The dependency cycle needs to be broken

Lynette Nicholson, a Research Manager at Old Mutual

July was national savings month, a month that highlights the fact that there is an urgent need for South Africa to improve its savings culture.

Improvement in the country’s savings culture is critical to addressing South Africa’s challenges of economic growth and the uninsured gap that exists in the country. 

Old Mutual released its annual Savings and Investment Monitor. The 2018 version showed that there a few developing trends related to the country’s current savings culture. 

An issue of confidence

Lynette Nicholson, a Research Manager at Old Mutual, pointed out that the country’s savings culture is directly related to the confidence within the country. 

“One of the questions that we ask during the survey into the Saving and Investment Monitor is if people feel confident about the South African economy. In 2016, only 31% of people said that they were confident in the economy. In 2017, this figure was 34%. There were a few bad years in savings terms. This year, 43% of the people we surveyed said that they were confident about the state of the country’s economy, and it shows in that there is a slight increase in the country’s savings rate,” said Nicholson. 

She added that there is even an increase in the country’s business confidence index which jumped from 34% in the first quarter of 2018 to 45% in the second quarter. 

Household spending habits

There is also a decrease in the household debt to income ratio. This means that households are getting more serious about servicing debt. 

“According to Old Mutual Research into the spending habits of households, the research showed that 67% of a household’s monthly income goes towards consumption and living expenses. The research adds that 13% of a household’s monthly income generally goes towards servicing debt while 14% is put in savings. Only 6% of a household’s monthly income is spent on insurance and medical aid,” said Nicholson.   

Education is proving to be a significant problem. The research shows that only 43% of the households that participated in the survey were actively saving for their children’s education. 

In 2010, this figure was 63%, so a 20% decrease in eight years suggests that the challenges that households face are significant. 

Dependency is a problem

Dependency is a problem in South Africa as many families see their children as their retirement plan and rely on them for support. 

“This trend continued in 2018 as the Old Mutual research shows that 38% of the survey’s respondents said that their children should look after them when they are old. The research adds that this is particularly rife in households that earn below R6 000/month where the dependency ratio is 41%. Households that earn more than R40 000/month only have a dependency ratio of 24%,” said Nicholson.

A scary statistic released by Old Mutual is the Government dependency ratio. Thirty two percent of the respondents to the survey believed that Government will take care of them if they are unable to take care of themselves. Again, this is more prevalent in households that earn less than R6 000/month where the government dependency ratio is 50%. 

Living expenses

With a high debt to income ratio, South Africans are being forced to cut back on living expenses; more so than last year. 

The research shows that lower income groups are spending less money on airtime and data to cope with increasing debt levels. Higher income groups are also spending less money on airtime, but are also spending less on electricity, groceries, holidays and DSTV. 

“There is also an increase in shopping at cheaper supermarkets or changing to cheaper grocery brands. We expect this trend to increase in the future,” said Nicholson. 

According to the Old Mutual research, a large portion of respondents pay bills late or miss payments when income and expenses do not meet. This is particularly prevalent in households that have an income of between R6 000/month and R13 999/month. 

For households that have an income of over R20 000/month, the coping mechanism when income and expenses do not meet is to take out a personal loan. 

Editor’s Thoughts:
We all have different coping mechanisms during tough economic times. However, the dependency ratio that exists in South Africa, both on families and the government, is problematic. While not a lot of income is being spent on insurance, these products help break the cycle of dependency. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.