Can the social security reforms really work?
Plenty has been written about National Treasury’s proposed social security reforms. The plan is to implement a national system of retirement savings that would ensure every South African saves towards their own retirement. Although the exact structure of the solution is not yet known we assume that it will involve up to 18% of gross income to a certain salary cap being filtered to a state pension fund. This fund will most likely be administered by the private sector in the form of individual accounts for each pension fund contributor.
One of the main aims of the scheme will be to boost the current dismal levels of national savings and to prevent the loss of pension funds due to early withdrawal of funds. When first introduced these reforms were going to be implemented by 2010; but consensus among major stakeholders is this date will not be met. In the interim some questions are emerging about whether the proposed solution will offer any support to the poorest members of society. Could this be another well intentioned plan that leaves those it hopes to assist in a worse position than before?
Not appropriate for low income workers
For answers to these questions we turn to a recent research report titled Old-age saving by low income South Africans. The report was compiled by Genesis for the Finmark Trust and the South African Savings Institute. It “was prompted chiefly by the current low levels of household savings in SA, as well as recent social security and retirement fund reform initiatives by National Treasury and the Department of Social Development.” Hopefully the investigation will provide further guidance for policy decisions in this regard.
There are a number of hurdles that the intended retirement legislation will have to overcome. The report identifies these hurdles in relation to individual in LSM 1 to 5. The first is that a number of very low earners earn less than the current Social Old Age Grant (SOAG) for their entire working lives… These individuals will never save enough to earn a pension benefit in excess of what is already available to them. In the second category they note that although “low, irregular earners are able to afford to save occasionally; they still have to make significant sacrifices against current consumption needs.” In the third group, low, regular earners can afford to save but again have to make significant consumption sacrifices. And finally the report identifies middle income earners whose major obstacle to saving is behavioural.
The report notes: “LSM1 to 5 represents a large proportion of the South African population. The 2006 GHS indicates that it is comprised of around 20m adults in 8.3m households – 74% of all households in South Africa. 54% of the group is female and the majority reside in non-metropolitan areas (70% or 13.8m people). The average LSM1 to5 household has 3.8 members, only slightly higher than the national average of 3.7. Household size rises to 4.6 for LSM1-5 households receiving the social old age grant (SOAG).” A 2006 FinScope study estimates personal income in LSM 1 at below R300 per month rising to R1 000 per month in LSM 5.
An inevitable behaviour problem
The same FinScope study reveals the extent to which “long-term saving is limited among the poor.” It paints a picture of small savings, usually consisting of irregular lump sums which are immediately drawn against for short-term purposes. Of all those surveyed in the LSM 1 to 5 category only 5% indicated retirement saving as a motivation for their current savings. Instead, emergencies (43%), food (33%), funeral costs (32%) and school fees (20%) occupied the top four slots. And that’s rather a sad observation!
Taking matters further the report concludes that savers in the LSM 1 to 5 population concentrate on savings transaction accounts, with 41% of LSM 5 and 28% of LSM 4 indicating access to such a facility. “Retirement vehicles such as retirement annuities and occupational funds, on the other hand, are hardly used by this group. The figure below shows that usage for retirement annuities and occupational funds is less than 5% even for LSM 5,” says the report.
Intervention will have to achieve the following
The report concludes that the final structure of Treasury’s social security reform will have to be attractive to private savers. Four essential factors were identified… These include:
- Flexibility in contributions to allow for periods of unemployment or other emergencies that reduce income. The report was quick to highlight the need for discipline in contributions via an automatic deduction into a savings vehicle
- Flexibility to allow for some withdrawal of funds during emergencies such as periods of unemployment. (This seems in direct contradiction to one of Treasury’s preferred outcomes – that early withdrawals be discouraged – particularly when one period of employment ends)
- Products need to be relatively low risk, low cost as market fluctuations and changes have a disproportionately negative effect in absolute terms on people with small amounts saved
- It is essential for distribution channels to be low in cost, accessible and trusted
Even if these features could be built into the final solution there is still doubt whether those in LSM 1 to 5 will be able to participate.
Editor’s thoughts:
While browsing through some of the observations and recommendations in this report we couldn’t help but think that the main motivation for Treasury’s social security reform is a bit of a misnomer. There will certainly be long-term benefits from legislated savings; but in the short-term the taxpayer is going to have to bankroll most of the intended beneficiaries. Will we be able to implement social security reforms without making people in the LSM 1 to 5 category wards of the state? Add your comments below, or send them to [email protected]
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