Like many South Africans, Nkululeko Makhaya has only the most basic financial strategy for his future: a pension contribution deducted from his salary and 100 rand ($11.90) put aside each month towards family funeral cover.
The 35-year-old admits this is woefully inadequate, but with only a modest salary and obligations to both his immediate and extended family, there is barely enough each month to see him through to the next paycheck, let alone save.
Cue the future: what happens in 30 years when he is still very much alive but retired, and inflation has eaten into his pension?
“I’ll get by somehow. Hopefully my children will have good jobs and take care of my wife and me in return for the good education I’m paying for now,” said Makhaya, a salesman for a Johannesburg cleaning products firm, Reuters reports.
“I might not even live to retirement, in which case the funeral policy will come in handy.”
In fact, Makhaya is setting aside more than most people in South Africa, where the majority of households are forced – or choose – to spend most of their income, and just keep their fingers crossed about the proverbial rainy day.
The weak savings culture is a big headache for the government because it hampers speedy economic growth. With less cash sloshing around its banking system, South Africa cannot finance the infrastructure such as roads, ports and broadband Internet needed to move its economy up a gear.
Tellingly, it fares poorly on both growth and savings when compared to peers in the BRICS bloc of developing countries.
This year, South African GDP is forecast to grow at a rate below 3 percent, against 8 percent for China and 7 percent in India. And its savings rate of just 16 percent of GDP compares with 53 percent for China, 34 percent in India and 20 percent for Russia. Alarmingly, it appears to be getting worse.
“A strong savings culture is almost a prerequisite for sustainable economic development and South Africa has in the last 10 years or so gone backwards very fast,” said Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa, a trade group for firms that provide savings products.
“Households basically save zero percent in aggregate, meaning at a national level household income equals household expenses. If you go back 10 to 15 years ago it was probably sitting at 6 to 7 percent,” Dempsey told Reuters.
Net household savings, mainly in the form of retirement funds, long-term insurance, unit trusts and bank deposits, have been in negative territory since 2005, the Treasury says. In contrast, household debt as a ratio of disposable income remains unsustainably high at 75 percent.
Finance Minister Pravin Gordhan and his predecessor, Trevor Manuel, both begged South Africa’s 50 million people to save more, but their entreaties were trumped by the power of bling – those with disposable income would rather spend it on the latest flat-screen TV or smartphone than put it away for the future.
This partly reflects South Africa’s racially divided apartheid past in which millions of marginalized blacks had no access to credit and other financial services. They are now grabbing the chance to acquire assets at the expense of saving.
“It’s not necessarily a bad thing,” said Colen Garrow, an economist at Meganomics.
“Low savings levels should be seen in the context of assets such as homes and motor vehicles that new consumers purchased after the first democratic elections in 1994. Before that, most South Africans were simply not able to buy such assets.
“But I can see why Pravin Gordhan is worried. If you can’t finance investment out of your savings – which we can’t – then you’re going to have to go out of South Africa and borrow on international capital markets. That’s exactly what’s happening.”
Under apartheid, black South Africans with little access to traditional banking came up with informal savings schemes like “stokvels”, in which a small group of around a dozen people – usually women – gather once a month and pool their savings.
Each chips in a small fixed sum, usually between 100 and 1,000 rand, and a different member each month gets to take home the whole pot. Peer pressure ensures all members contribute, providing a convenient way for women in poor townships to save up for big purchases like furniture.
An estimated 40 billion rand ($4.8 billion) is invested in stokvels, a recent study shows, but the money rarely finds its way it into the formal financial system, denying the economy access to funds that could help fund crucial investment. Banks and investment companies are trying to get access to that money.
Sluggish growth represents a major political threat for the ruling African National Congress, the former liberation movement which turned 100 this year but is still learning how to run a sophisticated emerging market economy.
The government says growth needs to hit 7 percent to make any sort of a dent in unemployment that, at 25 percent, is crushing the dream of the “Rainbow Nation” by perpetuating the racial inequalities of apartheid and fuelling one of the world’s highest rates of violent crime.
Angry township protests by young men with little to lose are already a daily occurrence, and, after uprisings across the Middle East and north Africa in the last 18 months, top ANC officials admit they sitting on a powderkeg.
SPEND, DON’T LEND
However, with bank charges stubbornly high despite government pressure to get them down, and interest rates at 30-year lows since the end of 2010, there is very little incentive for most South Africans to save.
Yields on 3-year domestic debt are now at 6.5 percent, close to historic lows and compared with 8 percent five years ago.
Meanwhile, banks, credit card firms and shops make it all too easy to borrow, despite a law introduced in 2006 to try to enforce responsible lending.
Which is why Nkululeko Makhaya’s neighbor in the lower-middle-income Johannesburg suburb of Bramley drives the latest BMW model. And why 23-year-old receptionist Sindi Mpheko can only afford to rent a small backyard room in the rundown township of Alexandra but always turns up for her job in the Sandton financial district kitted out in the latest trendy wear.
“I’m just taking care of me for now, no responsibilities. I want to have fun while I can and worry about the future later, in my late twenties,” Mpheko says, a touch defensively.
She is among the 90 percent of South Africans the Treasury says are not tucking away enough savings and investment to enable them to retain the same living standard on retirement.
Even higher income earners such as chartered accountant Carol Khozwayo would rather invest in “visible” assets such as property than put money in the stock market or government bonds.
Khozwayo and her husband have re-mortaged their house in the upmarket Fourways suburb of northern Johannesburg to purchase two smaller town houses they rent out to finance the repayments.
The 2007 collapse of asset management firm Fidentia in a fraud scandal in which millions of rand – including pensions for miners’ widows – went missing, has also given the savings industry a bad name.
“I would rather see physical evidence of my investment and be assured that my children’s future is fairly secure,” Khozwayo said. “Look what happened to Fidentia.”