Government shoots itself in the foot 

By implementing the two-pot retirement system, the government will experience a short-term gain in terms of increased tax collection but will feel the long-term pain from lacklustre economic growth as savings are tapped to fuel consumer spending. 

The two-pot retirement system officially came into effect on 1 September, promising South Africans early access to a portion of their retirement savings. 

The two-pot system has been designed as a way to prevent South Africans from withdrawing their retirement savings prematurely. 

Under the old system, the only way South Africans could get their hands on their retirement savings was to resign or be retrenched. This created very poor outcomes for many in retirement. 

To avoid this, the new system forces South Africans to keep the majority of their savings, two-thirds, invested until retirement while giving them access to a ‘pot’ containing one-third of contributions. 

This is expected to have a significant impact on South Africa’s economy, greatly increasing disposable income and boosting the government’s tax revenue. 

Asset manager Stanlib expects GDP to increase by an additional 0.2% in 2024 and 0.2% in 2025 due to the two-pot system. 

Research from the Reserve Bank shows that the benefit may be even more significant and help bring down the government’s debt-to-GDP ratio. 

Its research also shows the government could collect an additional R41 billion in personal income tax in the fourth quarter of 2024, with billions more in VAT and corporate income tax from increased spending. 

Head of investment research at FNB Wealth and Investments, Chantal Marx, said this new system, combined with interest rate cuts, will boost consumer confidence in the coming months. 

This is expected to be positive for domestic retailers, particularly those focused on discretionary items such as clothing and furniture. 

Some benefits could also accrue to the banks, as savers may utilise their withdrawals to pay down debt, improving asset quality and driving higher transaction activity.

Thus, the new retirement system appears to be a net benefit for the economy and the government’s ailing finances. 

However, some analysts and economists have said the two-pot system is a classic case of the government choosing short-term gain in exchange for long-term pain. 

Stanlib senior economist Ndivhuho Netshitenzhe said the increase in household consumption expenditure would likely be import-intensive, limiting the upside benefit to overall GDP. 

Increased spending in the next year will be offset by declining savings and a smaller pool of capital to fund investments in South Africa. 

South Africa already has one of the lowest savings rates in the world, with household savings reaching -0.9% as a share of disposable income in the first quarter of 2024. 

The two-pot system has the potential to make this even worse as South Africans increasingly tap long-term savings for short-term spending. 

A low savings rate implies a low investment rate unless foreign savings can be imported by running a current account deficit, Old Mutual Wealth investment strategist Izak Odendaal said.  

This is fine under normal conditions, but the major drawback is that these foreign flows can be reversed, especially if they are largely portfolio investments.  

This is the case in South Africa, where most foreign capital inflows head for the JSE to buy bonds or equities – ‘hot money’ that can leave at the click of a button – instead of being invested in long-term businesses as ‘foreign direct investment’.

As the graph below shows, there is a strong linkage between savings and fixed investment.

The chart shows a worrying decline in savings over time, partly because of increased borrowing and taxation levels and partly because of rising unemployment. 

Investment rates have been depressingly low in terms of share of GDP over the past 30 years, apart from the period roughly between 2005 and 2015. 

As the chart shows, domestic savings were insufficient to fund this investment boom, and the country ran a large current account deficit during that time. 

Domestic savings is a more stable source of funding for fixed investment, and fixed investment is crucial for sustainable economic growth, Odendaal said.  

“If there is one thing that economists agree on, it is that countries that enjoy long periods of rapid economic growth are countries with high investment rates.” 

“At 15% of GDP, South African investment levels are around half of where they should ideally be.” 

“The blame does not primarily lie with a lack of domestic savings, but rather with political and policy uncertainty, institutional bottlenecks and depressed business confidence.” 

A growing retirement system can ease this constraint over time, but it is unclear if the new system will be able to do so as it is highly dependent on individual behaviour. 

Hopefully, expectations are correct that the magnitude of annual net outflows will dwindle over time, settling at levels lower than the current annual outflows, Netshitenzhe said.  

“Unfortunately, international experience shows that if these types of reforms are not well designed and implemented, the boost to economic activity tends to be short-lived and results in a decline in pension savings over the long term.” 

“All this occurs without alleviating the financial pressure on consumers by reducing their debt or enabling them to build a buffer against higher costs.”