SA’s pension funds grow but national savings rate flounders
South Africa now has the lowest savings rate even among middle-income and emerging economies
South Africa has one of the largest pension systems in the world, but low savings continue to constrain growth, says Nthabiseng Moleko, a lecturer in managerial economics and statistics at the University of Stellenbosch Business School.
Moleko says unemployment and the working population’s spending habits have had a negative effect on the savings rate.
“Employee contributions to pension schemes have risen in South Africa, with significant growth in the number of South African pension funds from 2,771 funds in 1958 to 5,150 in 2014.
“South Africa’s pension fund [pool] of almost R4-trillion makes it the biggest system in Africa and the 11th biggest in the world, but the increase in pension assets over the years has not resulted in a higher domestic savings rate.”
She adds: “Increased deficits and the negative savings effect on national accounts can deplete the build-up of pension reserves, indicating that pension reform may simply redistribute assets but not increase savings or have any positive increase on overall economic growth.”
Moleko says South Africa’s savings rate began deteriorating in the mid-1980s from a high average rate of 26.7% at which it had surpassed several developed countries. It now has the lowest savings rate (14%) even among middle-income and emerging economies, whose savings rates exceed 20%.
“South Africa compared with other emerging markets such as Malaysia and India exhibited the same level of savings at 21% in 1980, but the others have all escalated to above 30%. The World Bank maintains that investment levels exceeding 30% are necessary for growth. To curtail slow growth in South Africa’s economy, the low investment and savings rates that impede transformation of the economy need to be increased.”
She also says South Africa needs to adopt policies that will increase the level of household savings and reduce government dissaving, in order to boost the country’s overall savings rate.
“Savings could be used to bolster economic growth through capital markets. Postponed consumption is captured as savings for households, corporates and governments, and this capital could be used to contribute to capital formation channelled towards productive investments.
“Financial intermediaries – be it banks, pension funds using bonds or stock exchanges – trade instruments on securities markets for the purposes of ensuring long-term returns, abiding to trustee-guided and Section 28-regulated investment allocations.”
Moleko adds: “The privatisation of pension funds has led to a substantial increase in the accumulation of domestic capital. Where do pension funds invest? Where is all this money going? Is it not possible to rely on domestic savings versus foreign debt, which has been accepted as long as we can service debt?
“South Africa and other emerging-market economies could boost their investment in infrastructure and productive capabilities using domestic savings. Savings can be used to rebuild economies, finance infrastructure and develop new industries, with Canada, the US and China as some examples. Loans and debt are even encouraged, but why not use our own savings that can play a critical role in rebuilding the national economy?”
Therefore, she says, “we need to look again how they are invested”.
“It is important that investment returns be maintained and risk management of pension funds retained without adopting the approach that investment in ourselves will afford us lower returns.”
Nthabiseng Moleko is a lecturer in managerial economics and statistics at the University of Stellenbosch Business School and is busy with her PhD in development finance.
This article was paid for by the University of Stellenbosch Business School.