UIF: No ‘Big Bang’ needed for im­pact to be felt

Finweek English Edition - - INSIDE - BY JININE BOTHA

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.

Rob Cooper

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