People the world over are living much longer. Catalysed by the near exponential advance of medical technologies and the science of wellness, the ageing revolution is undoubtedly a cause for celebration. But it also creates immense challenges for societies and individuals, who need to support the many more years they have ‘after work,’ as compared to the years spent working. For most of us alive today, it is becoming essential to save significantly more.
These trends clearly create an urgent need for new solutions from the global retirement savings industry. In South Africa, they are interweaving with a complex, continually evolving socio-economic dynamic, with various idiosyncrasies that create unique local challenges.
South Africa’s retirement savings shortfall is both well documented, and alarming.
The average replacement ratio for South Africa’s retirement industry is estimated at just 25 to 30%. This implies that, on average, people with some form of retirement savings can expect to receive the equivalent of just over a quarter of their income at retirement as post-retirement income. People tend to seriously underestimate the impact that this implies in terms of their quality of life after work.
Reducing this shortfall is not only essential to alleviate the burden experienced by state and society – which need to step in to support those who do not have enough savings to support themselves in retirement – but it is essential to grow the economy.
And while the challenges that face our society are unquestionably vast, this shortfall is, at a fundamental level, heavily impacted by behaviours – notably that South Africans are big borrowers, which is quite the opposite from being big savers. So severe is South Africa’s borrowing rate, that half the population is shown to have a net-negative financial position, with debt acting as a driver of inequality.
Savings in retirement funds at a member level on average is very low, according to the Institute of Retirement Funds Africa said in its presentation. It provided statistics from within the industry showing that two-thirds of members have less than R50,000 in their funds.
Other available data shows how bad the retirement savings situation is in the country:
• The Federation of Unions of South Africa (Fedusa) said that only one in every three South African adults (including pensioners) has some form of pension, noting there are around 17 million pension accounts, representing as many as 13 million people. Adults aged 15+ make up approximately 42 million.
• The 10X South African Retirement Reality Report 2020 found that nearly half (49%) of South Africans do not have a retirement plan. Of the respondents who said they had some sort of retirement plan, 75% were worried about whether they will have enough to live on after they retire, or feel unsure about this.
• Several polls run by BusinessTech over the last three years showed that between 30% and 45% of readers simply do not put any money away towards retirement at all.
• The Sanlam Benchmark Survey for 2020 showed that 61% of pensioners can’t make ends meet.
• Alexander Forbes Member Watch analysis for 2019 showed 50% of members are expected to retire with less than a 20% replacement ratio (recommended is upwards of 70%) – and that the average benefit at retirement is approximately R350,000.
• Statistically, around 60% of fund members in employer funds have accumulated six months’ salary or less, particularly at lower salary levels.
South Africans have a very bad savings culture with only 10% of South Africans saving enough for retirement. Even compared to other poorer countries like India, South Africans are bad at saving responsibly.
If you have money to invest – whether it is R1,000 or R100,000 – think about it carefully, make the most of tax breaks and make sure your retirement savings are invested in portfolios where you get the lion’s share of any growth.
Whether you are starting an investment that you plan to build up over time with small, regular contributions, or have come into a large chunk of money that you want to invest, you should ask yourself whether you’re part of the 10% who will be able to retire, or part of the 90% who needs serious introspection and an urgent retirement action plan.