Contending with inflation, stagnant incomes and a soaring cost of living, middle-class people need to plan carefully for when they stop working. (Getty)
A 2023 study by the UN University World Institute for Development Economics Research on “The domestic savings shortfall in developing countries — what can be done about it?” found that only 19.8% of people above statutory retirement age receive a pension in sub-Saharan Africa and just 8.9% of the labour force is covered by pension schemes.
This is much lower than the global average where 77.5% of people above statutory age and 53.7% of workers have pension coverage. The middle class in Africa is at the centre of this crisis, with a decline in disposable income, limited savings and little to no fixed capital formations.
Across the African continent, unemployment is sky high and real wage growth has remained stagnant over the last two decades, showing little sign of recovery, based on prevailing macroeconomic trends. Taxation rates, over time, have increased and further reduced the income of the middle class.
Inflationary pressures have also been on the rise, driven by rising global energy and commodity prices. Climate shocks caused by global warming are wreaking havoc on public infrastructure and changing weather patterns are causing droughts in parts of Africa and heavy rains are submerging farmlands in other parts.
Along with climate change, we have also seen disruptions from the pandemic and geopolitical instability in Ukraine, Gaza and elsewhere, affecting supply chains, placing upward pressures on prices and accelerating the erosion of disposable income.
These factors have combined in an insidious manner that has made it much harder for middle-class families to balance their budgets. Many have turned to credit cards and other short-term borrowing instruments, leading to spiralling debt and rampant default.
Take the case of South Africa, where many people are at risk of not maintaining their standard of living during their retirement years. According to a 2023 study by the Association for Savings and Investment, only 6% of economically active South Africans are going to retire comfortably — that is just six people out of every 100. Half of the adult population has no retirement plan at all.
These are alarming statistics, requiring significant policy interventions. This brings into question recent policy directions taken to allow drawdowns on the savings component of retirement funds in the “two-pot system”. In essence, from 1 September 2024, retirement funds in South Africa will be split into two parts, a savings component and a retirement component. The proportion in the savings component can be withdrawn as cash preretirement, while the retirement portion is preserved till retirement age.
In a political economy shaped by stagnant wages, rising food costs, high energy prices, climate change and geopolitical instability, the future appears grim for middle-class families. These factors mean disposable incomes will be under increasing pressure, insufficient to cover current requirements with little left for saving and, importantly, securing retirement needs.
So, what is disposable income and why does it matter?
Disposable income refers to the proportion of an individual’s or household’s income remaining after deductions for tax and other mandatory payments required by law. There is discretion on what that remaining income can be spent on, hence it being called “disposable”. The challenge faced by the middle class relates to the fact that this disposable income is insufficient to cover their lifestyle requirements, short-term savings needs and retirement investments.
Servicing basics, such as mortgages, healthcare, educational costs, credit card debt, transport and food takes up, in some cases, 90% to 100% of this disposable income and has pushed millions of middle-class families around the world into a debt spiral.
What about the impacts on marginal propensity to consume?
Marginal propensity to consume (MPC) measures the portion of disposable income spent after it has increased. As an example, should an individual receive an increase and their disposable income grows by, say, R1 000, then what proportion of this increase is consumed, and how much is saved or invested for future needs? In an environment where all disposable income is spent paycheck to paycheck, the MPC is 100%.
The pay rises received by most workers around the world have not kept up with inflation, suggesting the long-term trend lines are upward facing for the MPC ratios and downward trending for the disposable income factor.
What is the way forward?
The 2023 International Monetary Fund Annual Report refers to a cost-of-living crisis as countries battle high inflation and high commodity prices and seek more IMF intervention. The report contends that governments are struggling to manage rising food and energy prices while dealing with core inflation because of the reduced policy spaces and depleted sovereign reserves caused by pandemic relief expenditure.
Sub-Saharan African countries need access to lines of credit to finance sound policy interventions that will place their economies on sustainable paths to recovery. A constrained macro-economic environment will only serve to exacerbate the economic situation of the middle class.
Faced with stubborn inflation, stagnant incomes and rising costs of living, the middle class has to make critical decisions about conserving disposable income and increasing retirement savings. Families should evaluate lifestyle choices, explore income diversification, reduce debt levels and consider delaying big-purchase items, such as new cars.
More importantly, they need to speak to an experienced and licensed investment advisor and design an investment and retirement plan which balances both current and future retirement needs.
Dr Mthandazo Ngwenya is an international development consultant and business executive.