EDITORIAL: New rules on retirement saving just one step in the right direction
Far more financial literacy is needed to protect South Africans from bad investment decisions
After years in the making, the Treasury has struck a deal with unions about introducing a new regime that will compel millions of retirees to use two-thirds of their provident fund to buy annuities, a type of insurance designed to provide income for retirement.
The new rules blur the lines between provident and pension funds, whose members are already subject to annuitisation requirements in exchange for tax deductions on the money flowing to the retirement pot.
It is true that the new rules will bulk the captive market for the existing annuity providers such as Sanlam, Alexander Forbes and Old Mutual. But they cannot solve the problem facing retirees: buy an annuity that is guaranteed for life but may not keep pace with inflation and cannot take advantage of later increases in asset values; or buy a living annuity, which is exposed to market fluctuation but may not last the entire life.
But they are a good thing for retirees, many of whom make terrible financial decisions when they reach old age. One cannot ignore findings of surveys, including one from the world’s largest global measurement of financial literacy, the S&P Global Financial Literacy Survey, which found that in SA financial literacy is at 42%.
Unfortunately, more than half the population is not able to make rational decisions when it comes to spending, saving, borrowing and investing. Data from the Reserve Bank consistently shows household debt as a proportion of income is dangerously high at more than 70%, suggesting that consumers fund their consumption with debt and have little left to save.
The truth is that given the choice, retirees will almost always avoid buying annuities in situations where they have an option to get their hands on a lump sum, which may flow to cruises, new cars or risky investments in new businesses.
The case for the new regime, which will apply to those over 55 as at March 2021 and will not be retrospective, is compelling for provident fund members, many of whom are low-income earners.
Annuities are designed to protect individuals against poverty in a country that has the most extensive social welfare system among emerging markets. The Treasury already spends billions of rand per year on more than 18-million social grants, and the latest medium-term budget policy statement signals that the support offered to the poor and working class on retirement cannot be sustained. For the first time, social grants will face cuts in real terms.
Without a compulsory annuitisation requirement, some provident fund members end up falling back on taxpayers, as most would have withdrawn all the accumulated savings and used most of the money to make large purchases like a home or an expensive car.
A privately funded lifetime income stream for millions of South Africans could free up more money for the Treasury to invest in revamping our dilapidated health and education infrastructure.
That said, it would be naive to think the reforms are a silver bullet to SA’s social security problem.
SA’s dangerously low savings rate is well documented. People are coming into old age without having saved enough money to maintain their lifestyles. The new rules are a step in the right direction. But to have any shot of success, South Africans will have to save a lot more than they do now.
It’s not ideal in a free society to be forced into making an irreversible decision about your money. President Cyril Ramaphosa should accompany the new regime with financial literacy courses for schoolchildren to equip them with tools to navigate their finances.
Who knows, in a generation or two SA could start thinking about scrapping these mandatory annuity purchase rules and put a financially literate people firmly in charge of their finances when they reach old age.
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