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Budget speech 2020 – Tips for Tito

On 26 February 2020, Finance Minister, Tito Mboweni will deliver the 2020 National Budget Speech to announce how the government plans to spend its budget and collect revenue.

Rowan Burger, Momentum Investments Head of Client Strategy, has some interesting views on where the government should focus to improve retirement savings. According to Burger, it is time for legislators to reassess the state of retirement savings in South Africa and chart their own course. “The focus on cost-saving needs to shift to financial inclusion and quality of outcome,” Burger says.

From the 2018 National Treasury tax statistics, we can observe that there are only 4.7 million in the system of some estimated 16.5 million workers. We also see that contribution levels average 11% of taxable remuneration dropping down to only 2% for the top earnings category.

This clearly indicates the current system misses its mark in terms of coverage and delivery of outcomes.

Instead of a further focus on incremental cost efficiencies that could be achieved by funds, it is time to take a broader view of how to solve our problems:

The old age grant is generous by international standards and as it is means tested, it forms a disincentive for low income workers to participate and preserve savings.
Much of our workforce is informal or part-time which means the pre-determined regular contributions required by the Pension Funds Act excludes them from meaningful participation (we only have 9 million permanent full time employees).
While there is a tax incentive for higher paid workers, those below the threshold have no incentive to tie their savings up until they are 55.
Meanwhile, threats of prescribed assets and other investment restrictions have higher paid workers preferring to save outside the system where they can control their savings.
The ability to encash benefits in full when changing jobs leads to over 90% of these members doing so, resulting in savings terms being nowhere near the 40 years and results in insufficient benefits.

Click here to read the media release.

It will be very interesting to see if any progress is reported on the planned changes to bring provident funds in line with pension funds, particularly as far as restricting proceeds from being paid out in full. With very important elections on our doorstep, I am not holding my breath. On the other hand, Mboweni has never been scared to be controversial and apolitical.

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