When South Africa’s two-pot retirement system came into effect in September 2024, it was widely welcomed as one of the most significant retirement reforms in decades.
For the first time, retirement fund members could access a portion of their retirement savings before retirement without resigning from their jobs. The reform was designed to strike a balance between providing consumers with access to emergency funds and preserving a portion of their savings for retirement.
Within days of implementation, retirement funds were flooded with withdrawal requests as millions of South Africans sought access to much-needed cash.
Initially, this appeared to confirm what policymakers had anticipated: households were under financial pressure and would make use of the opportunity to access their savings. However, as the months passed, the initial wave of withdrawals did not disappear. Requests continued, suggesting that many South Africans were not experiencing a temporary financial squeeze but facing ongoing financial strain.
In many respects, the two-pot system has become a window into the financial health of South African households and a revealing indicator of the country’s ability to absorb financial shocks without experiencing severe hardship.
A window into household financial strain
The challenge is that many South Africans do not have a financial safeguard. Research conducted by the Financial Sector Conduct Authority found that only about 51% of South African adults can be considered financially literate. At the same time, debt continues to place significant pressure on household finances.
According to TransUnion’s Consumer Pulse research, a large proportion of South Africans report that their incomes are not keeping pace with rising expenses, while many consumers continue to rely on credit to meet everyday needs.
As such, the two-pot system has not created financial stress; it has simply exposed it. It is therefore unsurprising that retirement savings have become an emergency fund of last resort for many households.
Although the two-pot system has provided valuable relief, it has also exposed an uncomfortable reality. Many South Africans are being forced to choose between their immediate financial needs and their long-term financial security.
This is where the conversation becomes more nuanced. The success of the two-pot system should not be measured solely by the number of withdrawals processed. It should also be evaluated by what those withdrawals reveal about the broader financial well-being of consumers.
For many individuals, access to retirement savings has helped to settle debt, cover school fees, pay for medical expenses, or manage unexpected household costs. In these situations, the system has served exactly the purpose it was intended to serve. However, every withdrawal comes at a cost.
The long-term cost of short-term relief
Funds withdrawn from the savings component are subject to tax at an individual’s marginal tax rate. This means members often receive less than they initially expect. More importantly, the money withdrawn no longer benefits from years or even decades of compound growth.
Time is one of the most powerful drivers of retirement outcomes. Money invested today has the potential to grow significantly over a working lifetime. Removing even relatively modest amounts from retirement savings can therefore have a disproportionate impact on future retirement income.
For instance, a withdrawal of R20 000 may provide immediate relief today, but if that amount had remained invested and continued to grow over the next 20 or 30 years, its value at retirement could be substantially higher.
The true cost of the withdrawal is not only the amount taken out but also the growth that is forfeited over time. In addition, early withdrawals are taxed at an individual’s marginal tax rate, which can immediately reduce the amount received, whereas retirement benefits are often taxed more favourably at retirement. This means the same R20 000 could be worth significantly more if preserved until then.
This highlights one of the inherent tensions within the two-pot system. It provides flexibility when consumers need it most, but that flexibility can come at the expense of long-term retirement outcomes. The reality is that no retirement system can compensate for broader financial vulnerability.
If households lack emergency savings, carry high levels of debt, or are unable to absorb unexpected expenses, pressure will inevitably find its way elsewhere. The two-pot system has simply made that pressure more visible.
An opportunity for greater financial engagement
For perhaps the first time, large numbers of retirement fund members are actively engaging with their retirement savings. Consumers are checking balances, understanding fund structures, and asking questions about their long-term financial well-being.
This increased engagement should not be underestimated. Retirement savings have historically been viewed as something distant and abstract. The two-pot system has brought retirement planning into everyday financial conversations, creating opportunities for greater financial awareness and education. However, access alone is not enough.
Financial resilience beyond retirement funds
Building a financially resilient society requires a broader approach that includes financial literacy, responsible debt management, emergency savings, and long-term financial planning. Retirement funds play an important role in that ecosystem, but they cannot carry the burden alone.
Ultimately, the most important lesson from the two-pot system may have little to do with retirement itself.
It has revealed how many South Africans remain vulnerable to financial shocks and how quickly long-term savings can become the solution to short-term challenges. Although the reform has provided much-needed flexibility and support, it has also highlighted the urgent need to strengthen financial resilience beyond retirement funds.
The two-pot system was designed to help South Africans access their savings in times of need. What it has unexpectedly revealed is just how many people are living in a constant state of financial need.
That is a conversation that extends far beyond retirement reform and one that policymakers, employers, financial institutions, and consumers will need to confront together.
Astrid Ludin is a former Deputy Commissioner of the Financial Sector Conduct Authority.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
