Prof Haroon Bhorat, Chair: Investment Committee at Sygnia
The core aim of a well-designed public and private pension fund system is to mitigate against income loss at retirement, using forced savings during an individual’s working life. In essence, a retirement funding system is about designing the optimal income-smoothing system to service an individual throughout their lifetime.
However, a need for pre-retirement liquidity will invariably arise as a result of positive and negative economic shocks. In simple terms, all unforeseen and sudden events – ranging from the loss of a job to the purchase of a new home – may require an individual to make a lump-sum cash injection. Failure to do so may result in elevated debt levels for the individual and their household and cause undue socioeconomic hardship.
With these very real income challenges in mind, national governments around the world have considered the possibility of early access to retirement funds (before retirement). Countries such as Singapore, Chile, the US, UK and New Zealand already have such schemes in place or are considering implementing them. The core thinking in designing South Africa’s two-pot retirement system is that easier access to retirement savings will allow households to use these savings to buffer against shocks.
Research has shown that the limited early availability of retirement savings can increase the overall welfare of affected individuals. For example, work on Singapore’s mandatory defined contribution (DC) plan shows that early access has led individuals to pay down credit card debt and sometimes hold onto withdrawals to invest in property. However, the dangers of accessing pension savings early are only too apparent. In poorly designed schemes, pension savings can be depleted such that they provide inadequate retirement incomes, while early access to funds may be poorly utilised by financially illiterate households.
The behavioural response to National Treasury’s two-pot pension system remains to be seen, but the SA Reserve Bank (SARB) research team has run a basic macroeconomic simulation with a focus on the 1/3 of the savings pool that will be applicable to the early withdrawal rules (noting the restriction of one withdrawal per tax year at applicable tax rates). SARB assumes two withdrawal rates, which they term “High” and “Moderate” withdrawal scenarios.
The SARB’s only other behavioural assumption is that higher income households will not withdraw as much because of the tax implications (although these implicit elasticity values are not clearly included in the model). So what do they project in terms of withdrawal values? For the high withdrawal scenario, they project that South Africans will extract an additional R100bn from the savings portion of their pension funds in Q4 2024 – this is in addition to the historical resignation portion of R110bn expected for 2024 as a whole. In 2025 and 2026, the withdrawals fall to R40bn and then rise to R42bn.
The relevant figures for the 2024–2026 moderate withdrawal scenario are significantly lower at R40bn, R20bn and R21bn respectively. The macroeconomic effects of the two-pot system are particularly interesting. The core assumption in the SARB model is of a positive expenditure (and tax) shock to the South African economy by as early as Q4 2024. Much of the economic stimulus thus revolves around the aggregate demand injection to be realised from these funds.
Specifically, the SARB model expects consumption expenditure to increase, bringing moderate inflationary risks – the risk of interest rate hikes – all as GDP is projected to tick up slightly: in a high withdrawal scenario, GDP is projected to grow by 0.3 percentage points (pp) in 2024 and by 0.7 pp in 2025.
Assuming GDP growth of 1% this year, that means the projection is for GDP growth of 1.3% instead and instead of 2% for 2025, 2.7%. These are not insignificant changes, and they could have materially positive real economy multiplier effects. The moderate withdrawal scenario projects GDP to grow by 0.1 pp and 0.3 pp, to 1.1% and 2.3% for 2024 and 2025 respectively. Holding the inflationary risk constant for now – the two-pot system is in essence a consumption kicker – offers a significant boost to short-term GDP growth in South Africa.
Notably, however, the effect is decidedly short-term in both models: by 2026 the effects from the new system are completely muted.
What the model does not cover, of course, is concern around the longer-term impact of individuals who make early withdrawals having a smaller pool of savings on which to retire… but that’s a conversation for another day!
“Specifically, the SARB model expects consumption expenditure to increase, bringing moderate inflationary risks – the risk of interest rate hikes – all as GDP is projected to tick up slightly: in a high withdrawal scenario, GDP is projected to grow by 0.3 percentage points (pp) in 2024 and by 0.7 pp in 2025.”
ENDS
