If all working people in South Africa saved an appropriate amount for their retirement, children’s education and housing, it would provide investment funding that could help pull our country out of the economic doldrums, according to a paper presented at the Actuarial Society of South Africa’s annual convention in Cape Town this week.
Actuaries Guy Chennells and Keagan Kistan from Old Mutual told the convention that increasing our savings through our retirement funds is the most effective way to boost the nation’s savings and meet the need for economic growth.
Yet they found that more money is leaving South African retirement funds than is going in: total retirement savings are actually declining because we are drawing out more than we are contributing when the costs of group life assurance and administration are included.
Chennells and Kistan say in their paper, “Can retirement savings save South Africa?”, that this was the case in 2014 and last year, when funds experienced a net outflow of 1.88 percent of the country’s gross domestic product (GDP), which means the country is “being starved of a critical savings pool”.
Although improved retirement savings alone cannot save South Africa, it can play an important part and will at the same time improve our individual lives, as most of us do not save enough for retirement, the pair say.
They say if we all contributed closer to the maximum 27.5 percent that we can deduct from our taxable income, it would have a huge impact on the country’s savings. They say that while policymakers should address the issue of preserving savings, stopping the leakage of retirement savings through non-preservation will have less of an impact on the economy than an increase in contributions.
Chennells and Kistan say for this reason it is worthwhile for the government and financial services industry to focus on reforming the retirement system.
The two actuaries admit that increasing household savings in an environment where household savings have been declining for the past two decades is “a challenge” and they say that further work is required to determine how we can be encouraged to save more. They say the government needs to design systems that support us saving more by, for example, helping us to get out of debt and manage our finances optimally.
They suggest that employer-sponsored savings through retirement funds could be put to greater use to help you save for all your needs and recommend that methods used successfully in other countries should be investigated.
The reasons for focusing on retirement savings as a vehicle for saving are:
• The savings are long-term in nature and hence can be used to fund long-term projects, such as infrastructure, which enable economic activity;
• The government is devoting significant resources to improving retirement savings levels and coverage;
• The industry is well-established and is seeking solutions to the problem of under-saving; and
• Most of us do not save nearly enough for a secure retirement.
Chennells and Kistan say the retirement savings “system” is an efficient way to channel any increases in household savings, because the savings are deducted directly from payroll, you pay lower institutional fees on your savings, and you enjoy tax advantages.
In addition, there are benefits for employees, because your employer may sponsor your contributions to a fund and can use its resources to support your financial well-being through positive communication and education.
Chennells and Kistan identified seven “levers” that could be pulled to increase national savings:
1. Getting us to preserve 100 percent of our retirement savings when leaving a fund, typically on resignation. The actuaries worked on the assumption that currently only 30 percent of withdrawal benefits are preserved within retirement funds.
2. Getting us to preserve 100 percent of our retirement savings on retrenchment. The actuaries assumed that currently no one who is retrenched preserves their retrenchment benefits and considered the impact if we were forced to leave all our retirement savings in our funds on retrenchment.
3. Getting us to increase our retirement fund contributions from the current average of 13 percent of our salaries to the maximum amount you can contribute and still receive a tax deduction: 27.5 percent of your taxable income or remuneration, whichever is higher.
4. Expanding compulsory contributions to retirement funds to the entire working population. The actuaries considered two different contribution rates: 13 percent and 27.5 percent of salaries.
5. Expanding the amount on which you must make contributions to include your net investment income.
6. Expanding the amount on which you must make contributions to include any operating surpluses from any business you run.
7. Increasing the amount you need to save to 40 percent of your income. Although this may seem very high, this would take into account not only your retirement savings, but savings for education and housing.
Of these seven “levers”, Chennells and Kistan identified increasing the amount we contribute to our funds as the most effective. If we were all to contribute the maximum of 27.5 percent, it could result in savings as a percentage of GDP increasing to 25.7 percent.
Savings at 25 percent of GDP is the “magic number” required to get GDP growth to 5.4 percent, the target set in the government’s National Development Plan.
Chennells and Kistan say that South Africa is in the unfortunate position of needing higher savings to spur growth, and needing higher growth to create capacity in household incomes for saving. While there are no simple solutions, they say that if every effort was made to support and encourage household savings, as long as the government provides the conditions for investment in the country, “it would be possible to begin a virtuous cycle of increasing savings, increasing investment and economic growth, which in turn will result in increased investment and further growth”.