As in most of the countries, the South African government has been trying to encourage individuals to save for their retirement through the implementation of several pension-related tax expenditures. In 2016, these provisions were the largest tax expenditure in South Africa, amounting to R 72,991 million (35% of total tax expenditure).
This paper aims at shedding light on the effectiveness as well as distributive impact of these tax benefits by exploiting the comprehensive retirement reform implemented in 2016, which aimed to simplify and harmonise the system in the hope that this would, in turn, incentivize savings further as well as increase the fairness of the pension scheme. Using administrative tax microdata in the context of SA-TIED programme, we show that, already before 2016, a greater proportion of individuals were contributing to a retirement fund as taxable income increased, with more than 90 per cent of individuals in the top decile using these funds to save for retirement.
Moreover, not only did more people contribute in the higher deciles, but they also contributed a larger amount on average, with the median contribution amount increasing as income increased. When it comes to the impact of the 2016 reform, our preliminary findings show that the reform was effective in increasing retirement savings. Nonetheless, besides a significant (yet temporary) reduction in the number of individuals contributing more than R 350,000, the effectiveness in reducing the regressive impact of these provisions is less evident. In 2018, the top 20 per cent of income earners received over 77 per cent of the benefit from the upfront deduction.
Agustin Redonda is a fellow with the Council on Economic Policies (CEP) where he leads the Fiscal Policy Program. Prior to that, he has been a research and teaching assistant with the Economics Department of the University of Lugano (Switzerland). He also worked with the Organisation for Economic Co-operation and Development (OECD), as well as for the National Plan to Reduce Informal Activity at the Ministry of Labour, Employment and Social Security in Argentina. Agustin holds a PhD in Economics from the University of Lugano, a MSc in Economics from University Paris I – Panthéon Sorbonne, a MSc in Economics from University Paris – Est Créteil, and a BA in Economics from the University of Buenos Aires (UBA).
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