South Africa needs to be creative to avoid falling off the retirement cliff

The majority of retiring South Africans look to the state for support. Shutterstock

In 1881, Otto von Bismarck, the first chancellor of united Germany, designed the concept of “retirement”. The ideal time, he said, would be 70 years of age. Back then, people simply didn’t retire. If you were alive, you worked. It was a revolutionary idea given that the life expectancy of a German worker was around 45.

Bismarck, and others who followed suit, didn’t expect workers to outlive their retirement savings. But with the phenomenal advances in medicine, increased longevity is now a reality which poses a serious welfare challenge.

The Baby Boomers retirement conundrum is a story which has been widely told. A largely American concept, Baby Boomers refers to a generation of people born in the 1940s to the early 1960s. The term was coined because the US saw a dramatic increase in the number of births after World War II – quite literally a baby boom. This generation has reached the traditional retirement age of 60 to 65 and yet are reluctant or unable to retire.

The effect of this is twofold: individuals are living longer which results in higher medical and living expenses. And countries have to plan for the increased number of older people while the Millennial generation (people born in the 1980s to 2000s) is faced with looking after ageing parents.

In a developing economy such as South Africa, this challenge is even more pronounced. Firstly, the country faces a bigger bill to support a growing older population. The number of people reaching retirement age is increasing. Although there’s no statutory retirement age, the accepted norm is that people retire between the ages of 60 and 65. People over the age of 60 with no other means of financial income qualify for a monthly state pension (also called an older persons grant).

Secondly, South Africa suffers from a poor savings culture. The implication is that South Africans are increasingly relying on credit to provide for themselves and their families’ basic needs. Many people are living beyond their means and getting caught in the debt trap. Ultimately, the burden on government’s limited resources increases as individuals become more reliant on public services when they enter retirement age.

Impact on the economy

South Africa’s population is ageing, with 8% of the total aged 60 or older. This percentage has been rising, and will continue to do so as life expectancy increases.

Life expectancy in South Africa had declined between 2002 and 2005 as a result of HIV/Aids, but the expansion of health programmes to prevent mother to child transmission as well as access to anti-retroviral treatment have contributed to an increase in life expectancy since 2005.

Although the provincial life expectancy rates vary, the overall country life expectancy rates have been climbing steadily again, and now stand at 59.7 years for males and 65.1 years for females.

The bulging numbers of retiring people is a precursor for a host of socioeconomic challenges. These include a rising pension bill for an already pressured public purse. About 17 million South Africans, a third of the country’s total population, depend on array of social grants. Of these, just over 3.1 million receive the older persons grant. This number is expected to rise to 7 million by 2030.

While the country is seeing a rising number of retiring people the taxpaying base is not growing and unemployment numbers remain stubbornly high. The number of individual taxpayers decreased by 13% from about 5.5 million during the 2013/14 tax year to about 4.7 million during the 2014/15 tax year. I estimate that – based on the average decline of 7% in 2013/14 and 13% in 2014/15 – the number of assessed taxpayers will further decrease by 10% in the 2015/16 tax year.

The rising retirees numbers will also have a negative impact on economic activity. This is based on the assumption that people spend less in retirement than they do while working. The 2016 Tax Statistics report indicates that in 2014 the average taxable income of assessed taxpayers aged 65 and older only increased by 3.5% - compared to the growth rate of 11.7% of individuals younger than 65 years.

Rising retirement numbers are also also known to result in a significant loss of expertise, sometimes referred to as the “brain drain”. The problem becomes more acute when the loss of skill due to retirement exists alongside a poor education, skills feeder-system.

Solutions

The situation calls for innovative solutions from different stakeholders – employers, the financial industry and the public sector. To face the loss of skills challenge South Africa should allow for the extension of working tenure of retiring workers. The country should look at raising the retirement age to, say, 70.

But this is a double-edged sword, as it will only compound South Africa’s already severe unemployment rate of 26.5%. But not raising the retirement age will have serious ramifications for the majority of lower-income South Africans who don’t have a private pension fund.

Perhaps the answer lies in between. Organisations could create a type of mentorship programme where older workers could transfer much needed skills and experience to a younger generation. This wouldn’‘t only address the country’s high unemployment rate, but also the mass of unskilled, young individuals.

Another option to consider is phased-in retirement, whereby the person entering into retirement isn’t permanently on the books of the company, but is rather retained as a contractor.

Retirees should also be encouraged to embark on a second, self-employed career to keep cash-flow going. Ultimately, the idea that everyone is willing or able to retire at 60 or 65 is an illusion and one that could result in the Baby Boomer generation going bust.