Here we go again: borrowing from the future

The government’s recent offer to public servants to replace salary increases with a pension payment holiday is yet another example of how retirement savings are seen as a slush fund of sorts, a pot of money to be easily drawn on in times of difficulty, says Mica Townsend, 10X’s Business Development Manager.

In a country badly overdrawn and unable to curtail its spending, it is perhaps unsurprising that the R4,5 trillion held in public and private retirement funds is seen as a big, untapped piggybank whenever South Africa hits a new financial pothole. But it really does create a counter-productive mindset for savers.

In 2012 already, the Ministry of Economic Development proposed that retirement funds provide “concessionary finance” to help pay for infrastructure development. The mooted changes to Regulation 28 of the Pension Funds Act stop short of prescription, but one suspects they will be highly suggestive. The same regulations already lay a host of other developmental goals at the feet of retirement savers, as though their own financial needs are secondary. 

It’s not just the size of the retirement savings pot that makes it attractive, but the evasion of accountability it allows: being able to borrow from the future, without having to pay back, or suffer the consequences. The reasoning is persuasive, because the immediate urgency justifies the cost, and the long-term opportunity loss is not quantified.

Ostensibly, the government’s offer to replace salary increases with a pension holiday is a pragmatic idea that settles the public sector wage dispute and doesn’t strain the budget or reduce pension benefits. The immediate impact on the Government Employees Pension Fund (GEPF) is modest. Per its last actuarial valuation, future liabilities were 108% funded. The estimated R80bn contribution holiday, representing 4% of assets, wouldn’t change this materially. 

On the other hand, the long-term opportunity cost is enormous. R80bn earning a real (after-inflation) return of 5% per annum would be worth R1 trillion in 50 years’ time – a staggering loss of investment potential. That is the true cost of our financial mismanagement, passed on to future generations.

Cosatu’s proposal to grant Eskom a R250bn GEPF loan was premised on the same short-term thinking: protecting current jobs at huge expense to future investment.

It’s ironic, because industry and Government constantly admonish fund members not to cash in their retirement savings on changing jobs. These proposals promote the exact opposite. So does the DA’s recent motion to give people access to their pension savings during times of financial distress, such as the recent lockdown. The same contradiction also pervades our retirement fund law, which does not mandate saving, minimum contributions, or preservation. 

The harm lies in the sub-text: that retirement funds double up as a rainy-day reserve, that there’s no need to be financially resilient, that saving can simply be deferred. Surely, we must entrench the opposite mindset, that retirement saving is non-negotiable and serves one purpose only: to fund retirement. 

Already, two-thirds of over 60’s depend on the state old-age grant, and less than 10% of fund members can maintain their lifestyle in retirement. Of even greater concern is the rising number of people in the second half of their work-life. Ten million people expect to retire within the next decade or two, with little plan for what they will live on when they get there. 

Few are prepared, because saving has not been made a priority, or they hope to delay their retirement. But the high ratio of young people entering the workforce versus those at the other end (2.4 to 1) underlines how difficult it will be to defend their jobs.

South Africa faces a huge unfunded pension liability that threatens financial hardship to a growing share of our population. While we can do little to change that, we should persuade the younger generation to do better. For that to happen, our government needs to stop signalling that retirement funds are an appropriate source of emergency funding, either for national or private purposes.

Get investment and saving tips straight to your inbox.

Related articles

Get started or switch to 10X today.