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Johannesburg - Government can best deliver on its mandate of transforming the country by creating an enabling environment in which the poor can save, according to Scott Field, chief financial officer for FedGroup.
He wants saving for retirement to be mandatory, even if only in terms of forcing preservation of a portion of a working person’s pension contributions.
“South Africa remains a highly polarised society, with the enormous divide between rich and poor continuing to grow," he said.
"There is no short-term answer to the problem, because, by nature, sustainable, broad-based wealth creation is a long-term process."
However, if every South African found it easy to put away even R50 a month, then, he explained, over the medium-term, a tangible increase in wealth at grass roots is more than possible.
"From this kind of platform, we can be confident that each subsequent generation will be better off financially than the one that preceded it,” he said.
Unit trusts
Statistics prepared by the Association for Savings and Investment SA (Asisa) show that more than R1trn currently sits in unit trust funds in South Africa.
This has a major steadying influence on the overall economy, but represents savings by only 5% of the population and all of it from the upper income groups.
“Pension funds also confer overall economic stability, but they’re not discretionary for most low income members. Therefore, they don’t provide the means for individuals to manage their own financial wealth,” said Field.
“In an attempt to encourage savings, banks are introducing accounts designed for low income people, but are still adding bank charges that effectively nullify any potential for an individual’s wealth to grow."
A deposit of R100 will attract bank charges of R5, he said. If the interest earned on that deposit is 5%, then it takes the consumer a year to recover the bank charges, without being able to increase his capital.
To make matters worse, with inflation running at 5% the consumer is actually losing money, not making more of it.
“The only way for an ordinary person’s money to make money is through participation in property or the stock market. The least complicated and best performing vehicles for such investments is unit trusts and there are indeed many unit trusts that allow a deposit as low as R50," he said.
Bank charges
“However, again, the bank charges eliminate any profit. So, for most South Africans, there is no incentive to take an interest in unit trusts.”
Field believes that the government’s insistence, via the South African Revenue Service (Sars), on a tax number being provided by participants in unit trusts – and in any other savings – is a significant administrative burden that particularly the poor don’t want to shoulder.
“In any case, the vast majority of South Africans earn too little to pay tax and, therefore don’t have a tax number. Having to register for a tax number just so that you can participate in unit trusts is hardly worth it, if the bank charges on your deposit wipe out any interest you may earn," he said.
"And, for those earning slightly more and are therefore, able to deposit, say, R100 000, being taxed on the R1 000 in interest that you would earn at the end of your first year is most discouraging."
Fais and Fica impose similar impediments to saving, he said.
Encourage savings
Field said it would be far better for government to focus on encouraging savings by eliminating the need for a tax number or proof of residential address for deposits below a certain level and also to put pressure on banks to slash bank charges for savings accounts less than a certain value.
“If we want people to want to save, then we have to offer them an opportunity that isn’t simply an alternative to the mattress or coffee tin they’re already using to store their money," he said.
"And only government can bring to bear the moral and policy force to make commercial entities change their approach. We’d like to see that moral force at work in this year’s budget speech.”
At the other end of the savings spectrum – retirement – Field said government needs to ensure that working South Africans preserve at least a portion of their pension funds when leaving one job for another or being retrenched.
“For people who lose their jobs and struggle to find another one, the pension monies they are able to withdraw help to put food on the table in the short-term. So having some of that money available is important," he admitted.
Pension problems
“What is worrying, however, is that most people will change jobs three or four times during a working life and, at each change, withdraw and spend their entire pension."
So, with each new job, they have to start making pension contributions from scratch and, as a consequence, their final pensionable amount shrinks significantly.
"They then look to the state to support them in their retirement years, which negatively impacts government’s capacity to fund transformation in general and service delivery in particular," he said.
“We’d like to see government consolidate the social contract each of us has with all other South Africans by making preservation of a portion of pension monies obligatory. The existing legal structure doesn’t have to change; simply the detail.”
The 2013 budget speech did indicate government’s intention of allowing up to R300 000 of savings over a person’s life-time to be tax free.
“This is definitely a move in the right direction,” Field said. “But the need for a tax number in order to make a savings deposit has the effect of disabling the initiative before it can get off the ground."
He said he does not have an issue with government’s legitimate need to increase the tax base.
"But we think it would be better, initially, to increase the wealth that could, eventually, be taxed. There’ll be time enough to find ways to tax the wealth, once we’ve actually created it,” he said.
He wants saving for retirement to be mandatory, even if only in terms of forcing preservation of a portion of a working person’s pension contributions.
“South Africa remains a highly polarised society, with the enormous divide between rich and poor continuing to grow," he said.
"There is no short-term answer to the problem, because, by nature, sustainable, broad-based wealth creation is a long-term process."
However, if every South African found it easy to put away even R50 a month, then, he explained, over the medium-term, a tangible increase in wealth at grass roots is more than possible.
"From this kind of platform, we can be confident that each subsequent generation will be better off financially than the one that preceded it,” he said.
Unit trusts
Statistics prepared by the Association for Savings and Investment SA (Asisa) show that more than R1trn currently sits in unit trust funds in South Africa.
This has a major steadying influence on the overall economy, but represents savings by only 5% of the population and all of it from the upper income groups.
“Pension funds also confer overall economic stability, but they’re not discretionary for most low income members. Therefore, they don’t provide the means for individuals to manage their own financial wealth,” said Field.
“In an attempt to encourage savings, banks are introducing accounts designed for low income people, but are still adding bank charges that effectively nullify any potential for an individual’s wealth to grow."
A deposit of R100 will attract bank charges of R5, he said. If the interest earned on that deposit is 5%, then it takes the consumer a year to recover the bank charges, without being able to increase his capital.
To make matters worse, with inflation running at 5% the consumer is actually losing money, not making more of it.
“The only way for an ordinary person’s money to make money is through participation in property or the stock market. The least complicated and best performing vehicles for such investments is unit trusts and there are indeed many unit trusts that allow a deposit as low as R50," he said.
Bank charges
“However, again, the bank charges eliminate any profit. So, for most South Africans, there is no incentive to take an interest in unit trusts.”
Field believes that the government’s insistence, via the South African Revenue Service (Sars), on a tax number being provided by participants in unit trusts – and in any other savings – is a significant administrative burden that particularly the poor don’t want to shoulder.
“In any case, the vast majority of South Africans earn too little to pay tax and, therefore don’t have a tax number. Having to register for a tax number just so that you can participate in unit trusts is hardly worth it, if the bank charges on your deposit wipe out any interest you may earn," he said.
"And, for those earning slightly more and are therefore, able to deposit, say, R100 000, being taxed on the R1 000 in interest that you would earn at the end of your first year is most discouraging."
Fais and Fica impose similar impediments to saving, he said.
Encourage savings
Field said it would be far better for government to focus on encouraging savings by eliminating the need for a tax number or proof of residential address for deposits below a certain level and also to put pressure on banks to slash bank charges for savings accounts less than a certain value.
“If we want people to want to save, then we have to offer them an opportunity that isn’t simply an alternative to the mattress or coffee tin they’re already using to store their money," he said.
"And only government can bring to bear the moral and policy force to make commercial entities change their approach. We’d like to see that moral force at work in this year’s budget speech.”
At the other end of the savings spectrum – retirement – Field said government needs to ensure that working South Africans preserve at least a portion of their pension funds when leaving one job for another or being retrenched.
“For people who lose their jobs and struggle to find another one, the pension monies they are able to withdraw help to put food on the table in the short-term. So having some of that money available is important," he admitted.
Pension problems
“What is worrying, however, is that most people will change jobs three or four times during a working life and, at each change, withdraw and spend their entire pension."
So, with each new job, they have to start making pension contributions from scratch and, as a consequence, their final pensionable amount shrinks significantly.
"They then look to the state to support them in their retirement years, which negatively impacts government’s capacity to fund transformation in general and service delivery in particular," he said.
“We’d like to see government consolidate the social contract each of us has with all other South Africans by making preservation of a portion of pension monies obligatory. The existing legal structure doesn’t have to change; simply the detail.”
The 2013 budget speech did indicate government’s intention of allowing up to R300 000 of savings over a person’s life-time to be tax free.
“This is definitely a move in the right direction,” Field said. “But the need for a tax number in order to make a savings deposit has the effect of disabling the initiative before it can get off the ground."
He said he does not have an issue with government’s legitimate need to increase the tax base.
"But we think it would be better, initially, to increase the wealth that could, eventually, be taxed. There’ll be time enough to find ways to tax the wealth, once we’ve actually created it,” he said.
