MALAIKA MAHLATSI: The two-pot retirement system is a lifeline for many South Africans

On the 1^st of September 2024, the “two-pot” retirement system came into effect in South Africa. The system was established through the Revenue Laws Amendment Bill, which was signed into law by President Cyril Ramaphosa.

Through this law, individuals can access a portion of their retirement savings without needing to cash out or resign from the entire pension fund. Individuals may withdraw up to 10% of their savings to a minimum of R2,000 and a maximum of R30,000.

This once-off withdrawal is intended to help cash-strapped consumers make use of a portion of their retirement savings.

There has been criticism levelled at this change to pension laws in South Africa, with many arguing the system breeds financial irresponsibility, and that it’s intended to benefit our constrained fiscus.

I want to reflect on these sentiments before I explain why the two-pot retirement system is a necessary and progressive intervention for millions of South Africans.

It is true that the South African Revenue Service (SARS) has made millions since the two-pot retirement came into effect.

Consider the argument by Alex Forbes, which has processed over 78,000 withdrawal requests from its members in less than two weeks – that of the R1.5 billion that it has processed thus far, roughly R270 million is going to SARS.

This is because individuals are compelled to be registered for tax before the withdrawal from their pension funds can be processed. While contributions to retirement funds are not taxed, tax is charged on the money withdrawn from the retirement funds.

The tax charged by SARS is calculated at the tax rate applicable to an individual. In addition to this, SARS is using the two-pot retirement system to compel individuals to settle their tax debt. Those who have outstanding returns or who owe SARS will have the debt automatically deducted from their withdrawal amount.

There’s no question that SARS is a key beneficiary of the two-pot retirement system and that this is happening at a time when the fiscus needs a substantial injection, owing to the long periods of contraction and minute growth of the South African economy.

Another criticism that has been levelled at the two-pot retirement system, one that is more economistic, is that the system diminishes individuals’ future earnings because they don’t get to benefit adequately from compound interest on their retirement savings.

Compound interest is interest that is calculated on both the initial principal (the money deposited) and all of the previously accumulated interest. Generating “interest on interest” is known as the power of compound interest, and depends not only on the initial principal amount but mainly on the length of time that the money is saved or invested. Thus, withdrawing the money early affects the compound interest.

While I understand these concerns, I do believe the two-pot retirement system is a much-needed lifeline for millions of South Africans.

The reality of the situation is that most South African households are cash-strapped and battling to make ends meet.

The level of household debt in our country is extremely high. According to data from Trade Intelligence, South Africans have over R2.35 trillion in debt. A significant proportion of this debt is from credit cards and loans, which, according to the latest TransUnion quarterly South African Industry Insights Report, is on the increase.

Of significance is that low-income households have a greater demand for credit, particularly the unsecured kind. The TransUnion report goes on to state that consumers are using their credit facilities not for luxuries, but for basic necessities.

For working-class people, particularly those living in townships, a significant portion of income is directed towards transportation costs. According to the latest Gauteng Household Travel Survey (GHTS), roughly 60% of households spend more than the policy maximum target of 10% of their income on public transport – and this number has been increasing over the years.

In cities like Cape Town, households spend up to 43% of their income on public transport. The fact that households spend this much on public transport reflects the inequities arising from the persistent reproduction of apartheid spatiality that sees central business districts established far from working-class locations, and better amenities being available in more affluent neighbourhoods.

The two-pot retirement system gives poor households breathing room to manage debt. People who criticise the two-pot retirement system don’t seem to have an appreciation of the effects that debt has on individuals and households.

For one thing, too much debt, particularly from unsecured facilities which are used by many poor households, makes it impossible to build wealth. When every cent that an individual makes goes towards paying off debt with high interest, they’re not able to utilise the money to generate income or save.

Additionally, such individuals tend to be caught in a never-ending debt cycle, as higher interests mean longer periods to pay the debt. This keeps poor households poor, while wealthier households can continue to build their own wealth.

Furthermore, the impact of debt on health and well-being is also significant. Research by Equifax draws the link between the debt levels in American households to mental health challenges in the country.

According to the study, people with debt are more likely to face common mental health issues such as prolonged stress, depression and anxiety. The article goes on to state that: “Increased stress could decrease the quality of your sleep, which can in turn negatively affect your physical health and impair your ability to concentrate throughout the day."

The article illustrates how these mental health challenges are also linked to debt, stating: “On the flip side, these negative effects can make your financial situation even harder to handle. Individuals struggling with mental health issues are more likely to have trouble managing their finances… All of this together creates a cycle that’s hard to break: A poor financial situation may lead to mental health struggles. Then, once you’re struggling with your mental health, it could become even more difficult to manage your money, so your debt only continues to grow."

Finally, it’s important to reflect on the simplistic argument that South Africans have a poor savings culture, an argument that even the National Treasury has historically advanced.

This sentiment is so deeply entrenched that it has been accepted as an indisputable fact. But to accept this narrative is to disregard the realities of the South African economy and the debilitating levels of structural inequalities that confront our country.

It is also to ignore the fact that wages in our country have been declining for many years.

According to the Bureau for Economic Research (BER), South African salaries have not been keeping up with inflation for several years. Data from the BER shows that salaries and wages increased by 3.8% in 2022 and 4.6% in 2023, while inflation averaged 6.9% and 5.9%, respectively. This resulted in a cumulative decline in consumer buying power of 4.6% during 2022-2023.

The situation has continued in 2024, with wage increases continuing to be below inflation. This is occurring in a segmented labour market where there are significant inequalities, with income disparities assuming a gender and racial character.

Black people continue to earn less than their White counterparts, and the gender pay gap means women continue to earn less than men, even for the same jobs.

Add Black tax to this problem, understanding that the average Black person is responsible for at least eight other unemployed and dependent relatives, and you’ll appreciate the complexities of why many South African households struggle to save.

Even social security is inadequate, with most social grants, including the child support grant, falling below the national poverty line.

It’s a difficult situation, and as the BER argues, while many households started feeling the pinch during the COVID-19 pandemic, South Africa has been battling with a cost-of-living crisis long before the global pandemic.

And so, it’s important that as we speak about the two-pot retirement system, we do so with a full understanding that for many, it’s the difference between relative security in the future and surviving the present.