/ 23 July 2010

Save now and secure the future

There are three contributors to national savings: households, companies and the government, but each saves for different reasons.

Households save to meet future expenses and for retirement, companies save after-tax profit for future expansion and the government needs surplus funds to meet its social and infrastructure commitments.

If we save too little as a nation we seriously undermine our ability to invest in infrastructure, such as roads, bridges, ports and power stations — the assets essential for long-term gross domestic product (GDP) growth.

Right now South Africa Inc is struggling to maintain a gross savings- to-GDP ratio of just 15.4% and households, which are included in that figure, are guilty of not saving. If South Africa hopes to return to the savings and investment boom of the late 1960s and early 1970s, it has to encourage individuals to save. To this end, various organisations and companies in the domestic financial services industry dedicated July to instilling a savings culture.

National Savings Month is about educating individuals about the importance of saving and encouraging households to provide adequately for both short-term emergencies and long-term retirement needs.

“At the individual or household level, saving has to do with risk management,” says Elias Masilela, a board member at the South African Savings Institute (Sasi). “Someone who is sufficiently ‘saved’ will be better prepared to deal with unforeseen circumstances than one who is not.”

Wilhelm Janse van Vuuren, a wealth manager at FNB Private Clients, agrees: “One of the most important reasons to save is to prevent your family from suffering financial hardship.” Short-term savings also make it easier to engage in financial transactions. “Someone who is cash flush tends to get a better deal than somebody with nothing to his name,” says Masilela.

Cash is a fantastic bargaining chip for big-ticket purchases such as motor vehicles and houses. The strict application of the National Credit Act, for example, means that banks now favour mortgage applications by prospective buyers with significant cash deposits.

“We need to get the message across to people that the immediate, visible benefit of saving money is their own financial security,” says Leon Campher, chief executive of the Association of Savings and Investments SA (Asisa). ‘However, another crucial benefit of a strong household savings rate is a stronger economy, job creation and ultimately a lowering of interest rates and inflation.”

One of the most neglected aspects of personal financial planning is saving for retirement. The July 2010 Old Mutual Savings Monitor laments the lack of financial discipline, including the preference of employees to spend their retirement benefits when changing jobs. “This creates a time bomb of individuals who haven’t provided for their retirement,” it says.

The government has a number of incentives in place to encourage savers, including tax exemptions on the first R22 300 (R32 000 if you’re over 65) of interest income in the 2010-11 tax year and concessions for contributions to pension funds, provident funds and retirement annuities. But the financial services community is in two minds about whether these rebates are sufficient to encourage saving.

“In the past eight to 10 years, the government has ‘returned’ approximately R8-billion per annum to individual taxpayers,” says Masilela. But that extra cash hasn’t found its way into savings accounts. Instead, we’ve seen a decline in household savings over the period.

The government has to go beyond incentives to encourage savings. “As the savings institute, we’re asking government to join us in various training and education exercises to change the savings mind-set of South Africans,” he says.

Education is of particular importance because of the shift from defined benefit retirement funds to defined contribution funds. In the past the employer was responsible for meeting stringent financial conditions to provide its pension fund members with a “salary for life”.

Now this responsibility rests on the employee and to a lesser degree the trustees of the pension fund. Another area in which the government hopes to bolster saving among households is through the long overdue national social security system.

The financial services industry is behind any solution that will improve the social well-being of households, provided it is properly researched and sensibly implemented.

A practical and flexible solution could run alongside the country’s already established retirement industry. “If we are forced [through regulation] to contribute a percentage of our income to a central retirement fund, it will definitely contribute to an improved savings pool,” says Janse van Vuuren.

The Old Mutual Savings Monitor reveals, particularly among lower-income groups, an expectation that children or the state will provide support for retirement. This persists despite the desperate plight of old-age-pension grant recipients. South Africa is already cracking under the pressure of paying 12-million welfare grants from the income taxes collected from just five million taxpayers.

This prompted economist Mike Schussler — during a postbudget speech at an event hosted by Absa and the South African Institute of Tax Practitioners earlier this year — to say: “Look at South Africa’s dependency ratio — there are three recipients to one taxpayer and it’s unsustainable.”

“Another of the major problems is our high unemployment rate,” says Janse van Vuuren. There are far too many individuals who are unable to contribute to the national savings pool or provide much-needed revenue to the state.

Rian le Roux, chief economist at Old Mutual Investment Group SA, says: “The burden on future generations of taxpayers is going to go through the roof, especially if we combine the poor savings situation with the bizarre decision to lower retirement ages.

While economies across Europe wrestle with hiking the official retirement age to 70 years, South Africa is forcing this target down from 65 years to 60. “Governments around the world are focused on reducing budget shortfalls and containing debt.”

People worldwide are learning the hard way that governments aren’t going to be able to support them through their retirement. “People will have to care for themselves and this will likely require much higher savings during their working years,” Le Roux says. The plea from organisations such as Asisa and Sasi is for all South Africans to ‘save today and own tomorrow”.