Patching the leaky savings bucket

Johannesburg - While the likes of Old Mutual and the Association for Savings and Investment South Africa are beating the drum of financial education as a way to tackle poor savings levels in South Africa, one expert believes more drastic steps need to be taken.
 
Neil Lightfoot, banking engagement manager at financial services sector consultancy Genesis Analytics, argues South Africans need to look abroad at how other economies have tackled the problem, pointing to the study of behavioural economics as an alternative way to tackle it.
 
Behavioural economics involves understanding how consumers think, and the structuring of financial products to discourage consumers from making spur-of-moment buying decisions.

"One of the mainstays of behavioural economics thinking with respect to savings is that unless savers have specially designated savings accounts which are not immediately accessible or callable, they are highly likely to dip into these accounts - the so-called leaky bucket," said Lightfoot.

South Africa's top insurance houses would agree. As the slowing economy took its toll on the South African workforce, many people cashed in savings and insurance policies - setting themselves back many years.
 
Another example would be mandatory retirement savings accounts. According to Lightfoot, studies show that workers are typically less likely to opt in than if they are automatically enrolled, irrespective of the fact that the savings product provides them with tax benefits.

A third example would be the use of a portion of savings based on escalating future earnings. In other words, if employees were saving 2% of their income when they started, this should be automatically ratcheted up when they receive a pay increase rather than depend on the workers adapting their saving habits.
 
While many have found fault with the structural implementation of initiatives such as the proposed National Health Insurance (NHI) and a national savings scheme, these steps would tie in with theories being pushed by Lightfoot.
 
"Government and policy makers have an obligation to step in to save people from themselves," says Lightfoot. 
 
Recent research from financial services group Old Mutual [JSE:OML] highlighted that South Africa is facing an increasingly challenging savings environment, coupled with a weak economic recovery.
 
Household debt to disposable income was around the 80% level, indicating that the majority of South Africans' income was being directed towards servicing debt. A further finding was that those with relatively high debt levels also had poor savings habits.
 
"You have to save much more than you think, and you need high real investment returns over your working life," said Rian le Roux, chief economist at Old Mutual Investment Group South Africa.
 
The "leaky bucket" syndrome also reflects in the advice Old Mutual offers would-be savers:
 

• The greatest present you can ever give your children is to never become dependent on them;

• Gain a full understanding of your future financial liabilities;

• Start saving early;

• Never spend pension money when you change jobs; and

• Beware of get-rich-quick schemes.

 
 - Fin24.com