BUSINESS NEWS - South Africans are notoriously bad savers. Our household savings ratio has been negative for most of the past 10 years, meaning that we are borrowing more than we put away.
This is a significant problem for the country, as our gross domestic savings rate is below the levels needed to support sustainable economic growth. It is also a risk to individuals and families, as most of the population has no financial safety net.
“All of our middle class, and even many in the upper class, are one unfortunate incident away from poverty,” independent actuary Rob Rusconi told the Alexander Forbes Hot Topics Summit in Cape Town on Wednesday. “In other words they are cutting it very fine. They have enormous potential to fail.”
Why are we such bad savers?
The question this raises is who should be taking steps to address this issue. The government already provides some social protection in the form of disability and old-age grants, but it can do little more. The national budget is stretched as it is.
Of course people themselves should be saving more, but Rusconi suggests that they aren’t getting the right encouragement to do so.
“One of the reasons that we have such a poor savings culture is that we save badly,” says Rusconi. “Another is that we don’t have the appropriate incentives to save. Rationally, we don’t get what we need from our savings.”
This, he believes, is a shortcoming of the financial services industry.
“The financial services industry has the potential to play an enormous role in the well-being of South Africans,” says Rusconi. “But they are doing a pretty bad job of it.”
Look at retirement savings
Unfortunately many financial products are neither easy to understand nor developed with only the customer’s best interests in mind. This creates a distinct gap between what people need, and what they are offered.
One of the areas where this is prevalent is in retirement savings. In order to secure tax benefits, products in this space are structured in such a way that the funds can’t be accessed until the member either resigns from employment, or turns 55. But what happens if someone desperately needs cash before then?
“The problem with retirement savings is that it’s all or nothing,” says Rusconi. “It can’t be all or nothing. Emergencies happen.”
There is a great deal of anecdotal evidence to suggest that many South Africans have resigned from their jobs just so that they can receive the payout from their pension fund. They are so desperate for money that this is the only option they feel they have left.
For Anne Cabot-Alletzhauser, head of the Alexander Forbes Research Institute, this means that employers have a role to play as well. If they are genuinely concerned about the overall well-being of their employees, and they should be, then they need to consider what tools they are offering them to assist them in their financial journey.
“We have to stop thinking that our responsibility is just to give members retirement savings,” she says. “We can multiply that capability so much more.”
An innovative solution
Rusconi notes that there is an interesting solution that has been developed between Alexander Forbes and a local employer who saw the need to provide something more appropriate.
As part of a default savings arrangement, every employee has 15% of their salary deducted for pension and savings. This is the same rate at which this deduction has always been made.
However, this amount is now split. While 11% still goes into the company’s pension fund, 4% is diverted into a savings fund that can be accessed at any time, but with the inconvenience of having to fill in the necessary forms and wait a day for the money.
“This provides limited access to a portion of your savings, it recognises the need for access to emergency savings, and it nudges sound behaviour,” Rusconi explains.
