There is an ongoing debate in the financial services industry about how to get people to save more. Of course, getting this right would be good for the industry itself, because the more assets it manages, the more money it makes.
It is, however, also good for the individuals who are investing. Saving for retirement and other medium or long term goals is essential to secure one’s wealth.
On a wider basis, increasing the rate of saving is also good for the country. A number of studies have shown that domestic savings are necessary to support economic growth.
Speaking at the Actuarial Society 2016 Convention in Cape Town on Wednesday, Old Mutual’s Guy Chennells, noted that these impacts can be significant.
“Savings and investment is by no means sufficient to secure economic growth,” he said. “But empirically, across countries that have grown sustainably over 20 or 30 years at meaningful rates, savings and investment is critical.”
South Africa’s savings rate was 16.4% of GDP in 2015. This is well below the 25% to 31% that various studies have suggested is necessary to sustain the 5.4% economic growth target set in the National Development Plan.
Chennells pointed out that these savings come from various sources – government, corporates, foreigners, and South African households. If you ask where further savings are going to come from, however, there is only one of those that stands out.
“Government is unlikely to be able to save much at all, for obvious reasons,” Chennells said. “Corporates present a less clear cut case, but almost all of the current savings is already carried by business.
“So really, for new savings into our economy there is only one place to look, and that is households, which currently have a negative net savings rate,” he argued. “Just looking at it at a high level and comparing South Africa to other economies with low incomes per capita, this country’s savings are too low and there has to be scope to increase them. I don’t want to minimise the challenges to saving, particularly high dependency rates and the high unemployment behind that, but if one is to get higher domestic savings in South Africa the place to look is households.”
Chennells added that the retirement savings industry is the most obvious place for this to happen. This is because the savings held here are usually longer term, the industry itself is already well established, and there are tailwinds in the form of government wanting to increase coverage and providing tax incentives. Retirement savings are also important to the individual, so by saving more people are directly benefiting themselves.
“This industry is, however, greatly under-utilised,” Chennells said. “This is not an original thought, but we have this wide infrastructure that could be used much more effectively.”
Using statistics from the Association of Savings & Investment SA (ASISA), the Financial Services Board (FSB) and the South African Reserve Bank, Chennells and his colleague Keagan Kistan calculated that in 2015 the retirement savings industry in the country actually had a net outflow of 4.6%. In other words, more money was withdrawn from retirement savings than was invested.
Chennells and Kistan then looked at the various ways in which this could be addressed, and estimated what the impact of higher household savings in South Africa could be in terms of the high level impact on the country’s savings rate relative to GDP.
“What we found is that it’s clear that increasing the percentage of their income that people contribute to their retirement savings is by far the strongest lever we can pull,” Chennells said.
While forced preservation of retirement savings and universal coverage of the working population would have marginal impacts on the country’s savings rate, if everyone contributed 27.5% of their salaries to their retirement funding, which is the tax-deductible maximum, the country’s savings rate could be lifted to close to 24% of GDP.
“That is already in the realm of what South Africa needs,” Chennells noted. “If everyone were to save appropriately for their own personal needs, that level of savings in South Africa would be sufficient to create a pool of funds, which if invested appropriately would produce GDP growth above 5%. which is an important level in our economy.”
There is a challenge there to individuals to consider what personal impact they could have on their country’s future, while at the same time ensuring their own financial security. But there is also a challenge to the industry to find ways to encourage a higher savings rate and help people to overcome the obstacles that they face to saving more.
“We haven’t done nearly enough to encourage a higher savings rate,” said Chennells. “I can’t say what the answer is, but I can say that its worth it. Not just for our bottom line, or for the individuals we help, but for our country.”
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