Africa-Press – South-Africa. South Africa has a looming financial headache, with the number of individuals reliant on the state pension set to grow in the coming years as many cannot afford to retire on their own means.
Around three million South Africans already receive the R2,200 grant per month, with millions more relying on other grants or family for their income in retirement.
This places an immense financial burden on the state or family members, which is only set to grow in the coming years, as data points to only 9% of South Africans being able to comfortably retire.
South Africa should be able to fund the state’s old-age pension as it has a young population and a growing workforce, which are economic tailwinds.
However, the major issue is that young South Africans cannot find jobs, meaning their productivity is not being used in the economy.
This is feedback from Old Mutual chief investment strategist Izak Odendaal, who studied the various pension systems in place around the world in comparison to South Africa’s, which has largely been deemed inadequate.
Given widespread poverty and unemployment, many South Africans are not members of occupational pension funds, nor do they have private retirement savings arrangements.
Odendaal explained that this pushes many to be reliant on the state in retirement, with three million people relying on the state’s old age pension of R2,200 per month.
This is paid directly out of the fiscus and, as the population ages, taxpayers will likely have to support more pensioners.
With a stagnant economy, this may prove difficult as tax revenue grows largely in line with nominal GDP growth, unless there are major changes to tax rates.
Furthermore, the problem is likely to get worse in the coming decades, with only 9% of South Africans able to retire comfortably.
Another complicating factor is the mismanagement of South Africa’s largest pension fund, the Government Employee Pension Fund (GEPF).
This fund is an exception in that it is a defined benefit fund, in contrast to the others in South Africa, which are defined contribution funds.
In other words, if it ever runs out of money, taxpayers will have to bail it out, Odendaal said. This makes the governance issue at the Public Investment Corporation, which manages the GEPF’s investment, more concerning.
South Africa’s potential saving grace
Old Mutual Wealth’s Izak Odendaal
South Africa has a potential lifeline in its young population, with its workforce expected to grow until 2075.
This is often termed the demographic dividend in economics, with a growing workforce driving productivity and growth higher.
As a result, tax revenue climbs, enabling the state to fund more ambitious projects, further enhancing growth, or fund welfare programmes such as the state’s old-age pension scheme.
South Africa should be experiencing this virtuous cycle. However, it has a major issue in that it has the highest youth unemployment rate in the world, meaning that its productive workforce is not being utilised.
The challenge of creating enough jobs is massive, but Odendaal said South Africa is not at risk of running out of workers anytime soon.
Allan Grey’s chief investment officer, Duncan Artus, explained that the tailwind is a common factor among emerging markets that have grown strongly in recent decades, as a growing workforce is central to strong economic growth, with exceptional productivity growth.
“A lot of the questions are negative on South Africa, but we have one good thing going for us in the country versus the developed world,” Artus said.
“We have a growing population and, crucially, we have a growing young population that is able to work and grow the economy.”
However, Artus warned that this tailwind could be wasted in an economy that has not meaningfully grown in the past decade.
“We have a lot of young people and we have a lot of young people in the workforce, but we do not have an expanding labour force participation rate,” Artus said.
“As our chairman, Ian Liddle, says, ‘It does not help if you have got a lot of young people that do not have a job’.”
This creates a problem of its own, with a young population that is at risk of becoming dissatisfied and willing to participate in extreme governance changes.
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