Improving SA’s savings culture: how regulators can help

National Treasury’s discussion paper Strengthening Retirement Savings  is critical of South African’s poor savings habits, and rightly so. To improve the situation, the paper suggests

1. mandatory saving  (ultimately through a social security system)
2. compulsory preservation
3. compulsory annuitisation at retirement

In substance, these are positive measures, but do they go far enough and do they provide the necessary immediate response? The paper blames individuals for their poor savings decisions (and yes, this is where the ultimate responsibility lies) but fails to acknowledge that our present laws are highly permissive in parts, and unexplainably restrictive in others. These laws underpin our poor savings habits and should be changed. Cases in point:

1. it is not mandatory for existing employees to join a newly-established work place fund
2. existing employees may only join a newly-established work place fund within the first twelve months, and are then prohibited from doing so
3. there are no minimum prescribed contribution rates
4. the minimum retirement age of 55 is an anachronism as life expectancies have increased
5. the withdrawal lump sum tax tables are not very different from the retirement lump sum tax tables; this still encourages savers to withdraw early, rather than hold out for retirement
6. the proposed tax deduction caps create a disincentive to save for higher income individuals

Why create temptations knowing that most of us lack the discipline and foresight to save responsibly? It must be easier to fall into the net, and harder to get out. The present laws need to become more permissive on employees wishing to join workplace funds, and less permissive on workers wishing to cash in.

As a broad overlay, the law should create the mindset that retirement savings have only one purpose: to fund retirement. It must do away with the notion that there is a pot of gold waiting at the end of the rainbow. Instead it must create the expectation that what awaits is a monthly annuity income stream that kicks in at retirement. Changing the disclosure – emphasising the approximate monthly pension at retirement rather than the cash lump sum – could help shape investors’ expectations and mind sets, and motivate them to take positive steps that will increase their retirement “pay”: save early, save consistently, save more, work long and watch costs.

To this end, the proposal that forced preservation will be partially waived for the unemployed who have exhausted their UIF benefits would send the wrong message – that this money is available for other purposes. By permitting early withdrawal, the Regulator merely exchanges the short-term (funding) problem with a long-term problem. It would be a classical case of kicking the can down the road.