Higher household savings could transform SA’s economic growth – study

Saving boosts investment spending which is crucial to economic growth.
Dr Adrian Saville, chief strategist at Citadel Wealth Management and one of the authors of the Savings Index.

JOHANNESBURG – South Africa’s poor rate of household savings is materially holding back its economic growth rate, according to research from Investec and the Gordon Institute of Business Science (GIBS).

At 16.3% of GDP, the country’s savings rate translates into an investment rate of 18.7% (explained by a slight uplift from foreign investment), which will fund an economic growth rate of just 2%, the Investec GIBS Savings Index finds.

If South Africa wants to achieve economic growth in the order of 5%, as envisaged in the National Development Plan (NDP), it needs an investment rate closer to 28.3%, according to the index.

Released on Wednesday, the Savings Index reveals that 90% of South Africa’s economic growth over the past 20 years can be explained by growth in consumer and government spending.

“Neither of those are sustainable and neither of those contribute to the development of productive capability. The healthiest economic growth is investment fed and export led,” said Dr Adrian Saville, chief strategist at Citadel Wealth Management and one of the authors of the index.

Among 39 countries whose economic activity accounted for more than 95% of world output between 2001 and 2010, the average investment rate had a 73% correlation with the average economic growth rate.

“The single most important explanation for economic growth in any economy is investment spending. Savings play a pivotal role in improving economic growth through funding investments,” said Saville.

Based on 13 aspirational countries or “savings stars” – which achieved economic growth of more than 7% for 25 years in a row – the Savings Index establishes a small set of common ingredients that explain sustained and elevated economic growth.

Chief among these is a high rate of investment. Other attributes include a competent government, macro-economic stability and outward economic orientation.

The countries range from Brazil and Botswana, to South Korea, Japan, China and Indonesia.

The Savings Index then assesses South Africa’s performance against these countries based on three pillars, namely, the extent of its existing savings pool, the rate at which new savings are flowing into the pool and the environmental factors that influence savings.

Combining the scores from each of these three pillars, South Africa achieves a total score of 63.4, where 100 represents a pass mark for national savings.

“We are two thirds of the way to being aspirational superstars,” said Saville, who argued that South Africa is walking “straight past a yawning opportunity” to convert the 2% economic growth that we’ve got into the habit of delivering into the 5.4% that we write about.

Saville said that South Africans are “collectively responsible” for saving, which in turn leads to investment and economic growth. “If you want economic growth stop spending and start saving,” Saville commented.

Higher household savings crucial

Unsurprisingly, the environmental factors that have the greatest negative impact on South Africa’s savings rate is sluggish growth in per capita incomes, slow growth in productivity and entrenched high unemployment.

“The promotion of domestic savings – especially among households – holds the greatest prospect for the promotion of elevated economic growth,” said René Grobler, head of Investec Cash Investments.

By reducing consumption to bolster savings, attracting non-resident savings to promote portfolio investment and attracting foreign direct investment, South Africa can escape the “savings trap”, Grobler said.

“We sit in a relatively undemocratic landscape where information is asymmetrical and the cost of access is high, so we have headwinds rather than tailwinds to savings behaviour,” said Saville, calling on industry to establish “affordable and accessible savings channels”.

Speaking to Moneyweb on the side-lines of the launch of the index, chief director of financial investments and savings at National Treasury, Olano Makhubela explained that government’s strategy to promote a savings culture involves both “nudging” consumers to save (by providing tax incentives for example), as well as compelling them to do so through, for example, the compulsory annuitisation of retirement savings.

Makhubela said that Treasury welcomes the Savings Index and will track it closely.


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Then why doesn’t SARS make all interest tax free or do they lose too much income tax on the amount above R23800 per annum!

They not talking about people with somewhere over R400 000s in savings, because that’s what one needs to have saved to be able to earn over R23800 in interest, and only the amount of interest going above R23800 is taxed. No way the average household will have over R400 000s in savings, and that is who they are saying needs to save.

Many people, probably the majority, struggle to live on bare essentials. They have no capacity to save.

People don’t earn enough in SA to have substantial savings. At times one salary is supporting a household of 5 unemployed people. Youth unemployment in KZN is at 80%. Until more jobs are created and less financial pressure on households then there will be a possibility to save.

In order to save, income must increase or spending must decrease. Both are under pressure at the moment. It’s a bit of a conundrum then: saving grows the economy, but economic growth bolsters income and increases spending. Perhaps then increased saving needs more than simply an increased income, but rather a complete mind-shift.

Does anybody have any idea what the income tax take is for amounts above R23800 and R34500 ? It can’t be significant and can only be a tiny portion of the R400 billion or so per annum SARS collects in income tax!

Apply your marginal tax rate to the amount greater than the exemption. Yes, it probably is very small relative to total tax collections, but I don’t have actual figures.

A few weeks ago I heard Adrian Saville almost have a heart attack on a radio show as he, sounding frustrated and on the brink of a meltdown, desperately tried to highlight and emphasize the importance of saving and how much a change in the financial behavior of South African’s is deemed as being of absolute necessity as soon as possible.
Am glad you lived Adrian.

So, unsurprisingly, South African’s don’t save.
Bling, bling and more bling, flashy cars and clothing, gadgets, shopping sprees, the list goes on…
Image, status and instant gratification invariably matters more than building true, everlasting wealth to a ridiculously large proportion of the populous.
But stating the obvious does not solve the problem.

How do you solve this ?
How do you change mindsets ?
How do you teach people to find satisfaction in driving a old PAID-UP car, and not the latest, flashy, debt-sinking model ?
A car is just a mode of transport, if it’s safe, reliable and (relatively) comfortable, that should be enough, right ?
Clothes are just pieces of cloth.
Live in a house you can afford.
Bragging rights mean bugger-all.
It’s a psychological thing.

Education at the earliest stage possible would be the solution, but the less said about the state of our education system, the better.
Remember, it’s not that people don’t know that they need to save but rather, saving is just not a high enough priority.
In an ideal world, people wouldn’t need to be told to save, that thing called common sense, but, that’s the hand we’ve been dealt.

So, savvy Dr Saville, why don’t you pull a Mark Barnes on us, come up with a credible plan, present it to government, and who knows, you might be our next Minister of Savings, or something along those lines..

Firstly Banks are flush with money at the moment therefor they do not entice people to save . Interest Rates offered are not worth saving for . Secondly SARS will be doing away with the R23800.00 and R 34500.00 Tax Free amounts once the Retirement Reforms have been fully Implemented . This same Issue has been discussed over and over again and yet nobody wants to Budge . Govmnt should change their Attitude ” in Nudging people to save ” to rather ” Supporting and Assisting People to Save ” after all we are all Adults !!

Are you sure about them doing away with the tax free amounts? I believe that SARS will simply leave the exemptions unchanged and they will run off over time as the figures become increasingly meaningless with inflation reducing the value of money. I thought this was the situation after they introduced the tax-free savings vehicle last March. Please correct me if I’m wrong.

SARS said that the present interest exemptions would remain FOR THE FORESEEABLE FUTURE. The question is, how long is that?

God only knows how those in their 30’s and 40’s today driving Suvs,Mercs.Bmws and Audis are going to be able to retire, when their parents who saved a lot more than they did relatively and drove average cars are today driving corollas and are barely eking out an existence! Their life expectancy is probably 5 years more than their parents as well.

Savings in this country will never be taken seriously until a few essential ingredients are added to the peoples lifestyles:-
* You may not commit more than 40% of your net salary to service any form of debt that you have taken on – inclusive of house and car
* Interest earned on all investments should be tax free – many pensioners today live on their interest income but have to constantly have to dip into capital to meet tax commitments
* Commuting of 1/3 of an RA or a Pension Fund should be outlawed, people must learn to live without this commutation as in the longer term it affects you pension severely
* Pensioners should get a preferential tax rate over and above current tax tables, after all they have paid taxes for upwards of 35 years in most cases.
* Pensioner medical expenses should be totally deductible for tax purposes

This country is sitting on a volcano – we have youngsters who finished school as far back at the early 90’s who don’t have jobs and in 20 to 25 years time they will want state support in the form of a grant/pension and there will be no funds available

Budgets. Personal household budgets. Every, single month. Make sure that your income is more than you outgo. Save the rest. If you can’t save, adjust spending. If you can’t adjust spending, sell something. If you can’t sell something, take a second job or an odd job. There’s a way out of every hole you find yourself in.

The formula is simple, but difficult.

Increase income, reduce spending.

I believe the saying “living in ivory towers” is applicable here. today is the day where interest rates are likely to rise for the FIRST time this year. personal income taxes are almost certainly to be raised at the budget. inflation is back in the mix and with rand devaluing a lot of things just became a lot more expensive. and this kind doctor says – SAVE MORE!! with what? its like the unemployment question – until such time that there are fewer people looking for fewer jobs – it ain’t going to happen.

End of comments.



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