Bringing a first world model to our shores
When we were younger, we were always told by our parents or grandparents that we should never put all of our eggs in one basket. This is great advice, provided that you don’t have to rely on one particular basket of eggs to last you through retirement.
A lot can be said about the above scenario and the fragmentation that can occur when a client spreads worrying about future retirement savings, and dealing with financial commitments such as education, healthcare and paying off assets.
Just how much time and effort do you devote to one cost pressure? And how is the priority of these cost pressures weighted?
Living with a fragmented system
Anne Cabot-Alletzhauser, Head of the Alexander Forbes Research Institute, says that if clients have to take into account that they need to set money aside for major assets (bonds and vehicle finance), short-term insurance, life insurance and discretionary savings on top of providing for retirement, one can see how this battle can get the better of people.
People react to financial commitments in certain ways; while some face these commitments and bravely battle on, there are some who become disillusioned and shelve them in favour of daily survival.
“Individuals and employers have disengaged from the fragmentation challenge. However, employee benefits provide the most effective conduit for personal savings and family protections that an individual will ever have access to. The problem seems to rest with the singular focus on retirement savings as the central theme for long-term savings,” says Cabot-Alletzhauser.
She warns that if there is not a focus on the whole retirement journey, people will become more disillusioned with the challenges they face.
A workable solution
Singapore faced a similar situation in 1965, but they intervened because they did not want to become a nanny state. Cabot-Alletzhauser points out that the Singaporian Government established a system whereby there was a minimum sum for retirement income that people contributed towards every month; government then matched this and encouraged the public to use the rest of the money that they would have put towards retirement savings to cover other costs such as housing, education and medical needs.
She added that this asset based development strategy was seen as a key aspect to self-determination (actualisation), an aspect that ranks highly on Maslow’s Hierarchy of Needs and financial capability development. At the time, housing was seen as a top priority.
Cabot-Alletzhauser points out that if a person were to do this on their own, they would need to set aside 80% of their monthly salary. So let’s plug this into the Singaporean model. Government contributes 20% of the funding towards the minimum determined amount needed for retirement while the member of the fund contributes the other 20%. Government then urges members to distribute the other 40% between the saving priorities that matter the most to them.
Can this work in South Africa?
The merits of this system are undeniable. Today, Singapore has one of the highest savings rates in the world; it also has a consumer delinquency rate (the rate at which consumers will renege on payments or make later payments) of 5.97% and a credit default rate that has remained constant between 0.12% and 0.15% for a number of years. Singapore also rakes amongst the highest in the world when it comes to financial literacy.
There is one glaring problem when one looks at whether such a programme will work in South Africa. Singapore has a singular culture which has similar savings needs, South Africa is a melting pot of cultures where the savings needs of one person will be significantly different to the next.
“This can work in South Africa, but probably not as a government scheme. However, it can possibly be used as an option that employers offer employees,” says Cabot-Alletzhauser.
Is there a demand?
But is there a demand for this in South Africa? This questionwas unpacked when Alexander Forbes collected information for its upcoming Benefits Barometer, which is being released towards the end of July.
Alexander Forbes asked a number of impactful questions which apparently received some insightful responses.
The first question that was asked was: What do people really want, and what can the financial services industry and other role players do to assist individuals and households along their financial journeys?
Another question that was asked was: Is it really meaningful for the average South African to focus so doggedly on retirement savings, when there has been so little focus on an individual’s overall financial journey? Could there be other ways to rethink this?
Editor’s Thoughts:
The responses to these questions will no doubt be insightful and may paint a good picture in determining what challenges the person saving for retirement faces. If you were asked the two questions above, what would your response be? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
- Us people want more financial education given the country's background in terms of various cultures. the more we get told about it the more the psychological effect.
- The time factor becomes critical in starting a saving especially when linked to an event that will take place, retirement. The need to start is greater than education on financial well being as it's continuous. Force us to pay through salary deduction and you will succeed Report Abuse