BUSINESS DAY TV: We need to work longer to live longer, and save harder
Johan Van Tonder is a researcher and an economist at Momentum.
BUSINESS DAY TV: Average household wealth in South Africa appears to be headed backwards, and that’s even before our downgrade to junk status. The latest Momentum Unisa Household Wealth Index for 2016 shows that the levels of real net wealth per household is now at a similar level to where it was in 2012. And joining us to discuss the detail and the factors behind the decline is Johan Van Tonder, a researcher and economist at Momentum.
Johan, looking at the kind of decline we’ve seen in net wealth per household, is it as simple as earnings not keeping up with inflation?
JOHAN VAN TONDER: That’s one of the reasons here, but it’s also what households are doing with the income because what we’ve noted from the research is that households are not using the income in order to build wealth, they’re actually borrowing more to consume more and they’re not borrowing to accumulate assets.
Secondly, they’re not saving to accumulate assets, not just not saving, they’re not saving sufficiently to accumulate assets — and when I’m talking about savings, it’s more your savings into retirement funds as well as investment products. Because that’s what you’re ultimately going to use to retire with and if you don’t have sufficient of that, your retirement income will drop severely and then your living standards as well.
BDTV: For every rand spent on borrowings, how much is actually going towards consumption borrowings and how much is going towards borrowings where actual wealth may be created; in other words the mortgage you take out to buy a house?
JVT: Yes, the research we’ve done showed that for every one rand of gross income that you earn, 21c are going towards the repayment of your debt. In other words, instalments are taking up 21% of your income. Now if you divide that 21% or 21c further, you see that 30%, only 6c are going towards accumulation of assets. In other words borrowing to purchase a property or a vehicle so that you can get to work and back, and the other 70% or 15c of the 21c, are going towards consumption. In other words, personal loans and shopping for furniture and clothing, that type of thing.
BDTV: How surprising is this — the fact that people still aren’t saving enough, because we’ve had the country on somewhat of an education drive in terms of the importance of saving down the line and one would assume that the current economic climate starts to make consumers a whole lot more skittish and, so, conservative when it comes to their spend?
JVT: If you differentiate between the different types of consumers you’ll find one portion of them actually are borrowing to survive, in other words to buy food, clothing, even bus tickets, that type of thing. So there we can’t fault them actually because it’s their only source or legal source of an inflow into their budgets. But then you’ve got another group of consumers actually trying to live up to the Joneses, and there, the additional personal loans, credit card debt, designer clothing, etc ... that’s actually pushing up that 70% and that’s not necessary actually.
BDTV: Fin24 quoted Sanlam employee benefits, competitor, yesterday saying that people are going to have to work longer given the downgrade and one of the things that was mentioned is that a downgrade may hasten retrenchments and you might see more people cash in their pensions. How worried are you that this could cause a really unsustainable crunch for people’s futures?
JVT: Yes that’s a very important point. I think if we look worldwide what’s been happening, people are living longer. Now, if you live longer, you can’t really retire at age 60, [and] think you’re going to have enough money to sustain your current standard of living. So we need to work longer, actually, with a downgrade or without a downgrade; we need to work longer in order to sustain a longer life expectation. And we’ve also done some numbers on that which showed that if you retire at age 60 and your income replacement ratio is 50%, in other words if you ... should you have earned R50,000, the next day you would only earn R15,000. That’s not a day after you’ve retired. But if you work an additional five years and retire at age 65, that R15,000 increases to R21,000. In other words 75% or just more than 70%, and you can actually live on that without dropping your living standard.
BDTV: Still, if people pursue not to go down that route in terms of working for longer, what it will do is translate to an increased state burden. What kind of policy implications do you see that having down the line?
JVT: That’s the thing — if we look at net wealth going down in real terms, the pool of money that’s available for redistribution is shrinking, so there’s not a lot of money available from a smallish rich component in order to redistribute. So what the government can revert towards is to increase taxes further. But we also know the pool of taxpayers is shrinking, and we also know what’s going to happen with the current downgrade. Economic growth is going to go down and, as a result, tax income as budgeted by the former finance minister is going to go down.
So we might even see a bigger budget deficit and even more taxes, and that will affect wealth creation going forward,
BDTV: And on that very sober note we’ll leave it there.