South Africans don’t save nearly enough. The actual contribution to savings by the country’s households as a percentage of gross domestic product slipped into negative territory recently. Insufficient savings today means these households will be dependent on their families or the state in the future.
“We need to understand that savings are the foundation of a successful growing economy, creating certainty and financial independence for its people,” says Derrick Msibi, managing director of Investment Solutions, a multimanager that oversees 1 900 retirement funds. He has proposed some radical steps to improve the national savings rate. His first idea is for the treasury to raise the ceiling for tax exemptions on interest income.
The interest on a R400 000 money market deposit already exceeds the 2010-11 R22 300 limit. Homeowners can offset cash savings against their bonds and earn tax-free interest, but the rest inevitably succumb to the spending urge.
Msibi says a punitive “super VAT” on luxury consumables might address this. His second plea is to financial services companies to run aggressive awareness campaigns on tax concessions for contributions to retirement annuities and other long-term savings products.
“Savings institutions should run a concerted campaign alerting citizens of the legitimate deductions available in the income tax every year,” he says. There are two major obstacles to consistent savings. One is the high level of debt, thanks to the proliferation of mortgages, credit cards, store cards and other short-term financing facilities, resulting in a debt-todisposable income ratio of near 80%.
Yet the Old Mutual Savings Monitor, a survey of spending habits of 1 000 metropolitan households, concludes that debt-free individuals don’t save more. Another is the preference among local consumers to use spare cash to cover living expenses.
Mark Cunningham, head of financial planning at Imara Asset Management, believes savers should be encouraged to achieve their savings goals rather than splurging on unnecessary items. “Macroeconomic indicators may look good,” says Cunningham, “but many families are only now beginning to get on top of their creditcard debt and other obligations.”
He says households should maintain the tight financial discipline that helped them to survive the recent recession rather than rely on a softening credit market. “Many families have reviewed their lifestyles and started to save because of the dramatic wake-up call they received during the financial crisis,” he says.
Cunningham compared spending R10 000 on a discretionary item such as a plasma TV with a sensible savings-based alternative. His calculations showed: R10 000 spent on a plasma TV, paid off over 12 months at 17%, would add R900 to a family’s monthly expenses and cost R10 790. By comparison, R900 invested for 12 months at 10% annual growth would grow to R11 300 by the end of the first year.
Left to grow, without adding any contributions, the investment would be worth R18 592 after five years, R30 590 after 10 years and R82 809 after 20 years. The challenge is to educate South Africans on the importance of saving, and the financial instruments that can help them achieve their savings goals.