Policy makers are reassessing the way our country looks after its aged. This article looks at some of the issues demanding their attention.
South Africa provides for la tercera edad, the third age, as Spaniards refer to it, in many ways. These fall into three main categories:
1. Social assistance. About 2 million of our elderly depend on the government to provide an income in retirement – the state old age pension (Soap). They receive R820 monthly and research has shown that this meager amount goes a long way to meeting the needs of the elderly recipient, and frequently many family members.
2. Occupational retirement funds. A large proportion of employed South Africans – perhaps not large enough – save for retirement through a fund made available by employers. When they change employer, in theory, they leave their accumulated savings in the fund or take it to another, safe for their retirement. In practice, too much is taken early and spent.
3. Individual retirement saving. The third way to save is through a vehicle offered by an insurer or collective investment provider.
The government has an interest in the success of these savings mechanisms. This is not just because leaders are interested in the wellbeing of senior citizens, but because these mechanisms drain fiscal resources. The Soap is an obvious government expense. On the other two, government spends in tax revenue given up, the cost of incentivising citizens to save.
What makes South Africa different? First, the social assistance programme is not extensive. Many countries pay much more in social old age benefits, the majority of them collecting an explicit tax to meet this cost.
Second, we are not compelled to save for retirement. Some of us save because our employers require us to, but the policy maker does not mandate retirement saving.
Third, our system depends on the private sector for its success. Those with more extensive social security have other difficulties, but here our well-being in retirement depends on the efficiency of financial service companies.
What isn’t working well? You’ve seen it in the newspapers. The key problems can be summarised into two words: security and cost. Conflicts of interest and the absence of appropriate governance structures compromise the security of your saving, both in occupational funds and individual alternatives. Aggregate costs are high, eroding the value of savings, to the extent that cost erosion can exceed the value of the tax benefit.
But are things not improving? Indeed, we have strong signs of improvement. We have a regulator ready to enforce compliance, a policy maker considering with care all the options, and product providers and consulting firms willing to improve their processes and reduce their costs.
The work is nevertheless ongoing and there remain challenges. For the middle and upper classes, we must find ways to improve the security of savings and reduce costs.
Consumers need to be better educated to make their choices and should be encouraged to choose based on real need, such as cost and benefit, not on attraction, such as marketing hype. In short, we must make sure that the market operates more effectively.
The challenge is finding ways to create saving options for the low-income, informal and seasonal workers. Improving the retirement prospects for this large group of South Africans is the priority of thinkers and will be for some time.