Comment on the reduction of UIF contributions
Monday, March 23rd, 2015
Solidarity’s comments to the National Treasury on the proposed reduction of unemployment insurance contributions: section 6 of the Unemployment Insurance Contributions Act, 2002
1. Introduction – about Solidarity
1.1 These comments are furnished by Solidarity Trade Union (“Solidarity”) following the invitation for public comment on the proposed amendments to the Unemployment Insurance Contributions Act.
1.2 Solidarity is a labour union which has members who are employees of companies in nearly every industry in South Africa. The main industries in which Solidarity is organised are metal and engineering, mining, the electrical industry, telecommunications, the chemical industry, agriculture and general industries, including tertiary institutions, aviation and other specialised areas. Solidarity’s mandate is to protect the interests of the workers who are its members and as such Solidarity is exercising its mandate by responding to this request for comments.
2.1 Solidarity supports the proposal to reduce the maximum unemployment insurance fund (UIF) contributions from the current level of R297,44 per month to R20,00 per month, as this will amount to giving money back to the workers.
2.2 The UIF has reserves far in excess of what is required to prudently perform its functions and the value of the UIF’s investment portfolio has been steadily growing over the last decade. This is due to the UIF collecting far more than it requires on an ongoing basis.
2.3 Solidarity is opposed to the mandate of the UIF being extended to include functions like funding “job creation”, as this does not fit with the original purpose of the fund. Solidarity has commented on this as part of the public comments process regarding the proposed changes to the Unemployment Insurance Act.
2.4 The proposal to reduce the maximum unemployment insurance fund (UIF) contributions from the current level of R297,44 per month to R20,00 per month will likely result in all workers who contribute to the fund having more money, up to R252,47 per month, in their pockets.
2.5 This proposed change should not be limited to one year but be extended for as long as is necessary to reduce the UIF’s reserves to a level which is prudent but not excessive.
3. The mandate of the UIF versus UIF collections
3.1 The mandate of the UIF is to provide insurance for workers who become unemployed after a period of employment. Solidarity is of the view that this mandate should not be extended to include other, vaguely defined, objectives. Entities with broad and vague targets are liable to miss all of their targets because of the need to aim for a multitude. Confusion about arbitrary objectives also tends to create the conditions in which wasteful spending and misappropriation of funds can occur. The UIF should remain focused on its single, current mandate.
3.2 Solidarity is especially opposed to the mandate or functions of the UIF being extended to include aspects like funding “job creation”, as this does not fit with the original purpose of the fund. Solidarity is on record since 2012 as opposing attempts to broaden the UIF’s mandate. These attempts do seem to be motivated by a desire to reduce the accumulated reserves of the Fund, but such a desire not a good reason to extend its mandate. Solidarity has provided extensive comment on this topic as part of the public comments process regarding the proposed changes to the Unemployment Insurance Act. The documentation is available on request.
3.3 The UIF is clearly, on an ongoing basis, collecting far more funds from workers than it needs to carry out its mandate. Its investment portfolio has been growing at rates in excess of 15%, often in excess of 30%, per year over the last decade. This has happened partly because the UIF has, save for one year, been collecting more than double the contributions necessary to cover its disbursement of benefits annually over the past decade. Even at the peak of increased disbursements due to the recession, the UIF paid out R5,7 billion in benefits but collected R10,8 billion in contributions and a further R3,5 in investment returns.
4. The proposal to reduce UIF contributions
4.1 In view of the fact that the UIF has a surplus far in excess of what it requires to carry out its mandate, as well as the fact that this surplus keeps increasing and would keep increasing even if investment returns were not taken into account, it is a prudent and long overdue measure to drastically reduce the contributions that workers are compelled to make to the Fund.
4.2 As part of its motivation for the proposed reduction of contributions to the Fund, the Treasury has listed the dire economic conditions and higher taxes that households in South Africa face. While these are indeed relevant considerations, Solidarity is of the opinion that it is not even necessary to include these factors in the decision on reducing UIF contributions – the correct decision would be the same even if households in South Africa had excellent economic prospects and could look forward to lower taxes. From the UIF’s finances alone it is clear that lower contributions are needed to reduce the excessive surplus of the Fund.
4.3 The proposal to reduce the maximum unemployment insurance fund contributions from the current level of R297,44 per month to R20,00 per month will likely result in virtually all workers who contribute to the fund having up to 0,93% more money in their pockets, or as much as R138,72 per month. As the so-called employee contribution to the UIF comes from after-tax earnings, this money will likely go directly to the worker’s pocket.
4.4 The other up to 0,93% “employer contribution” may also go to the worker. This amount would in many cases be subject to income tax, leading to the total amount going to the worker’s pocket at 2015/16’s tax rates being reduced by 18% to 41%, depending on the marginal tax rate. Workers who are currently subject to the maximum contribution of R138,72 will receive R81,84 to R113,75 in their pockets after tax. Workers will therefore receive as much as 1,86% more money, up to a maximum of R252,47.
4.5 However, the employer may possibly withhold the “employer contribution” as it may not be considered a part of agreed remuneration. Even if the employer withholds this component, having already demonstrated a willingness to spend such funds on remunerating labour, it is likely that the employer will use the liberated funds to recruit additional employees. The outcome of this proposed change will therefore be positive for existing workers and is also likely to lead to increased employment.
4.6 Solidarity contends that the proposed lower contributions should not be limited to the 2015/16 year but be extended for as long as is necessary to reduce the UIF’s accumulated reserves to a level which is prudent but not excessive. From the experience of the most recent recession, it seems that a surplus of about 150% of the Fund’s annual disbursements should be sufficient to cover any rise in claims that may result from another recession. According to the most recent figures, this level would be around R11 billion – even adjusted for routine increases in remuneration which lead to higher UIF disbursements over time, this prudent level would certainly not exceed even R20 billion in the coming few years. This is still far lower than the current R72 billion surplus or its R94 billion investment portfolio.
4.7 The Treasury estimates that reducing contributions to R10 per month will draw down the Fund’s reserves by R15 billion in 2015/16. Clearly, this will not be sufficient to reduce the excessive reserves to a prudent level in one year. The Treasury has stated that the reduction in contributions will be revisited before the 2016/17 year. Solidarity contends that the current proposed reduction should remain in place for the 2016/17 year and as long as it takes to reduce the Fund’s reserves to a prudent level. The precise amount considered to be prudent could be determined closer to the time of the decision. Once this level is reached, consideration may be given to increasing the contribution limit again, but only to a level sufficient to enable the UIF to maintain this prudent level of reserves.
5.1 Solidarity is strongly in favour of the proposed reduction in compulsory Unemployment Insurance Fund contributions and has been calling for such a reduction since 2012. Solidarity is opposed to an extension of the UIF’s current mandate.
5.2 Solidarity is also in favour of this reduction staying in place through the 2016/17 year and as long as it takes to reduce the UIF’s excessive accumulated reserves to a prudent level.
5.3 After such a prudent level of reserves has been reached and an increase in UIF contributions is mooted, Solidarity contends that such an increase should only be to a level which allows the prudent level of reserves to be maintained.
5.4 Solidarity agrees that this proposal will be beneficial to households in South Africa and adds that reduced UIF contributions will also likely lead to more people being employed in South Africa.