OPINION: Savings mindset essential for you and your country
WORDS ON WEALTH:
It cannot be over-emphasised: the more South Africans can save, the better for their own financial wellbeing and the better for the financial wellbeing of the country as a whole.
It’s not that we don’t save at all. Most people in permanent employment contribute to a pension fund. This forced form of saving is severely undermined by people cashing in their retirement savings when they change jobs.
What’s missing is a savings mindset. On the whole, we don’t feel the compulsion to save voluntarily or, indeed, to live more frugally. Instead, we have a spending mindset, reinforced daily in the media, and exacerbated by an extremely casual attitude to credit, which is too easy to obtain. We’re a nation of credit-card swipers.
If we are serious about growing our personal wealth as well as putting our country on a decent growth path, our mindset needs to change.
Investec and Dr Adrian Saville, Professor of Economics and Competitive Strategy at the Gordon Institute of Business (GIBS), have collaborated in researching and analysing the major issues regarding savings and investment in South Africa. The Investec GIBS Savings Index has become an important barometer and measure of savings levels in the country. Alongside it, Investec has released a comprehensive report, Path to Prosperity for SA, which underlines the importance of savings to a nation’s economy.
Let’s start with the good news. The index now sits at 63.7 points, an improvement on last year’s low of 60 points (a score of 100 corresponds with a healthy, robust savings culture). In addition, all three components of the index – the pool of savings, the flow of savings, and the economic and social factors that affect the flow of savings – have turned positive.
In a podcast interview on the report, Saville says: "It is the first time in a number of years that we have seen such a coordinated upturn, which I really take as an encouraging sign, not of euphoria, or suddenly emerging to miracle status, but certainly an improvement on where we were 12 or 18 months ago.”
However, we’re still a long way off our post-1994 high of 70.7 in 2003.
Compared with other countries, our gross saving rate – down to 14.4% of GDP at the end of 2018 – is poor. The world average, according to the World Bank, was 25% in 2017, with some standouts being Ireland (56.3%), China (47.4%) and our neighbour Botswana (34.3%).
One component of the gross saving rate, South Africa’s household saving rate (that part of our disposable income that we do not spend) is hovering around zero.
The report dispels two myths about spending and saving.
Myth #1: Consumer spending is good for the economy
While consumer spending may boost the economy in the short term, it is not sustainable. The Path to Prosperity report notes: “Nine-tenths of the GDP growth we have seen since the late 1990s is accounted for by consumer spending and government spending … this is the type of spending that is cycled around the economy, that is not sustainable and that reinforces inequality. It is not the type of spending that is transformative, inclusive or sustainable.”
What is needed, the report says, is a culture of saving that translates into investment in the economy, into developing industry and infrastructure.
This is backed by data from the World Bank and the International Monetary Fund, which show a distinct correlation between a country’s saving rate and its economic growth.
You may argue that the correlation shows that the reverse is true: that a stronger economy supports higher levels of savings.
This is where we come to the second myth.
Myth #2: Only the well-off can afford to save
The report quotes research that found that in South Africa, while personal incomes have increased, saving rates have fallen. “The supposition is that people save proportionately less when they feel wealthier and save proportionately more when they feel poorer,” the report says.
“Every ‘rich’ nation was a ‘poor’ nation at some stage,” the report says. “How [have some nations] achieved elevated rates of saving off low income levels?”
The report cites three countries where this has occurred:
1. Chile. Between 1982 and 1995, Chile’s saving rate rose from 2.1% to 26.4% of GDP. This was kickstarted by pension fund reform that introduced a compulsory 10% saving of pre-tax income for formally employed workers into privatised defined-contribution funds.
2, Singapore. In 1959 Singapore “was a swamp, with no natural resources”. Among many innovations, the post-colonial government introduced forced saving for employees into a central state-run provident fund as well as voluntary asset-building incentives, inducing people to save from a young age. Per-capita income has risen from US$500 a year to some $52 000 a year today. The gross saving rate rose from 20% of GDP in the 1970s to 40% a decade later, where it remains today.
3. South Korea. South Korea’s saving rate rose to above 30% by the mid-1980s and has remained at that level. While the Japanese colonialists had inculcated a saving culture, the post-colonial government took measures both to encourage saving and to reduce unnecessary consumer spending. State-owned banks were prohibited from granting consumer loans and imported luxury goods were subjected to prohibitive tariffs.
While the government can certainly play a part in encouraging (and even forcing) South Africans to save, Saville suggests that consumers can take the initiative. “As much as we might be able to legislate better retirement saving practices, I don’t think the issue sits with legislation as much as it sits with our behaviours and our decisions ... We get saving earlier, we consume less, we save more and when we shift jobs we don’t cash out. If you can get those basics right, you don’t need legislation.”