July was National Savings Month – there have been a number of initiatives in the industry to increase the public’s awareness around the importance of saving. These initiatives are all geared towards increasing the rate of the number of South Africans who can retire comfortably, as statistics show that only 3% to 10% of South Africans are falling in this category. There have been a number of ideas put forward on how to increase this number, including the suggestion of increasing South Africa’s retirement age. Would this be practical and is it doable?
We need to reconsider what the concept of retirement means. The conventional thought of retirement was conceived by the first German Chancellor, Otto Von Bismark, who at the time of establishing what would become the world’s first retirement programme, said that the ideal age for retirement was 70. Twenty seven years later this was decreased to 65. What needs to be pointed out is that the life expectancy of a German worker at the time was around 45.
People were not expected to outlive their retirement savings, however with increased advances in medical science, this is becoming more of a reality. If South Africa wants to increase the number of people who can retire comfortably, we need to rethink the concept of retirement and what will be relevant within our current environment.
At the end of June 2014, Joe Hockey, Australia’s Treasurer, announced that he wanted to raise the country’s retirement age to 70, which would be the highest in the world. Retirement age has become a concern in the country as the population is living longer, meaning that Australia’s 2.4-million state-retirement-age pensioners are drawing about A$40bn a year from state pensions, which is causing a huge strain on national reserves.
According to Craig Aitchison, Old Mutual Corporate General Manager of Member Solutions, “we all need to start saving more money in order to provide ourselves with an efficient income during the longer retirement phase. Retirement fund members who avoid cashing in on their retirement savings when changing jobs, can possibly triple their savings at retirement age. Other ways in which to increase retirement savings is to start making contributions earlier and to take advantage of the tax changes by incrementally increasing savings each time a salary increase is received,” he says.
Aitchison says that while South Africa does not have a state pension, the country does offer a State Old Age Grant (SOAG). “The qualifying age for this grant has been reduced from 65 to 60, so that people can qualify earlier and the national retirement coverage is bigger. This is in contrast to Australia, the UK and Europe who have been increasing the retirement ages for their state pensions. This is a result of their state pensions becoming unaffordable, and the governments needing to reduce the burden of this cost. As the SOAG supports millions of people in South Africa, it is currently a sustainable system for the foreseeable future.”
The South African quandary
While increasing the retirement age is a system which may prove to be very successful in the developed nations, we need to ask ourselves if this will work in South Africa. When levels of unemployment in Australia reach 10%, the country goes into a crisis mode. With South Africa’s unemployment level currently at 25.2%, government can look at Australia’s 10% margin and only try to dream of achieving similar levels of unemployment. Raising South Africa’s retirement age will only compound our unemployment problem.
Aitchison says that mandating a raise in the retirement age may be unpopular, as South Africa is battling with high levels of unemployment. “Increasing the retirement age might reduce the employment opportunities for young people who are currently experiencing relatively high levels of unemployment. However, in South Africa, our challenge is to raise the amount of national savings, particularly the long-term savings that households are making. By encouraging people to keep saving for their retirement, we are contributing to the national savings rate, which unlocks further opportunities for our economy.”
There are other options such as a phased-in retirement, which seriously needs to be looked at as the person entering into retirement is not permanently on the books of the company, but is rather retained as a contractor for the company. The other option is for retirees to embark on a second career to keep cash-flow going.
One of the biggest problems that the South African retirement sector faces is the large portion of the population who does not have a private pension fund. This is a challenge that government would like to change and has indicated that forced participation will form a big part of its retirement reform. This may get South Africa on track to match or surpass retirement savings funds in other parts of the world.
“Australia has one of highest relative levels of retirement savings per person in the world. They have had a compulsory retirement savings system for some time where employers have to make a minimum retirement savings contribution for all their employees. The retirement coverage of full time employees in Australia is up to 96% and in South Africa the coverage is estimated to be around 50%. Even casual workers and self-employed people in Australia have a good coverage rate of 73%. If South Africa increases its retirement fund coverage rate, it will create a substantial pool of savings,” says Aitchison.
Article by Jonathan Faurie
Source: FA News