Most retirement savings products are aimed at people with a consistent income and who work in the formal economy, thereby excluding the vast majority of South Africans. By addressing this, the burden on the state can be decreased and the wellbeing of the country’s growing number of pensioners improved.
Economic estimations show that the size of the informal economy is approximately 7% to 12% of our entire economy. Those within the informal economy commonly face exclusion from financial market access. This is not just with regard to access to basic financial services, but in relation to products that will benefit household financial stability in the long run.
Statistics South Africa attributes almost a fifth of total employment, or 2.4m jobs, as coming from the informal sector. Characteristics of workers in this sector include inconsistencies in income streams, limited financial literacy levels, and limited, if any, access to pension or provident funds.
The current pension burden and cash transfers the state makes is 3% of GDP, or R128bn in 2016. Much of this is towards old-age grants, the highest contributing factor at R53bn, or nearly half of the state’s commitment. It has grown significantly in the last nine years, up from R21bn in 2008. Simply put, more households entering into retirement are reliant on the state for support. This is unsustainable in the environment of low growth, high unemployment and fiscal consolidation.
Savings challenges
We know that the average South African household does not save, with a current savings rate of 16%, dwindling from a high of 37% in 1980. Households save inadequate amounts for their retirement, but this could also point to a systemic problem. Are there suitable financial products to absorb postponed consumption in the South African context? This is a relevant question for all African economies that have a combination of formally and informally employed making up their economically active populations. In some African economies it is skewed heavily towards informal employment.
This story is from the 13 July 2017 edition of Finweek English.
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This story is from the 13 July 2017 edition of Finweek English.
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