My domestic worker is adamant that she would rather save to build a house in her village than invest in a retirement product. The only other savings she has are for her son’s education.
She is far from unusual. Old-Age Saving by Low-Income Earners, a study conducted by Genesis Analytics for FinMark Trust and the South African Savings Institute, confirms that housing and education are priorities for low-income earners.
These findings challenge the notion of compulsory savings that government is reviewing as part of its pension fund reform process. Before introducing a new pension and social security system, government needs to understand how people save now and the effect that compulsory savings would have on the priorities of low-income earners.
Rob Rusconi, a technical adviser to FinMark Trust and consultant to government’s inter-departmental task team on pension fund reform, says the findings have made him think.
“We need to think what this means in terms of what we do [with the pension fund process]. Housing and education are a non-negotiable expense.”
They are also priorities across all income groups. Sunel Veldtman of Barnard Jacobs Mellet Private Client Services says that among wealthier households the money spent on private education is often equal to what people should be saving for retirement and could be contributing to South Africa’s low savings rate. However, wealthier households have more scope to save than poorer households.
Rusconi says it is a fallacy to believe that education is free. He says none of the people who took part in focus groups for the study thought it was. To provide their children with a decent education they either had to pay school fees or buy text books.
The study showed that while some people saw educating children as an obligation, others regard it as a means of providing for an uncertain future by equipping children with the power to work and earn.
Moreover, according to the study, most people see housing as a valuable, tangible and even flexible means of providing for an uncertain long-term future. So it is not surprising that the take-up of existing long-term savings products, such as endowments, is low. They do not have the flexibility to put disposable income away as and when it is available, nor are people able to access these savings in an emergency.
Community saving was also highlighted as central to savings behaviour in this income group. My domestic worker would rather pay R200 a month to a burial society than receive the same cover for about R20 a month in a commercial funeral policy. The study says these insurance and informal savings agreements make themselves less affordable because “informal insurance arrangements tend to use up any excess cash”.
While this might appear to policymakers as irrational, one has to understand the social drivers behind these decisions to realise that they are not only rational but also add to a sense of belonging and wellbeing.
My domestic worker sees her contribution as a vital role in her community and also as an important part of her social network because she attends meetings weekly.
The study shows that many low-income earners readily contribute to the immediate needs of their neighbours in the knowledge that they are likely to benefit in turn during periods of difficulty. “There is a sense of sophisticated financial management of those that have very little,” says Rusconi, adding that these communities have a natural insurance system that policymakers have no concept of.
Many people partake in stokvels or grocery plans, contributing monthly to a savings pool that is used to buy groceries at the end of the year or to pay school fees.
As a result, short-term savings tend to be relatively high, but long-term retirement savings are extremely low. The study showed that in the lower income groups of people represented by Living Standards Measures (LSM) 1 to 5, about one-third of working-age people save, but only 5% of them say they save for retirement. Most savings go towards emergencies, food, funeral costs and school fees.
The study showed that the average personal income in every category from LSM 1 to 5 is lower for Âworking-age members than it is for their retired counterparts who receive the state old-age pension, now R940 a month. Forcing savings would therefore worsen other, very important, shorter-term needs.
“What concerns me is that a caring and informed policymaker could damage this structure. These are people who know how to work with a few rands. They are wiser than you think,” says Rusconi.
Considering that the largest portion of the population falls into LSM 1 to 5, the effort going into a new compulsory savings system might not be worthwhile if they exclude this group.
The report also recommends that savings need to be defined more broadly. It says “the conventional cash-based definition of savings, as understood … in terms of contributions to a policy, unit trust or government vehicle, seems to resonate little with poorer people, who value the more tangible aspects of saving in the form of incremental housing or education”.