Rainy days, or a rosy view?

South Africans don't save, or at least that is what the data always reflects. But with the financial services sector continuing to boom and the domestic pension industry ranked among the top 15 in the world, one cannot help but wonder whether the numbers reflect the true picture.

The national accounts show households had virtually no net savings in 2012. But in reality households could be saving many times more than that. The difference is in the definition, and whether or not you count pensions.

The Reserve Bank says the savings of the South African economy as a whole amounted to 14% of gross domestic product in the first quarter of 2013, an unimpressive figure compared with peer economies such as Argentina, which, according to World Bank data, had a savings rate of 22% in 2011. Mexico's rate was 27% and Russia's was 30%.

This is largely attributed to the corporate sector, which continues to contribute the most to national savings while the government, which is instituting countercyclical measures, is spending more than it brings in.

The savings rate of South African households is almost as bleak — Reserve Bank data shows a household savings to disposable income ratio of zero percent.

"The concern is that for South African households, the net savings ratio is extremely small, sometimes even negative," said Johan van den Heever, head of economic reviews and statistics at the Reserve Bank.

South Africans save pension
But Johann van Tonder, an economist at Unisa's Bureau of Market Research, said South Africans did save — but only if one considered their contributions to the pension industry as savings.

Van Tonder said the system of national accounts, an internationally prescribed accounting system to organise and develop macroeconomic indicators, used a method that looked at savings as a surplus or a deficit.

According to that method, savings were the money in the bank after consumers had paid for everything else, including contributions to retirement funds and purchases of annuities.

Van Tonder said another way to assess savings was to look at it from the household's point of view, namely the cash flow or consumer budget way.

"In this context, we use recurring income [cash inflows from income sources] as opposed to disposable income, and we also term contributions to retirement funds and purchases of annuities as savings."

Total contributions of employers and employees to retirement funds, and consumer contributions to annuities and group pension funds amounted to about 16% of a household's disposable income in 2012.

Not enough
That amounted to a total of R311-billion, up from R263-billion in 2011, and, as a percentage of recurring income, was 14%.

But Van Tonder said it was not enough.

"The amount we should save as consumers is estimated [by using the Bayesian probability theory] to be around 23% of recurring income. That means a shortage of approximately R196-billion. Put differently, we consume R196-billion too much, which should have been apportioned to savings."

Forced pension contributions are a characteristic of formal sector employment, which, according to the latest quarterly employment statistics produced by Statistics South Africa, accounts for 8.4-million jobs — about 16.5% of the population.

A recent MasterCard survey of consumer purchasing priorities found retirement is a top driver for putting money aside and 47% percent of South African respondents said they were saving for their retirement. But only 24% of Kenyans and 31% of Nigerians do.

Both Van Tonder and Van den Heever agree there are distributional problems when it comes to savings in South Africa.

Van Tonder said most of the savings probably flowed from middle- to high-income households, but there was a lack of data about this.

"In real life, there are quite a number of people who save quite a bit, but the aggregate figure is low," Van den Heever said.

The problem
Van Tonder said the importance of saving was not taught at school and "conspicuous consumption is rife in South Africa. Consumers fall easily for adverts and, because regulations make it more difficult to save, they will rather purchase."

But Andrew Fulton, a partner at Eighty20 Consulting, said South African banks also didn't encourage savings.

"Banks overseas don't charge the high bank fees that South African banks do and a bizarre South African practice like charging a client to deposit money would just not be tolerated in another country.

"Banks overseas can't rely on hundreds of millions if not billions of rands per annum in bank fees as South African banks do, so they rely more on using deposits wisely to make money, which should encourage deposits."

Mike Schussler from Economists.co.za agreed that banks offered no incentive to save. "The way it is going, it is much better to have money in a pension account."

But Van den Heever said puting all one's savings into cash in the bank was a very misguided way of organising one's savings and that, although there were always complaints about high bank charges, consumers had choices. He said there are a number of alternatives and banks don't have the monopoly.

Taxes make things difficult
Chris Hart, economist and chief strategist at Investment Solutions, said taxes made alternative methods of saving difficult, too.

"It is not lack of will but policy making it more worthwhile to have debt — and that can't be a good thing," he said.

"Taxes, namely capital gains tax, property transfer costs, death duties, dividend tax, tax on interest earned, are all inhibiting household savings or capital formation … We don't need incentives, as such. We need these hindrances taken away first."

Van Tonder agreed: "By taxing savings [returns on investment], the national treasury makes it easy to decide not to save — taxes became sort of a swear word — whilst the taxes on retirement fund returns will also make it difficult especially for the middle-income group to survive with their pensions after retirement.

"By taxing savings in a savings-poor country, the national treasury creates a problem for themselves as they first disincentivise a consumer to save and, when consumers do not have sufficient savings at retirement, they look to the treasury to provide them with grants, which in turn necessitates more taxes." Hart said low interest rates also made it more worthwhile to borrow money and spend it than to save it.

"Low interest rates and high inflation place people dependent on interest income under a lot of pressure. Inflation hampers wealth accumulation and people who assumed they had provided adequately for their retirement often find this is not the case."

A long-established pensions industry does show South Africans have a culture of saving and even the poorest of the poor make attempts to save — the more than 89 000 stokvels operating in South Africawere a prime example, according to Hart.

The FinScope South Africa 2012 Consumer Survey shows that the number of people who belong to a stokvel increased from 2.1-million in 2004 to 3.6-million in 2012.

With household assets in the country amounting to R7.8-trillion and household debt at a favourable level of R1.5-trillion, "it's not a bad story", Van den Heever said. "In a way, people have been investing more than they have been borrowing, but that is just the aggregate picture."

One thing South Africans do invest in is housing, according to Schussler, who said 70% owned their homes.

Although this is not counted as savings by the Reserve Bank, it is not considered as consumption expenditure either. Rather, houses are capital assets — durable assets that deliver a stream of services to households.

"So if you build a house, the construction cost is part of gross fixed capital formation and it adds to the capital stock of the country. Expenditure on the building of a house is not considered to be consumption," Van den Heever said.

"However, if you live in your house, the service that that house renders to you — rent — is considered as part of production in the economy and simultaneously as part of consumption."

The purchase of cars for personal use and the acquisition of all other kinds of durable goods, such as TVs and furniture, were treated in the national accounts as household consumption.

But, Van den Heever said, if a business bought a vehicle, it was considered fixed capital formation (or a fixed investment) in the national accounts.

Schussler said vehicles were a form of investment that was often not considered.

"There are more than 10-million vehicles on the roads, about two-thirds of which are paid off. While subject to depreciation, a vehicle tends to have some form of value after paying it off, which is not captured as savings.

Why save?
Hart said the macroeconomic reason for saving was that South Africa needed people to be taking risks in the economy. "We need two to three million new small businesses to solve the employment problem … effectively we need resources embedded at individual level.

"It all reduces the ability of South Africans to build up capital, which is a critical resource needed for growth of the country. We need households to be empowered to start small businesses, where jobs will come from," Hart said.

"Given all this, saving in an economy that is savings deficient is essential to overcome some of the macroeconomic challenges such as unemployment. In addition, increasing savings is an essential part of reducing the risk associated with retirement."

Investment, Van den Heever said, meant real fixed growth capital formation — residential buildings, construction works, transport equipment, general machinery and equipment.

"That's the kind of investment we want — fixed investment from all quarters into productive assets."

The whole point of financial savings was that the money was channelled and ended up in fixed capital goods, he said.

Credit extension
"To get the real picture, we have to unpack credit extension … consumers in South Africa are not saving at all," said Peter Dempsey, deputy chief executive of the Association for Saving and Investment South Africa (Asisa).

He said South Africans were spending more than they were saving, and credit extension should be considered when calculating the savings rate.

"An emerging middle class previously without access to consumer goods and financial services is continuously borrowing for consumption instead of saving in order to bridge the lifestyle gap," said the Asisa chief executive, Elizabeth Lwanga-Nanziri.

"Easy access to credit is as a much a disincentive to save since consumers can close the resource gap through credit facilities. At the same time, debt and the accompanying repayment obligations can stifle savings."

"The point is that credit allows you to consume now and save afterwards," Van den Heever said.

But buying capital assets through credit was also a way of saving, Van den Heever said. Loan repayments in the years after obtaining finance drained cash flow, forcing people to consume less out of their income — more perhaps than they would ordinarily put into savings.

According to the PwC South African 2013 banking survey, despite concerns that the consumer is under pressure, the ratio between household debt and disposable income in South Africa has declined consistently since 2008, from a level of 82.3% to 74.7%.

South Africans are saving more than you think
July is national savings month and financial institutions have used the opportunity to remind consumers that they don't save enough — and how important it is to do so.

But South Africans may not be as bad at saving for the future as is widely thought.

Johan van Tonder, an economist at Unisa's Bureau of Market Research, says if contributions to pension and retirement funds are factored in it brings household savings up from almost nothing, as recorded in the national accounts, to more than R300-billion last year — up from more than R260-billion in 2011.

However, whichever way you look at it, financial experts agree South Africans could save more. But they point out that there are a number of deterrents, ranging from inadequate financial education to low interest rates and easy access to credit.

And, of course, a high unemployment rate brings the aggregate savings rate down too.

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