The abolition of the means test for the payment of old-age pensions, mooted in last week’s budget, might be an incentive to save, says Elias Masilela, chief strategist of Sanlam Employee Benefits.
The means test is a complicated calculation that penalises those who have saved for retirement by reducing the grant amount if the individual is already receiving a retirement income.
Such a move will form part of a wider reform on pension and retirement funds, but it will affect high-income earners. Masilela says that while all pensioners will receive the old-age grant, higher-income earners will pay back via a tax claw-back. “If it is managed through the tax system, then people might not have to register for the benefit as long as they pay Site tax. Higher-income earners will not receive a direct grant payment, but rather a tax deduction on their income equal to the grant,” says Masilela.
Finance Minister Trevor Manuel also announced that the retirement age for men will drop from 65 to 60 in the next three years because high poverty levels make the gap discriminatory. It also does not suit the Constitution’s imperative of gender equality.
One of the reasons women’s retirement age is lower is because female joblessness is higher and studies have shown that grants paid to women have a higher impact on the household when it comes to education and nutrition.
By encouraging men to retire at 60, the state is providing a social safety net, while also hoping to expand labour absorption rates of young people who suffer the brunt of joblessness.
The old-age grant of R940 reduces poverty levels by 10% and is aimed at low-income earners. The loss of skills and experience to the economy is not significant, says Masilela.
Although there is an effective retirement date, seniors do not have to retire to receive the grant. It can be used to supplement savings to boost retirement funding in later years.
For people in a defined contribution environment, in whch individuals carry the responsibility of saving for their retirement, there is no incentive to retire early if you have not saved enough, so there is no need to safeguard against early retirement.