South Africa's pension landscape is undergoing significant changes with the introduction of the Two-Pot System and early retirement programmes. File photo.
When you are young, you are strong, later in life your strength will diminish, and your opportunities will fade away. It is insane for a strong and resilient you to borrow from the frail and weakened you of the future. Any prudent person would do the opposite. Debt in your younger days is acceptable, no debt in your latter years is advisable. After retirement, you must focus on preserving your assets. Leading up to retirement one should concentrate on getting to retirement debt-free and with a solid nest egg.
1. A worrying pattern is becoming clearer as the government repeats past mistakes that have increased debt levels to unsustainable levels. As the money runs out other measures not favoured are not looking good. As good alternatives.
Treasury said that it is re-introducing an early retirement programme to reduce government employment costs.
The ANC’s election manifesto wants to revive an apartheid-era policy compelling pension funds to invest in government-approved investments. It states it will: “engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development, and the economy through prescribed assets.” The Financial regulator cautions against the prescribed assets plan and makes the following statement, “Mandating pension funds to bankroll projects would not be advisable – FSCA executive Olano Makhubela.
The Two-Pot Retirement System was introduced earlier this year. In terms of this legislation, it will divide retirement contributions into two parts: a savings pot and a retirement pot. The savings pot allows for one taxable withdrawal a year, while the retirement pot must be preserved until retirement and used to purchase an annuity. The system aims to balance immediate financial needs with long-term financial security.
Reducing teacher numbers is not the way to go.
2. Current government policy is based on the government’s own financial predicament, and there is a temptation to implement populist policies which in the short term may buy some votes, however, in the longer term it will have a devastating effect not only on individuals but also on the government, who will lose the confidence of voters for those policies. A recent article in Money Web, quotes Adelaide Changole, Bloomberg 13 Aug 2024, who makes the following statement. “It is no use asking for realism and pragmatism from socialists because those factors are mutually exclusive. Socialism is the doctrine of stupidity and envy. Its inherent forces of corruption, exploitation, and decay are institutionalized under the banner of redistribution and material equality. Their manifesto is motivated by layers of ignorance, naivety, and self-interest.” These statements sound harsh, yet it is difficult to criticise.
3. In the Medium-Term Budget Policy Statement delivered on October 30, 2024, to the National Assembly by Finance Minister Enoch Godongwana, he outlined the three priorities of the government of national unity.
The minister stated that they know that our debt is unsustainable, because debt-service costs have become the largest component of their spending, and it is rising faster than economic growth. We are anticipating that government debt will reach more than R6.05 trillion, or 75.5% of GDP, in 2025/26. Debt-service costs will reach R388.9 billion in the current financial year. This means for every one Rand of revenue that the government raises this year, 22 cents of this is paid in debt-service costs. The minister and the cabinet do not offer practical examples of how they will build a capable, ethical developmental state.
4. South Africa ranks in the bottom ten out of 140 countries with the worst law and order rankings. The above statement of the minister is hollow words without a professional approach to improving the circumstances in which South Africans live.
The Minister stated that they expected a revenue shortfall in the current year over and above the February budget numbers. According to Kieswetter head of SARS, “The revenue shortfall is R22 billion, and we know that year to date, the two-pot withdrawals have amounted to just over R29 billion, against which R7.2 billion is withheld as tax. For the full year, we can expect a contribution from this source of over R12 billion. If not for this windfall the budget revenue would have been even higher at R4 billion or more.
5. The Reserve Bank made the following statement. “We are committed to stabilising inflation at the mid-point of the target band. Achieving this outcome will improve the economic outlook and reduce borrowing costs. Finally, we reiterate the views of the Committee on additional measures that would improve economic conditions. These include reaching a prudent public debt level, improving the functioning of network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.” How the Reserve Bank play a role in the public debt level is not clear at all. They never take employment levels into account when raising interest rates, as their only concern is inflation.
6. Public Service and Administration Minister, Ms Ayanda Dlodlo stated: “The total number of employees in the public service persons currently employed in the public service as of 14 February 2022 is 1 230 835.” She added that 131 176 public servants will reach the retirement age of 65 in 2025. This equates to 43,725 new retirees per annum. All government employees whose conditions of service fall under the Public Service, including those employed in all national and provincial government departments, offices of the provincial premiers, the Public Service Commission, Provincial Service Commissions, and the office of the Auditor-General, are members of the GEPF.
However, in absolute terms, the government employee wage bill has skyrocketed from R408 billion in 2013/2014 to R724 billion in 2023/2024. Treasury said that it is re-introducing an early retirement programme to reduce government employment costs. This is however not a real saving from a taxpayer viewpoint. The Government Employer Pension Fund will carry this burden and it will place an additional solvency burden on the Fund. The 30,000 employees going on pension will receive pension benefits and that money is ultimately guaranteed by the Treasury which receives income from taxpayers. This number almost doubles the expected retirements for the current year.
The Minister said the early retirement package will cost R11 billion, and this amount will be allocated over the next two fiscal years, with details to be set out in the 2025 budget review in February.
During a question-and-answer session with the media, the treasury said it was targeting a 30,000 uptake, which will result in a R2 billion cost saving a year because people in higher income bands will be replaced by those earning less. Public servants aged 55 to 59 will be able to apply for early retirement, without a reduction of pension benefits.
Government proposes allocating 47.9% of available non-interest spending to national departments, 42.3% to provinces, and 9.8% to local government in 2025/26.
Public procurement accounts for about 19% of consolidated government spending, totalling R1.5-trillion over the next three years. In the past several years, the governing party has at least, at the level of rhetoric, committed to a ‘new dawn’ that would not tolerate fraud, corruption, and patronage. Most attention relating to public procurement in South Africa depends heavily on its public procurement system and faces persistent issues of corruption within that system. The question is seldom asked why the government does not create internal capacity. Outsourcing leads to layers of unnecessary costs.
Every government statement regarding pension fund money should place every citizen on high alert.
* Kruger is an independent analyst.
** The views expressed herein are not necessarily those of Personal Finance or Independent Newspapers.
PERSONAL FINANCE