By Piet le Roux

One typically thinks of unemployment insurance as something people call on on a rainy day: it isn’t going to plug all the holes, but at least it’ll keep the lights on. But there’s something about a rainy day-fund that grew its portfolio in excess of R80 billion in the past 10 years or so that warrants a second look.

Unemployment insurance in South Africa is legislated by the Unemployment Insurance Fund Act, and the period for comments on a current Amendment Bill recently closed. The Act has come a long way; and the Amendment Bill now has many non-insurance elements in store.

History of the Fund

The Fund is a child of the depression. It has its origins in a cabinet meeting in 1932 and came into operation in 1937. Contributors and beneficiaries were at first limited, but, like all welfare projects unchecked by the market, grew markedly over the years. Initially there were several funds, with each fund established for a different industry. By 1946 225 000 contributors had provided a R6 million portfolio.

In 1967, under a new Unemployment Insurance Fund act, the consolidation of the various funds into one Fund took place. All the time the beneficiaries kept growing – not simply in number, but also in terms of eligibility. For example, maternity benefits were added in the 1950s and certain adoption benefits from 1988 onward. After the political reforms of the 1990s, residents of the homelands and black people in general also became eligible for UIF contributions and benefits.

During the 1990s the Fund ran into trouble and its financial position deteriorated to a point of technical bankruptcy (government enterprises have a tendency to very rarely really go bankrupt). This was to be turned around by the promulgation of the Unemployment Insurance Fund Act of 2002 and the Unemployment Insurance Contributions (UIC) Act of 2002.

The 2002 UIF Act further expanded the scope for benefits (benefits for 238 instead of 121 days; more maternity benefits; inclusion of domestic workers; etc.), but the UIC Act made sure that there would be enough income. What was the secret? Well, getting the taxman involved. From 2002 onward, the South African Revenue Service (SARS) ensured that employers diligently pay over to Caesar what Caesar said it was owed. What Caesar said it was owed turned out to be 2% of what an employer would have paid over to an employee.

So while contributions today are supposed to be 1% of salary each for employer and employee, readers of Mises.co.za will readily recognize that the full 2% should for all practical purposes be deemed to have come from the employee’s pocket. Total contributions per employee are currently capped at R297.44, which is reached when an employee earns R14 872 per month.

What SARS can do for a balance sheet

With SARS’s help the Fund’s books swelled rapidly over the past decade. The Fund’s total current portfolio sits at around R83 billion. In 2012, only R5.6 billion was paid out in unemployment benefits – less than half of the Fund’s R12.4 billion contributions income for the period. To put it differently: the Fund could halve the fees it collects and still run a surplus.

Let us for a moment ignore whether the Fund is in fact the best way to extend a helping hand to the unemployed in a time of need. Let us simply consider what could have been available to the economy had the fund only levied half its fees in 2012. Keep in mind that money paid over by employers to the UIF represents money those employers had demonstrated that they were willing to spend on employees.

What UIF does to employment

Had the fund halved its 2012 fees, its income from contributions alone would have been R6,2 billion. R6.2 billion per year corresponds to 130 000 entry level workers remunerated at R4 000 per month. That’s right, 130 000. And R4 000 per month is well above the minimum wage in various sectors, including the recently increased farm worker minimum wage which currently sits at just under R2 300 per month.

Consider also: in a hypothetical organisation with 50 employees, where 30 earn an income exceeding the contributions cap and 20 earn an average of R7 000, the total UIF levy amounts to just under R12 000 per month. That’s R12 000 per month the employer was willing to spend on employees… gone.*

Yes, folks, the Unemployment Insurance Fund ensures a not insignificant amount of unemployment. Excessive UIF levies serve to discourage employment. By drawing on this total supply of wages in the economy, UIF actually lowers employment that would otherwise originate from two sources: employees who would boost employment in general by their higher expenditure or judicious investing; and employers who would be able to finance the appointment of more employees with the additional funds available to them.

The above may even call for a revision of that earlier statement that the full 2% UIF levy comes from the pocket of the employee: at least in part, UIF levies come from the pockets of the unemployed.

Now, given the magnitude of its surplus income and the number of jobs not financed – and bearing in mind the original rainy day-idea in 1932 – one might expect the Fund to lower contributions. But it turns out that this is not what the Fund has in mind.

The Fund transcends insurance

The 2013 Amendment Bill is written with a view on explicitly expanding the Fund’s mandate beyond insuring against unemployment. The Bill would have it that the Fund should in future also fund employment creation programmes. While the current Act does have – at best -hints of this competency in there, the Bill goes much further. As it stands, the proposed amendment to section 5 of the Bill would enable the Fund to arbitrarily expend money for any purpose that could even vaguely be defined as

financing the retention of contributors in employment and the re-entry of contributors into the labour market.

In an accompanying memorandum setting out the objects of the Bill, it is noted that the Fund already finances housing developments in the North West province. The background information also states that the amendments are intended to allow the Fund to “assist in financing the employment promotion projects by the Public Employment Services”. Both these activities differ from the proper purpose of the current Unemployment Insurance Act as defined in Section 2 of the Act, which is simply to enable employees who have contributed to the fund (or their beneficiaries) to claim benefits if they become unemployed.

In fact, by expanding the Fund’s mandate to fund “employment promotion projects”, the Fund will become an institution that finances both employment and unemployment – a far cry away from its core justification of providing insurance. For example, read together with the intended expansion of benefits to government employees (what they’ll contribute is unclear), it might be stated with very little liberty that the Fund will now fund, at least partly, both the employment of people in the wasteful Expanded Public Works Programme as well as their unemployment.

Should the Bill be passed, we are also likely to see other wasteful employment creation exercises, similar to this R2 billion bond taken up by the UIF from the Industrial Development Corporation in 2010. Writes the IDC:

These funds will specifically be applied to job creating and saving transactions…

Conclusion

So to bring it all together: unemployment insurance in South Africa resembles insurance less and less and a welfare trap and a drain on the economy more and more. The Unemployment Insurance Fund thrives by taxing employment.

Far from me it is to say that there is no place for unemployment insurance, but I do question unemployment insurance administered in the above fashion. More likely, for proper unemployment insurance, which manages to avoid the excesses of interventionism – that is, for unemployment insurance checked by the market and administered with the empathy and good judgment of peers – one has to look to those not-so-far-back mutual aid and friendly society traditions which today are only vaguely remembered.

NOTES

*Of course, there are caveats about fixed capital outlays affecting employment expansion in any enterprise and so on, but the essence of the trade-off that is the case in point here remains applicable.

**Here’s a full submission on the Bill to the relevant portfolio committee.

***This article has largely been sourced from secondary sources, which explains some small differences in amounts used. I’m working on an article drawing on the UIF’s annual reports directly, which should clear this up. So far there appears to be no material implications for the current article’s conclusions.