Thought Leadership

PRESS STATEMENT: A mysterious decline from surplus to dysfunction

12/10/2023 | By Busiswe Mavuso

The emergence of alarming evidence of maladministration and allegations of corruption at the Unemployment Insurance Fund (UIF) requires urgent action to prevent what could become a systemic problem spilling over into the broader economy and across the social security landscape.

The UIF is an institution that was initially designed as a financial safety net for those facing unemployment. However, it now finds itself embroiled in a crisis that is affecting not only those directly impacted, 87 000 unemployed who are experiencing lengthy application processes and payment delays, but also the nation’s fiscal stability and governance more broadly.

When maladministration and inefficiency plague an institution that plays such a significant role in the economy and the lives of South Africans, it becomes a clarion call for action from all stakeholders and better governance. In a rare occurrence, business and labour are fully aligned on the extent of the problem and how urgently this need to be addressed.

Waiting for the issue to resolve itself is not an option. Instead, it is time for the government to take firm measures to turn around the governance and performance of a state institution that just a few years ago played a central role in securing social security and contributed meaningfully to economic stability during the Covid-19 pandemic.

How can a previously well-functioning state institution fall so far and so fast?

During the pandemic, the UIF was functioning smoothly, boasting a surplus of several billion rands and serving as a vital link between labour, business, and government. It provided crucial assistance to over 14 million workers facing reduced hours, retrenchment, and industries grappling with pandemic-induced closures. For many, it was the lifeline that sustained them through the crisis.

Yet, within just three years, amid the latest allegations of widespread mismanagement, the UIF’s fall from grace remains a mystery. How could an institution equipped with the necessary safeguards, systems, and processes to self-regulate and operate efficiently undergo such a dramatic transformation?

We don’t have the answer yet. But what is abundantly clear is how urgent it is to address the situation before it unravels even further – hurting the futures of the many who rely on it during their most difficult periods.

What’s at stake for South Africa?

A well-functioning UIF relieves pressure on the national fiscus because company and employee contributions provide the funds that support those who become unemployed. However, in its current state, it could become a financial burden undermining South Africa’s broader economy and social security landscape.

Its potential collapse places immense pressure on the National Treasury to open up the spending taps and extend existing unemployment grants. If individuals cannot access UIF support, a permanent unemployment grant may be the next step.

In February, the temporary Social Relief of Distress (SRD) grant was extended by another year and allocated an additional R36 billion, supporting approximately 8.5 million monthly.[1] But as the UIF falters, we can expect a rise in demand for the SRD grant and additional pressure to transform it into a more permanent social income grant. That would further strain an unsustainably stretched national budget and potentially push the country closer to bankruptcy.

The UIF crisis strikes at the heart of President Cyril Ramaphosa’s focus on combatting unemployment and fostering economic stability.  Without adequate financial support when they lose their jobs, South Africans will find it more challenging to secure new employment or become self-employed, endangering the nation’s economic empowerment goals.

Given the country’s low savings rates, UIF payments often serve as a financial bridge for workers between jobs. They also serve as potential seed capital for entrepreneurial ventures, which remains a crucial priority for the government. Therefore, those unable to access these funds due to present UIF inefficiencies stand to miss out on essential opportunities that could have long-reaching consequences for their economic prosperity.

The ramifications of the UIF crisis extend far beyond its direct beneficiaries. If there are governance concerns within the UIF, it raises questions about potential issues elsewhere. For instance, consider the scenario where similar governance concerns become apparent in the Government Employees Pension Fund (GEPF), a defined benefit fund covering 1.7 million civil servants, including those already drawing their pensions. Such a scenario would have dire fiscal consequences, with taxpayers bearing the financial burden of funding civil servants’ pensions.

A call for urgent reforms and decisive action

Urgent questions demand urgent answers. Despite calls from both big business and unions to place the UIF under administration, government ministers have been slow to respond. Labour and Employment Minister Thulas Nxesi responded late last week, indicating that the government is actively working on a series of structural, operational, IT and cybersecurity recommendations to revamp the UIF. While he has at least acknowledged the problem, there is still a lack of clarity and substance regarding how the immense challenges facing the UIF will be addressed and how a successful revamp will be achieved when the issues appear to be so entrenched and the need to address them so urgent.

A decisive government approach is urgently needed, demonstrating a renewed commitment to combatting crime and corruption. Overhauling the UIF’s operating framework, reevaluating management selection processes, scrutinising the board’s governance credentials and potentially outsourcing administration to the private sector are all essential steps that need to be considered.

As we approach the Medium-term Budget in November, where all eyes are on the government to see how it will reduce expenditure and demonstrate fiscal sustainability, the dark cloud of UIF maladministration threatens to undermine the entire fiscal consolidation plan that the National Treasury has been trying so hard to achieve.

The bottom line is that the UIF’s crisis is not merely a bureaucratic issue but a national imperative. The pressure on the National Treasury, the impact this could have on necessitating a potential extension of income grants, and the risk to South Africa’s sovereignty underscore the urgency of addressing this challenge.

We can’t let the UIF’s past success become a distant memory; the time for decisive reform is now.