Compulsory retirement savings, through pension and provident funds, have replaced discretionary savings efforts in South Africa, but the taxing of benefits paid to beneficiaries of these institutional savings has seriously eroded their appetite for saving and thereby boosted their consumption levels.
The result has been a decline in national savings levels.
This is the finding of an academic study by Vasco Nhabinde and Niek Schoeman, published by the Cape Town-based Economic Research Southern Africa (ERSA).
The working paper, entitled “The Impact of Retirement Benefits on Consumption and Saving in South Africa”, investigates the effects of institutionalised retirement savings in the light of Treasury's drive to establish a national savings fund.
Nhabinde and Schoeman find that, between 1996 and 2003, the contributions made to pension and provident funds, and the benefits received from these funds, forced a pull-back in discretionary savings. Discretionary savings were reduced by 4.3% in 1996 and by nearly 7.5% in 2003.
The findings are consistent with studies elsewhere in the world, which confirm that programmes aimed at retirement saving crowd out discretionary saving.
The authors express concern over this trend, as only a small portion of the South African population contribute to retirement savings plans - even though an estimated 70% of those in formal employment are members of private retirement funds. They warn that the provision for retirement, for the population as a whole, must be investigated.
An added worry is the increased dependency on new entrants into the contractual saving pool to service benefits paid to retirees. The ratio of benefits received to contributions made has risen from nearly 109 in 1996 to almost 125 in 2003. The figures imply that a substantial portion of benefits are not backed by contributions, but instead relies on investment returns. This trend may not be sustainable.
The taxation of benefits paid from retirement funds could alter savings and investment behaviour, Nhabinde and Schoeman warn. They point to evidence that South Africans have opted increasingly to allocate funds to assets, rather than to invest in pension and provident funds.