South Africa faces a retirement crisis

Growth House technical head Jonathan Nel said that for many South Africans, the gap between their savings and the savings they need to retire comfortably is widening.

On average, South Africans’ pensions replace only about 18% of their last salary. This is problematic because it is significantly below the industry benchmark of 75% required for a comfortable retirement. 

As a result, more than nine out of ten South Africans cannot afford retirement, and some rely on their children for financial support. This “sandwich phenomenon” creates generational cycles of economic stress. 

Additionally, inflation and economic pressures are widening the gap between savings and what people need for their retirement. 

Daily expenses and debt repayments consume a large portion of household income, which makes saving for retirement difficult.

The daily struggles of South Africans to make ends meet were exemplified by the items people chose to spend their money on when they gained access to a portion of their retirement savings.

They primarily used their withdrawals from the new two-pot retirement system to settle short-term debt and cover expenses related to their homes or cars.

But delaying retirement savings only increases the risk of financial insecurity in later years, said Nel.

“The earlier you start saving for retirement, the more you benefit from compound growth. Delaying savings can significantly reduce the funds available when you need them most.”

Furthermore, people live longer, so their retirement savings must last longer. Sanlam Corporate even suggests that South Africa’s actual retirement age is 80 instead of 65 because few people have enough money saved to retire earlier.

Because people live healthier, longer lives, they can also often work to an older age. Postponing retirement also allows additional compounded growth on retirement investments and reduces financial pressure on their retirement savings.

However, Nel also said that good health is essential for a good retirement. Healthy individuals tend to earn more, save more, and spend less on healthcare, allowing them to build stronger retirement funds.

“Longevity is both a blessing and a financial challenge. Ensuring that retirement savings last through extended lifespans requires disciplined saving and strategic investment planning,” said Nel. 

“If a client lives five years longer than expected, their replacement ratio can fall below 50%, creating a serious challenge to maintaining their lifestyle in retirement,” Discovery Invest CEO Kenny Rabson explained.

He added that poor financial decisions exacerbate the problem. He cited biases like loss aversion and the preference for immediate rewards over larger, delayed ones as detrimental factors.

Additionally, Nel said there has been a shift away from defined-benefit pension schemes to defined-contribution plans.

Defined-benefit pension schemes are commonly annuity plans or lump-sum payments with high administration costs that beneficiaries have little control over. 

That means the employer bears the risk that the investment returns will not cover the defined-benefit amount due to a retired employee.

In contrast, defined-contribution pension plans place the investment risk squarely on individuals, requiring a robust financial plan. 

This is because employees primarily fund these schemes, and employers can choose to match employees’ contributions. 

As such, employers are not responsible for the performance of the mutual funds, money market funds or the securities or stocks that their employees invest in for their retirement.