Everyone from domestic workers to chief executives of top companies will have to sign up for a new government-controlled national retirement fund that could be in place by as early as 2010.
The fund is part of a total overhaul of the current retirement saving system to bring in line with social security nets provided in most developed countries.
The government's objective is to ensure that every working will have a liveable pension at retirement equal to at least 40% of a final month's wage or salary.
Broad details of the comprehensive, complex and far reaching plans of government to improve the lives of mainly lower-income people were announced by Minister of Finance and senior members of his National Treasury team yesterday.
The backbone of the new plan will be the introduction of a social security tax which will cost you up to 15% of your income to a maximum of about R750 a month.
But this does not mean your take-home pay will necessarily be reduced. What the government intends to do is reduce the amount you are currently paying to an occupational retirement fund (such as an employer-sponsored fund).
Your contributions (plus the investment growth) to the proposed fund will remain your money and will not be shared with anyone else. The principle that is being applied is the same for current defined contribution retirement funds where each member's accumulated savings plus investment growth are kept in a separate account.
For lower-income workers, who cannot afford the contributions, the government intends to put up to R30 billion a year into the fund by way of wage subsidies.
The membership of the fund will come at two levels - a compulsory contribution level and then a compulsory choice level. With the second level you will have the choice of making compulsory contributions to the proposed fund or to an occupational fund or a retirement annuity provided by the financial services industry.
Then there will be a third voluntary top-up level of contributions using occupational or financial service industry funds. This optional top-up level is being provided to give you the opportunity to maintain your living standards in retirement.
Three other major proposed changes are:
A restructuring of the retirement tax system. The main target will be the current tax-incentivised saving system which is based on allowing you to deduct contributions to a retirement fund at a rate of up to 15% of your pensionable income. This system, however, favours the rich as the more you earn and the more you save the greater the tax deduction in rand terms. Against this the poor receive no benefits as they earn wages lower than the tax-paying threshold. The incentive system will be maintained but caps will be placed to halt the current "rich-get-richer" structure.
You will no longer be allowed to cash in your retirement savings if you resign, are fired or retrenched from your job when the new system is implemented. The current ability to take your money as a lump sum before retirement is seen as the single biggest reason why most South Africans retire in poverty.
At retirement you will have to use at least two-thirds of your accumulated retirement savings to provide for a guaranteed monthly pension for life. This means that provident funds, which permit you to take all your retirement savings as a lump sum, will be phased out.
Manuel and his senior officials were at pains yesterday to give the assurance that existing rights such as taking provident fund benefits as a lump sum at retirement will not be lost. This means provident fund members will be able to withdraw any money they have accrued before the implementation of the new scheme as a lump sum when they retire