/ 10 February 2012

Retirement tax cap is short-sighted

In the 2011 budget address, Finance Minister Pravin Gordhan announced that the treasury was considering a R200 000 cap on the tax that can be deducted for retirement savings. It is widely expected that this will be addressed in his budget speech on February 22.

The retirement finance industry has raised concerns about the cap because it penalises high-income earners who may be accelerating their retirement funding in their latter years.

But the real argument is that restricting national savings hurts the poor and the treasury is confusing two policy directives.

The National Planning Commission’s “Vision 2030” paper states that South Africa has to increase fixed-capital investment significantly, but, “given the country’s low savings ratio, capital is relatively scarce”.

South Africa needs more savings to generate the investment capital to grow the economy and create jobs. Our households save less than 1% of their income. As a result, South Africa is heavily dependent on foreign investment flows to fund investment in major projects. For example, last month, the South African government raised $2-billion on global capital markets.

International funding costs are determined by the vagaries of the market and influenced by our notoriously volatile exchange rate, international perceptions of South Africa and the general risk rating of emerging markets. In a global credit crisis, access to this type of funding dries up — and so do any major capital projects.

Fickle equity markets affect our currency
The inflows and outflows from our bond and equity markets are notoriously fickle and add to the volatility of our currency. The high participation of foreign investors in our markets increases the volatility and also means dividends are expatriated, negatively influencing our current account balance. But we remain highly reliant on this type of funding. Higher local savings would reduce the relative percentage of foreign investment and its potentially destabilising effects.

The ideal funding pool for large capital-expenditure projects is retirement money because of its fixed-term nature. A person investing in a retirement annuity, for example, cannot touch those funds until retirement, which means the length of investment is clearly defined.

Retirement funds are the biggest investors in government bonds and large shareholders on the JSE. Dividends and income are all reinvested in the fund and not transferred offshore or spent. The more money is held by retirement funds, the more we have available to create jobs and develop the economy.

There has to be an incentive to convince investors to lock their money in for a specific term, which is why the government provides a tax incentive for retirement funds. Telling someone that they are “too rich” to contribute to our retirement savings is short-sighted and politically motivated, rather than focused on creating real growth and employment.

It would be a worthy exercise for the treasury to calculate the cost differential between local and foreign funding over a 20-year period to decide whether the saving on interest and dependency on foreign capital outweighs the lost tax revenue.

Treasury may also want to consider that retirement funds are not the big tax dodge that it supposes. As any private bank will tell you, many self-employed, high-income earners do not use retirement funds as a tax incentive because they can often structure their taxes more efficiently.

Our tax tip for Gordhan is to look at the big picture and encourage the wealthy to save in fixed-term investments so that their wealth can be used to invest in South Africa’s future.

Finance minister Pravin Gordhan faces a stern test when he delivers his 2012 budget. View our special report