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Blog : 1 November 2016 (How much wealth in SA is trapped in pension funds and should it be used for quantative easing if required?)
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We stumbled onto this topic in bizarre fashion. While listening to Shaun Abrahams trying to explain the pension laws governing early retirement and stating that Ivan Pillay wanted to go on early retirement to access his pension money to fund his kids education it got us thinking. Just how much of South Africans money is locked up in pension funds? And what are South African's net wealth when assets such as pension, residential buildings etc are taken into account? |
Pension fund assets the size of South Africa's economy
The infographic below shows the value of SA's pension funds and compares it to the value of South Africa's economy. (Note all values are expressed in 2010 prices. I.e. prices have been adjusted for inflation).
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As can be seen from the above graphic the total value of pension funds is roughly the size of South Africa's entire economy. That's to say money in pension funds is around R3trillion. That is a massive amount of money that is essentially "trapped" as consumers cannot access this money freely. If they do access it before retirement it is taxed heavily as this is governments way to try and stop people from accessing funds they will need for their old age. The tax serves as a disincentive to accessing the funds prior to retirement.
Next question one has to ask is how much money is being contributed into official pension funds by both employees and employers?
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Interesting to note that employers contribute more to pension funds than employees. This is largely due to large pension fund contributions from government for example in which they contribute almost double what the employees contribute. Based on the data above employers contribute about 1.8 times what employees are contributing to pension funds. Now that we have a sense of scale of pension funds and contributions into pension funds the question then is just how wealthy are South Africans actually if one looks at the South African households' balance sheet? I.e All household assets including pension funds and other assets such as residential properties - all household liabilities such as household debt. We look to answer the question below.
The infographic below shows the relative size of various variables, which include all household assets, household liabilities, net wealth of households and GDP. We discuss the results in detail below the graphic.
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From the graphic above it is clear that total household assets (including pension funds and residential property) is by far the biggest in terms of overall value, with it equating to R8.65trillion in 2015. Net wealth being the second biggest (net wealth = total assets of households - total household liabilities). The overall net wealth of South Africans amounted to R7.215trillion in 2015, about 2.36 the size of South Africa's economy. Again it has to be stressed that most of the wealth is "locked" in pension funds and other illiquid assets such as residential property.
Household liabilities such as household debt according to the graphic above is about half the size (47%) of South Africa's economy. While looking at the aggregated numbers is one thing, it always makes for more interesting reading when its calculated per person or more commonly known as per capita. The table below shows the total value of various variables expressed as a Rand value per capita.
Household liabilities such as household debt according to the graphic above is about half the size (47%) of South Africa's economy. While looking at the aggregated numbers is one thing, it always makes for more interesting reading when its calculated per person or more commonly known as per capita. The table below shows the total value of various variables expressed as a Rand value per capita.
Description |
Rand Value (per capita) |
Assets |
157 495 |
Net Wealth |
131 302 |
GDP |
55 593 |
Pensions |
54 793 |
Liabilities |
26 207 |
Going back to what got us started into looking at the value of pension funds and the overall wealth of South Africans, which was Ivan Pillay's statement as reported by Shaun Abrahams that he initiated early retirement from SARS as he wanted to get access to his pension money to fund his children's education.
Pension funds holds a massive amount of South African's overall wealth in them (about 41% of South African's overall net wealth in fact), but sadly South Africans cannot freely access it, as legislation is in place to prevent South Africans from accessing it freely. It can be accessed but at a huge cost to those looking to access it. This raises the question, should government be allowed to dictate to it's citizens how and when it can access money that actually rightfully belongs to them? Is there a need for pension fund reforms to allow those who would like to access their pensions to do so more readily?
And looking at the world of quantative easing and negative interest rates in Europe etc. are pension funds perhaps not one way of boosting demand when economies really need it? While we are not advocating it should be done it does present an interesting proposition, perhaps a more compelling one than implementing negative interest rates or low/no interest rate policies.
Imagine if South Africa's government desperately wanted to boost short term demand in the economy, and they put legislation in place that for the next 6 months individuals are allowed to take say 5% of their pension fund money (tax free) to do with it whatever they want.
That would pump an instant R150billion into the economy (thats about 8.1%) of what South African households spend in a year. And since household expenditure is the main driver of economic growth, such a short term injection of money (will be sure to give economic growth a push in the right direction). Perhaps this is the only way the South African government will reach that unicorn growth rate of 6% that they have been dreaming about.
Pension funds holds a massive amount of South African's overall wealth in them (about 41% of South African's overall net wealth in fact), but sadly South Africans cannot freely access it, as legislation is in place to prevent South Africans from accessing it freely. It can be accessed but at a huge cost to those looking to access it. This raises the question, should government be allowed to dictate to it's citizens how and when it can access money that actually rightfully belongs to them? Is there a need for pension fund reforms to allow those who would like to access their pensions to do so more readily?
And looking at the world of quantative easing and negative interest rates in Europe etc. are pension funds perhaps not one way of boosting demand when economies really need it? While we are not advocating it should be done it does present an interesting proposition, perhaps a more compelling one than implementing negative interest rates or low/no interest rate policies.
Imagine if South Africa's government desperately wanted to boost short term demand in the economy, and they put legislation in place that for the next 6 months individuals are allowed to take say 5% of their pension fund money (tax free) to do with it whatever they want.
That would pump an instant R150billion into the economy (thats about 8.1%) of what South African households spend in a year. And since household expenditure is the main driver of economic growth, such a short term injection of money (will be sure to give economic growth a push in the right direction). Perhaps this is the only way the South African government will reach that unicorn growth rate of 6% that they have been dreaming about.
Data disclaimer:
Data obtained from South African Reserve Bank, Financial Services Board and Statitics South Africa
Data obtained from South African Reserve Bank, Financial Services Board and Statitics South Africa