After the Bell: Should we pan the two-pot system?

There are really only three golden rules when it comes to building an effective retirement pot and they are extremely well known and far too often honoured in the breach, even by me, I am ashamed to say.

Rule one is to start early. Rule two is don’t stop. And rule three is don’t touch the pot. 

The reason for rule one is that starting early unleashes the power of compound earnings, where you earn from your earnings on top of your earnings. The reason for rule two is that saving at regular intervals tends to obviate market volatility because, by definition, you invest through the highs and the lows. And rule three exists because it becomes increasingly difficult to save enough to live on in your retirement if you keep dipping into the pot. 

Why is it so hard to keep to the three rules? The simple answer is – life. 

I cashed in my retirement savings early after I became a freelancer. I used some of the savings to help my mother buy a house, and I’m fantastically glad I did so. Lots of people go through cash squeezes, which is when your retirement savings feel like a juicy left-over lamb chop calling your name from the fridge.

But the flip side of cash squeezes happen because of another very human response and that is, of course, carelessness about the future at best and outright consumptive greed at worst.

How do you balance these different needs and requirements? Well, the one thing you really don’t want is people resigning from their jobs to access their pension savings. And given the pressures of life and general poverty levels in SA, there is big political pressure to allow workers and employees to access their pensions early. 

It’s taken a long time, but I think the Treasury has handled this balancing act pretty well. The two-pot system will allow contributors from about a quarter of SA’s working-age population (call it seven million people) to access savings made into their “savings pot” from September onwards. The savings pot constitutes a third of their savings; the ‘retirement pot’ is only accessible on retirement.

The kicker is that anything you withdraw from your savings pot is taxable as income, meaning you forgo all the tax benefits of withdrawing the money when you retire. You will also face the possibility of being kicked into a new tax bracket that year.  

One controversial aspect is that you can “seed” your savings pot with up to 10% of your existing pension savings - up to a maximum of R30 000. And then you cash it in, go on holiday to Sun City, have a huge blast, and blow it all on the blackjack tables.

Government claims the provision is there to stop people from quitting their jobs to access their retirement savings. Government was more or less forced to offer this provision by opposition to the whole from the trade union movement – that well-known institution of economic common sense.

It is to the Treasury’s credit that it resisted a more extreme version of this arrangement. According to an analysis by Capital Economics, when this system was introduced in Chile, individuals withdrew the equivalent of 14% of GDP following the first two of three withdrawal bills.

So now the big question is, what effect will this have on the economy? And inflation? And will the withdrawals put pressure on the JSE? Given the low overall level of savings in SA and the fact that people on the lower end of the income spectrum tend to use this facility the most, the likely impact on SA will be only about 0.2% of GDP.

The current back-of-the-cigarette-box figures suggest that it will inject around R100-billion into the economy. There is good and bad in that number: it won’t be high enough to really pump inflation but neither is it high enough to pump the economy. It may however provide a bit of a boost for the taxman.

The intention is to help the economy in the long term by gradually increasing savings rates, encouraging people to save for their pensions which will relieve some pressure on the government to supplement pensions, as it is doing now. The only problem is that, in at least three countries where it has been implemented, it hasn’t worked. In Malaysia, for example, 80% of the population still retire without sufficient funds to maintain income above the poverty line.

And the reason for that is as mentioned above: saving for retirement is hard. 

A middle-class couple needs assets of around R20-million to retire comfortably in SA today, and that is but a dream for the vast majority of the population. But that doesn’t mean you shouldn’t get as close as you can (see three rules above). 

If you need a figurative cold shower, take a look at the graph below: by international standards, SA’s pension earnings (pension earnings as a proportion of pre-retirement earnings) are ridiculously low.



DM