The anticipated 1 September 2024 introduction of the so-called two-pots retirement system changes the rules for South Africans saving towards retirement; but it does not alter the macroeconomic or social environments in which households save. Nor does it substitute for good, timely financial advice. These truths were on naked display during the ninth edition of Critical Conversations, a thought leadership series by Sanlam Investments.
In its latest iteration, the asset manager assembled a panel of experts to tackle some of the fundamental questions arising from the looming two-pots implementation, including why South Africans struggle to save for their retirement. The experts offered up a range of obstacles to optimal savings outcomes including the cost of living, financial education and the glaring differences between formally and informally employed individuals, not to mention the pervasiveness of the country’s unemployment statistics.
The 41% unemployment debacle
“We have a 41% unemployment rate, and most workers support up to seven relatives,” said Matthew Parks, Parliamentary Coordinator for the Congress of South African Trade Unions. He also lamented the ongoing higher-than-inflation increases in the basket of goods and services that most households consume.
Anne Cabot-Alletzhauser, Co-founder of the Responsible Finance Initiative at GIBS, said there were many factors that make it difficult to save, and many stakeholders that shared the blame for poor outcomes. “The politicians are complicit for opening up the floodgates to credit; the financial services industry is complicit in terms of how they treat debt; and yes, the consumer is involved,” she said.
It turns out that the psychological factors driving human behaviour are important too. According to adult development and leadership psychologist Dr Mavis Mazhura, you have to think about how emotional debt contributes to financial debt. One of the biggest mistakes made by generations emerging from poverty is to equate money to self-worth. “People are using money as a coping mechanism to try and fill up the gap [that develops from shortcomings in] self-value and self-worth,” Mazhura said. Could this be why the average South African household is diverting around 75% of monthly income to service debt?
Panel host Lerato Mbele asked whether there was any link between households’ sub-par financial management and the apparent mismanagement of the broader economy. The sentiment was that if the government could run a huge deficit and maintain a debt-to-GDP ratio of 75% or higher, then why not the populace? “I am not sure whether South Africa has a money problem or a money management problem because whether you are looking at the state or the citizen, there is heavy indebtedness in the country,” Mbele posed. But the panellists were not too enthusiastic about the comparison, preferring to delineate the roles of consumer and state.
Economic explainer … from a trade unionist?
“The issue about foreign investment has to do with the fiscal responsibility of the government, not the fiscal responsibility of the citizen,” countered Cabot-Alletzhauser. But it was left to the trade unionist on the panel to offer an economic explainer. According to Parks, much of the debt carried by the state had been incurred to stimulate the economy, though he conceded that ‘corruption on a massive scale’ had exacerbated matters. “There is a consequence to workers and to consumers [due to corruption and loadshedding] because the economy is not growing, salaries are stagnant and jobs are not being created,” he said.
The conversation steered towards addressing South Africa’s over-spending, under-saving paradigm. “If you are a country that does not have the fiscus to support a grant-based economy, then you have to create a vehicle that allows you to train your citizens to [play their part in] an asset-based, development economy,” Cabot-Alletzhauser said. The message was that the government did not have the financial means to pay for retirement in addition to meeting social protection requirements in areas like education, health, housing and security. In this context, retirement is left to the individual; and the solution is to think differently about each paycheque from day one.
The panellists challenged conventional retirement thinking. Firstly, they suggested that monthly income be utilised to generate the maximum impact given an individual’s lens of responsibility. Secondly, the employed had to think of ways to earn an income beyond retirement. And finally, households had to appreciate the difference between income and wealth generation. “Income generation takes care of the short term; but when you are making decisions about wealth accumulation over the period of your employment, the decisions change,” Parks said.
A ridiculous, irrelevant retirement funding model
Another panellist took a tougher stance, declaring that today’s retirement model was irrelevant in the world we live in. The question becomes how to design a retirement system that helps the poor to escape poverty while simultaneously encouraging wealth building? One solution could be to align taxation and retirement funding allocations with individuals’ lenses of responsibility. However, it does not matter how creative you get with retirement solutions if the economy is stuttering along. “We have to grow the economy; we have to reduce unemployment; and we have to improve wages because the social package is important. … it prevents society from imploding,” Parks said.
It took some time for the discussion to wind its way to the two-pots retirement system, and when it did, the audience poll threw a proper spanner in the works. It turns out 45% of the audience felt two-pots would do nothing to address inadequate savings in South Africa, with 29% indicating they were not sure, and the balance saying it would definitely change outcomes. This was an interesting result given the obvious behavioural change the new regulatory structure would enforce, most notably the ring-fencing of a full two-thirds of retirement funding contributions from 1 September. Under the new regime, savers will no longer be able to access 100% of their capital when changing jobs.
The challenge, it seems, is getting individual savers to understand the system that government and other interested stakeholders have worked so hard putting in place. Cabot-Alletzhauser suggested that hands-on financial advice was a far better solution than financial literacy. “The component that is most in need of fixing in this country is financial advice; we have not spent enough time helping people to understand the consequence of taking one path versus another,” she said. In other words, more attention should be given to direct communication with individuals about the consequences and outcomes of their saving and spending decisions.
Advice first, then start the savings journey
Cabot-Alletzhauser argued for financial advice at the start of the retirement journey, and not only at the date when savers exit their retirement saving structure as currently required. The panel moderator warned that this starting advice should go way beyond the once-standard life policy plus RA spiel. Dr Mazhura, meanwhile, advocated for independent financial advice, and said the real challenge would be finding this advice for households earning less than R15000,00 per month.
“There is no access to financial advisers for low-income households; they are left to their own devices [and] by the time their income increases they have already made too many financial blunders,” she said. “Having access to independent financial advisers early on in life will help with financial self-determination.” For the final word, we turn to Manka Sebastian, Portfolio Manager at Sanlam Properties. “The two-pot system is an acknowledgment of putting people at the middle of their decisions; going forward we are going to see progress in using finance in an innovative way to create people-driven solutions,” she said. And that, dear reader, is enough for one newsletter instalment.
Get your two-pots news here
Upon post-event reflection, this writer felt that while the latest Critical Conversations event took a deep dive into issues around retirement, it was rather ‘light touch’ on the implications and impact of the two-pots system. Readers who are keen to know more about two-pots should sign up for an upcoming FAnews and Old Mutual webinar titled, ‘The Two-pot System and Your Practice.’ We hope to see you on 18 July.
Writer’s Thoughts:
The two-pots solution will not fix everything that is wrong with South Africa’s retirement system, but it will definitely improve long-term outcomes. Do you agree or disagree? And how would you tweak it to optimise retirement funding? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
Comments
Added by Paul , 01 Jul 2024My 2c worth is that there should be access to retirement funds only in the event of major disability and this should be non taxable, assuming that there is no cover already in place.
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