroduced to modernise t he administration of contributions and benef it s , a nd to l i mit f r audulent benefit claims.
“Even during t ough economic times when thousands of people were retrenched, the fund still managed to accumulate a surplus,” says Cooper. This is a clear indication that over the years the contribution value was generally too high in relation to the benef it value, he says, suggesting that a more rational approach would be to reduce the contribution value and bring it in line with the potential benefit.
“The f und ’s act uaries need t o consider the possibilit y of reducing the 1% contribution value for a longer period than one year, which would bring the huge surplus down and still give money back to employers and employees. It might sound nice to put back R15bn in the economy this year, but this is not that much if one looks at the debts of other institutions like the Road Accident Fund [it currently faces a f unding shortfall of R98bn, whic h g over n ment i s tr y i ng t o address by an additional 50c levy on the fuel price]. “Spreading this R15bn over a longer period than one year would have a similar, but more permanent impact on the economy.”
A SMALLER AND MORE PERMANENT REDUCTION TO THE MONTHLY LIMIT IS MORE RATIONAL AND WILL HAVE A LESSER, BUT STILL POSITIVE IMPACT ON THE ECONOMY.