Recent research has confirmed that the criteria of the means test used to determine whether people with low incomes qualify for the state old-age pension (SOAP) is discouraging this category of the population to save to make own or supplementary provision for themselves.

The study, entitled “Old-Age Saving By Low-Income Earners” was conducted by Genesis-Analytics for FinMark Trust and the South African Savings Institute. The results were released early in April. The aim was to understand the ways poor people provide for their old age and to identify the policy priorities needed to meet their needs more effectively.

One of the less surprising results was that finance minister Trevor Manuel seems to have been on the mark in his budget of February this year when he announced that the means test will be abolished as part of wide-ranging reform aimed at pension and retirement funds.

Amongst the more surprising results of the research was that working-age people in Living Standards Measure (LSM)1 1-5 income groups have on average lower incomes than the corresponding income for retired people.

Average personal income in every category from LSM1 to LSM5 is lower for working-age members than for their retired counterparts receiving a SOAP, now R940 a month. This highlights the low potential for working-age people in the LSM1-5 group to save. On top of this, they are discouraged to save for their old age because the means test is likely to reduce their chances of qualifying for state benefits as it disqualifies people with assets from receiving pensions.

Those in these income groups who actually do save in one form or another do not see providing for their old age as a priority, preferring to prioritise investments with more immediate tangible results such as improving their housing environment and educating their children.

One of the more disturbing findings of the study is that one reason why individuals from these groups fail to save for their old age is that they are unlikely to live to enjoy it. The statistical life expectancy of 20-year-olds has fallen over the past 13 years. For 20-year-old women it has come down from 71 to below 60 since 1994 and from 63 to below 55 for men.

The research also reveals that:

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For those in the low-income groups who survive to retirement, life is increasingly difficult. Unemployment is increasing among people older than 40. While on average fewer than one in four South Africans are unemployed, the ratio rises to one in three among those in their late 40s and nearly one in two among those approaching 60. This drop in employability is particularly sharp among people in the LSM 1 to 5 population groups – the poorest in the country – who are unlikely to save at all.

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Some 19.7 million South Africans – 74% of all households – fall within the LMS 1 to 5 categories.

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The SOAP is the most important source of income for the elderly poor. Of people aged 60 and older in the LSM 1 to 5 groups, 89% receive their income from this grant.

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There is a need to define savings more broadly. Conventional cash-based definitions of savings, as understood by the financial sector in terms of contributions to a policy, unit trust or government vehicle, seem to reflect little of the trend amongst poorer people who value more tangible forms of savings in the form of incremental housing or education.

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It suggests that existing long-term savings products such as endowments generally do not provide the flexibility to save periodically available disposable income or to access significant parts of the accumulated savings in the event of an emergency.

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There is a need to review the idea of compulsory savings, even for only the formally employed members of these LSM groups, supported by cash incentives of one type or another in the light of the savings preferences in these groups.

Manuel’s announcement about the abolition of the means test is part of a broader pension dispensation and retirement fund reform process. He also announced that the retirement age for men will drop from 65 to 60 over the next three years because high poverty levels make the gap discriminatory and to give effect to the Constitution’s stated intent of gender equity.

One of the reasons why the retirement age for women to date has been lower is that their unemployment levels are higher. Studies have also shown that grants to women have higher impact on the household in terms of nutrition and education.

A recent study by the Southern African Regional Poverty Network (SARPN) has also found that South Africa’s system of social security grants successfully reduces poverty. It is estimated that the SOAP reduces poverty levels by 10%.

The SARPN-report, however estimated that “a 10% increase in take-up of the SOAP reduces the poverty gap by only 1.2%, and full take-up by only 2.5%.

“The take-up rate for the SOAP is already high, and many of the eligible elderly not already receiving the SOAP are not among the poorest South Africans. As a result, further extensions of the SOAP have limited potential in reducing poverty.”

SARPN is of the opinion that the extension of other social grants like those for disability has greater potential to reduce poverty and that “the greatest poverty reducing potential lies with the progressive extension of the Child Support Grant.”

In a speech September last year to the conference of the Institute of Retirement Funds deputy minister of social development, Dr Jean Swanson-Jacobs said more than 12.9 million South Africans currently receive income support or social assistance benefits. This includes more than 2.2 million recipients of the SOAP.

The deputy minister said over 6 million working South Africans do not contribute to retirement savings and will over time become dependent on the SOAP.

According to FinScope™ South Africa 2005, a survey of financial use and behavior, about one-third of working-age members of LSM groups 1 to 5 save at all, but only 5% actually save for retirement. A good proportion who do save for retirement only do so because they are required to do so by their employers.

Besides straightforward reduction in poverty levels, there are also other little-known positive social spin-offs to state grants. “Both the SOAP and Child Support Grant are statistically significantly associated with improvements in school attendance, and the magnitudes of these impacts are substantial …

“To the extent that social grants promote school attendance, they contribute to a virtuous cycle with long term dynamic benefits that are not easily measured by statistical analysis,” the SARPN report states.

Greg Penfold

1) LSM is a system of categorisation used to provide differentiated socio-economic groupings.