Dirk Oosthuizen, Head: Research and Principal Consultant at Simeka
In France, earlier this year, a series of protests took place about a proposed pension reform to increase the retirement age from 62 to 64 years. The calls were for “le droit à la paresse” – the right to laziness, protesting against this increase in retirement age. The retirement age was eventually increased.
In South Africa, retirement age is often stated in the rules of a retirement fund, which effectively forms part of an employment contract. Many South African employers have investigated an increase in their retirement age or allowing employees to work beyond the agreed retirement age.
However, the calls in France in early 2023 were for “le droit à la paresse” – the right to laziness, protesting against this very increase in retirement age! It is worthwhile to consider a short summary of the retirement system in France, which is multi-tiered, and to compare it to the South African system.
In France, a minimum pension called the “Allocation de Solidarité aux Personnes Agées” is paid, which is similar to the state old age grant in South Africa. This minimum pension (first tier) is paid from state resources – therefore, unfunded or “pay as you go” from age 65. This minimum pension is also means tested, as in South Africa. So, any citizen earning an income above a certain threshold will not qualify for such a grant. In South Africa, payment of the state old age grant is subject to a similar test and is paid from age 60. This age used to be 65 for males and 60 for females, but was changed to 60 for both shortly after the Constitution was promulgated in 1996, to avoid any challenge of discrimination in this regard.
- The second tier is a mandatory state contributory system. This system is redistributive, meaning that the 15.15% contributions made by those in active employment are used to pay pensions to those in retirement. The system targets a pension of 50% of the 25 highest years of remuneration up to a ceiling. Retirement from this tier, with a full entitlement, is now allowed from age 64.
- The second tier has a further component – an occupational scheme, which is also redistributive on a similar basis and supplements the state scheme to increase the targeted pension to 70% – 80% of a similar remuneration.
- The third tier constitutes voluntary private pensions backed by investments, which can be compared to retirement annuities or (defined contribution) retirement funds in South Africa. Locally, retirement provision is almost exclusively funded – i.e. retirement benefits are backed by assets/investments.
The second tier, as described above, provides wide pension coverage throughout France and it is the change in the rules of these schemes that caused the protests earlier this year. Those in employment believed their benefits would be reduced as they would only be able to access the benefits two years later. It is clear that the redistributive nature of the scheme may cause a generational problem, as those in active employment are effectively supporting those in old age. (It is very similar to the so-called “black tax” in South Africa where children in employment support parents in old age).
The cost of this tier of pension provision has increased not only as a result of improved longevity, but also due to the fact that fertility has been significantly under the replacement rate of 2.1 for quite some time. The replacement rate of 2.1 is the number of children per female over her lifetime which will cause a stationary population over time. Fertility rates in Europe (especially Southern Europe) and in many parts of Asia (China, Japan and South Korea) have been much lower than this replacement rate. In some areas, the replacement rate is estimated to be as low as 1.26, or even below 1 in South Korea. This results in a smaller workforce that has to support a larger population in old age (ignoring some partial solutions that are not always that welcome, such as immigration – e.g. Brexit).
So, it is quite clear why France had to make these changes and, at the same time, use significant political capital in doing so.
In South Africa, fertility rates are still higher than the replacement rate but are rapidly decreasing in metropolitan areas, even though this may not be the case in some rural areas.
With pension provision largely comprising self-funded defined contribution schemes in South Africa, individuals tend to work as long as possible to try and accumulate enough capital for retirement, thus often continue to work post retirement age to supplement retirement savings – earning the right to be lazy!
However, the dynamics in South African organisations are complex with many pressures, notwithstanding the retirement funding need described above. Amongst others, these may include:
- Transformation (legal and business requirements)
- Retention of scarce skills
- Employment of youth
- Employees’ ability to continue working beyond a normal retirement age of 60 has improved with improved healthcare
- Breaks in service and therefore funding for retirement.
These pressures often inform a decision about a change in retirement age in organisations, with some employers making a bold move to increase normal retirement age – which often is met with little resistance by employees due to the reasons given above. Some employers opt for short-term contracts post retirement age, affording them the optionality to select employees with whom they wish to continue an employment relationship.
In South Africa, regulation has long prohibited differentiation in medical scheme rates based on age, causing significant cross-subsidisation between young and old. As a result, many young employees opt out of medical schemes or use hospital cover only options. Many members of medical aids have been buying down on their medical plan options over time, not only due to affordability but probably also due to the implied need for such medical insurance. In insurance this effect is referred to as selection. An often-quoted statistic is that on average 50% of medical expenses are incurred in the last two years before passing. So, young members will often try to find a way out of having to subsidise older members.
It is therefore clear that policymakers need to be prudent about financing policy initiatives that may be politically expedient – such as the proposed National Health Insurance – and lower hurdles to access state grants (basic income grants), as the policy initiative must be balanced against the cost to be incurred by the next generation and future resistance when the benefit may have to be reduced again. The right to be lazy has a cost in itself.
Note: Le droit à la paresse” is a book written by Paul Lafargue, published in 1883. Lafargue, a French Socialist, argued that wage labour is slavery and as machines were taking over the workplace, people should rather work less as machines produced sufficiently.