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SA pension system in the doldrums

05 July 2023 Gareth Stokes

If you or your clients are putting your faith in the South African pension system as a safety net for your golden years, then it may be time to rethink your retirement planning strategy. This advice follows the publication of the Allianz Global Pension Report 2023 which, like many other global rankings produced over the years, places South Africa deep in the bottom quartile. The report offers a comprehensive overview of pension system outcomes in 75 countries, from top performers like Denmark, the Netherlands and Sweden to bottom-of-the-table, Morocco; Lebanon; and Sri Lanka.

Friends in poor places…

South Africa sits alongside countries like Cambodia; Kenya; and Kuwait with an Allianz Pensions Index 2023 (API 2023) score of 4.2 out of a possible five, with one being good and five being poor. PS, the API assesses the adequacy and sustainability of pension systems based on three sub-indices and around 40 parameters, each  having a different weighting in a country’s index score. Per the report’s executive summary “Pension reform is back in the spotlight; but although the challenge is a global one, the focus of reform differs: policymakers in industrialised countries are more concerned about sustainability, while those in many emerging markets are faced with the all-important task of broadening the coverage of the pension system in the first place”. The report leads with an overview of the three pillars or sub-indices that inform the API. 

Pillar I is described as ‘basic conditions’ and is informed by demographic change, public indebtedness and general living standards, among others. In other words, the study starts by reflecting on the “structural preconditions that any pension reform has to take into account”. Leaders in this area include Israel, the Netherlands and Norway while the laggards include three of the so-called PIGS (Greece, Italy and Portugal) and China. It turns out that age is a major factor under the ‘basic conditions’ pillar due to the constraints placed on social systems by rapidly ageing populations. PS, France’s recent decision to raise the state retirement age from 62 to 64 years has been met by widespread protest, despite this intervention considered necessary for the long-term sustainability of its retirement system. 

Key ‘age and mortality’ considerations

The ‘basic conditions’ segment of the study drilled deeper into the long-term impact of COVID-19 on life expectancy and the influence of declining birth and fertility rates on average retirement ages. “Record-low births in Brazil, China and Italy point to the possibility that fertility rates could remain permanently lower than expected and thus accelerate the aging of populations even further,” Allianz wrote. In fact, the most recent United Nations’ world population projections expect the share of people aged 65 and older to rise from 10% of the total today to 17% in 2050. This share is set to double in Asia and Latin America, from 10% to 19%, and reach 24% in North America, Australia and New Zealand. Europe, meanwhile, is sitting on an age timebomb, with their 65-plus age group forecast to expand from 20% to 29%. 

“These numbers underline the importance of preparing pension systems for demographic change to guarantee their long-term financial sustainability and avoid overburdening future younger generations,” Allianz said. They noted that Africa was in the ‘sweet spot’ of the demographics curve with the share of people older than 65 years expected to reach a modest 6% by 2050. Unfortunately, the percentage of working age people is offset by the dearth of economic opportunities evidenced as high levels of unemployment in many countries. High unemployment is a major constraint to pay-as-you-go pension systems in which the workforce funds the pensions of current retirees. Solutions, according to Allianz, include raising retirement ages and / or reducing state pension benefits. Ironically, South Africa’s most recent decision was to reduce the age hurdle for the State Old-age Grant to just 60-years. 

A need for capital-funded elements

Pillar II is focused on sustainability or an “assessment of how well a pension system can cushion the impact of [the aforementioned]demographic change”. The best performers in this sub-index are Egypt and Indonesia, “mainly thanks to increases in their retirement ages and the introduction of capital-funded elements into their pension systems”. Sri Lanka and the United Arab Emirates, meanwhile, sat at the bottom of the pile on this measure. Their poor performance on this sub-index were explained by low retirement ages and failure to introduce incentives to delay retirement. 

Retirement ages in Egypt averaged at 60-years for men and women compared to Sri Lanka at 55-years for men and 50-years for women. South Africa comes in at 60-years for men and women. However, the official retirement age is not the main rating factor under this pillar. Allianz mentioned: “capital-funded elements; incentives to postpone retirement; and the introduction of demographic factors in the adjustment of retirement benefits” alongside age. 

The third pillar derives from “the adequacy of pension systems, by questioning whether they provide an adequate living standard in old age”. According to Allianz, key performance indicators in this sub-index include access to financial services, benefit levels and the integration of older workers in the labour market. Denmark and the Netherlands top this segment, with Laos and Uzbekistan at the bottom. In the latter countries, “coverage of the workforce population is comparatively low [while much] of the population has no access to financial services”. South Africa does not fare too badly on an access to financial services measure; but it performs rather poorly on the ‘old-age as savings motive’ measure. 

Whether a country’s pension system provides an adequate standard of living in old age was identified as an important measure under the adequacy heading. Allianz used International Labour Organisation (ILO) standards to set benefit ratio targets from a pension system of between 40% and 60% of an average wage. Using OECD statistics, they commended Brazil for having one of the most generous pension systems worldwide, with a benefit ratio of around 89%. South Africa, which pays a State Old-age Grant of just ZAR2 080,00 per month was among the worst performers with a gross benefit level of just 15%. 

More formal sector jobs; better pension system outcomes…

“The 2023 Allianz Global Pensions Report findings suggest that most pension systems lay greater emphasis on the well-being of the current generation of pensioners than on that of future generations of tax and contribution payers,” warned Allianz. They advocated for “a strong capital-funded pillar” to guarantee a more sustainable and adequate pension system before suggesting that pension reforms had to start with labour market reforms. “Without increasing the share of people in the formal labour market in emerging economies and fostering the integration of older workers in the labour market in industrialised economies, even well-intended pension reforms will yield only meagre results,” they concluded. 

Writer’s thoughts:
A few years back, SA was all about comprehensive social security reforms. National Treasury seems to have put these reforms on the back burner as it struggles to reconcile the growing number of grant recipients and shrinking tax base. Do you think SA will ever have enough resources to pay a ‘living wage’ to its State Old-age Grant recipients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comments

Added by Sanele Nyoka, 05 Jul 2023
I am not sure about this research as it seems to conflate private pension schemes with non - contributory state pension scheme. In my view the two-pot system will put a lot of pressure on the state system if most contributory scheme members dip into their savings, especially considering the longevity risk. for a developing economy, i think SA's pension system is out there with the best in the world. For old age pensions, there can never be enough resources considering we pay young unemployed people stipends.
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Added by Paul, 05 Jul 2023
No, given the current trajectory I do not think SA will ever have enough resources to pay a 'living wage' to its State Old-age Grant recipients. This is a ticking time bomb.
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