Between a rock and a hard place
This article was first published in the fourth-quarter 2012 edition of Personal Finance magazine.
A substantial 40 percent of employed urban South Africans, many of them squeezed in a financial sandwich because they have to look after their parents and their children, expect that their children will provide for them in their old age.
And 38 percent expect that government will do so if they (and presumably their children) cannot look after themselves.
Currently, about 2.7 million people receive the social old-age grants of R1 140 a month for people between the ages of 60 and 74 and of R1 160 a month for people aged 75 and over.
Rian le Roux, chief economist at Old Mutual Investment Group South Africa, says in effect the country is creating an informal pay-as-you-go retirement scheme, with this generation of workers funding the current generation of pensioners. But the danger is that high unemployment will make this system unsustainable.
Meanwhile, there will be increasing pressure on government to meet the demand for social old-age grants, which are paid from tax, Le Roux says.
The expectations about dependency quoted above come from the latest Old Mutual Savings & Investment Monitor, which is based on the opinions and lifestyles of 1 000 employed people who live in metropolitan areas. The findings are supported by a qualitative survey undertaken by Sanlam.
Although the Old Mutual survey found that the expectation that children or government will provide financial support in old age is weighted towards respondents in the lower-income groups, a significant 24 percent of people who earn more than R40 000 a month say they will depend on their children when they can no longer work, while 19 percent say they will look to the government’s old-age grant.
The question is whether their children will be able to support them. Some 23 percent of the people surveyed say they are supporting not only their children but also their parents and other older dependants.
In the case of respondents who are already parents, the percentage of those who say they will depend on their children in retirement rises above the average of 40 percent, with 43 percent of fathers and 53 percent of mothers saying they will look to their children for support.
The expectation that they will have to support their parents is not a surprise to many of those surveyed, with 40 percent saying they already plan to support their parents and other family members. A further 12 percent say they expect to support their parents but have not made any plans for doing so.
Then there is the 24 percent of those surveyed who say their parents are on their own – they have no intention of supporting them.
The growth of intra-family dependency is also apparent in the increasing number of employed adults who continue to live in the family home, let alone in the number of unemployed adults who do so: almost 50 percent of this live-at-home group is estimated to be unemployed.
According to the survey, 29 percent of employed adults still live with their parents, against 21 percent two years ago.
When broken down by age group, 62 percent of respondents aged 18 to 24 still live at home, a further 44 percent in the 25 to 34 age group do so, and 17 percent in the 35 to 49 age group live at home.
By racial group, 33 percent of employed black adults and 24 percent of employed whites, coloureds and Indians continue to live in the family home.
By income bracket, the percentage tilts from 38 percent of those who earn less than R6 000 a month to 18 percent of those who earn more than R40 000 a month.
Old Mutual researcher Lynette Nicholson says parents who continue to support children once they are adults limit their own ability to save for retirement, with the result that members of this “sandwich generation” will look to their children to support them in old age, creating yet another “sandwich generation”.
The “sandwich generation” is pretty evenly spread across income groups, although the incidence is highest among black people (34 percent) and those in the 35 to 49 age bracket (27 percent), she says.
Nicholson says the probable perpetuation of the “sandwich generation” emphasises the need for everyone to save for retirement, and to start doing so at an early age, in order to break the cycle of dependency. For this to happen, consumers will have to be far more conservative in their spending.
The survey found that parents do not intend their children to be ill-equipped for the job of providing for them in their retirement.
According to the survey, 76 percent of respondents say they try, or will try, “to give my children the best opportunities in life”. When it comes to respondents who already have children, that percentage jumps to 93 percent for dads and 95 percent for moms.
One of the reasons people do not have enough for retirement is that they have different savings objectives at different stages of their lives.
The survey shows that for 35 percent of 18- to 24-year-olds, saving for a motor vehicle is the priority, but only 18 percent prioritise retirement savings. However, by the time they reach 50, 56 percent of people prioritise retirement savings, whereas only 10 percent prioritise saving for a motor vehicle.
The survey shows that different savings targets are prioritised at different lifestages, often through necessity. For example, children’s education becomes the savings priority for 30 percent of 25- to 34-year-olds and for 44 percent of 35- to 49-year-olds.
SPONGING KIDS A THREAT TO PARENTS’ FINANCES
Threats to your comfortable retirement come in many guises, from unscrupulous salesmen to identity thieves. But one of the threats lurks where you least expect it: in the heart of the family.
“The youth of today take so much longer to start in life than earlier generations. You find people at the age of 35 with no proper income, living off their parents at a time when their parents are entering retirement,” Jan-Carel Botha, the 2012 Financial Planner of the Year, says.
“These children manipulate their parents for money. Most retirees can barely afford to maintain their lifestyle throughout retirement, but are now being asked to re-invest into their children.”
It has become a rapidly increasing problem over the past three to four years and is one of the major discussion points with clients, says Botha, a planner at Ultima Financial Planners in Pretoria who has the Certified Financial Planner accreditation.
The drain on parental finances can take many guises. One common form is when adult children borrow money and never pay it back. It can be large lump sums, such as the capital to start a business, or small but frequent “loans”.
More often, the cost is relatively hidden, such as when parents help out with day-to-day living expenses.
Botha says living arrangements are fertile ground for exploitation. The children can end up living rent-free in an investment property belonging to the parents that is supposed to be a source of income. “Or the couple have two adult children living with them while they should actually be downscaling their accommodation and capitalising the profit.”
Trying to get the parents to act in their own financial best interests is not easy, Botha says.
“A lot of the behaviours I touch on in the financial planning process are manageable, but this is a difficult one.”
One strategy available to the financial planner is to provide perspective. He or she can illustrate the results into the future if the client persists in paying the child’s expenses or does not get back the loan he or she has made.
The appeal to rationality, however, does not always outweigh the pull of emotion.
“We often give advice about this type of behaviour, and the retiree agrees while in the office but later loses perspective and continues the destructive behaviour. The reason in the end is always ‘It’s my child’.”
Botha says a person’s own children represent one of the hardest areas about which to listen to sound advice.
And adult children do not make it any easier for parents to resist the pull of emotion. Many manipulate their parents – for example, by making handouts a precondition of their parents being able to see their grandchildren.
“Children are very clever and know what buttons to press,” Botha says.
There are always buttons available, because the problem has its roots far in the past. It is in childhood and the teenage years where boundaries are set and where children learn independence and self-esteem. Parents will find it hard to enforce boundaries that have been absent or erratic for the past 30 years or more.
The original ambiguity about boundaries may originate from parental guilt: guilt about divorce, for example, or guilt about not having spent enough time with the children when they were growing up.
Botha’s advice for young parents is to raise your children to respect other people’s boundaries and to be financially smart. “Provide a loving and safe home environment and a good school education – this is the extent of your obligation,” he says.
His advice for parents with children who sponge off them is this: you are doing them no favours and you could be perpetuating dependence in your grandchildren.