Covid creating a generation that will never be able to afford retirement

South Africa’s tough economic climate over several years, coupled with the financial pressure put on households by the Covid-19 pandemic, is threatening to create a lost generation in the country who will not be able to retire because they simply could not save enough during this period.

With the protracted recovery from the pandemic, and the fact that most of those who are saving for retirement find themselves part of the sandwich generation (where they must financially support children as well as ageing parents), is there a focus on survival at the expense of saving for a period that is 30 to 40 years in the future?

The 2020 Sanlam Benchmarks Survey, which presents a snapshot of retirement vehicles across the country, paints a worrisome picture when it comes to current saving towards retirement.

It indicates that eight out of every 10 local retirement fund members have experienced a reduction in their annual salary increase and/or their net income.

In addition, some of these people took a forced sabbatical or went through a retrenchment process during the pandemic.

The survey adds that up to 41% of employers who offer umbrella funds offered financial respite to fund members by suspending employees’ retirement savings contributions in 2020.

It notes that both standalone retirement funds and employers in umbrella funds remained committed to meeting their risk cover premiums during the pandemic.

The survey referenced statistics from Statistics SA which point out that:

• 8% of working South Africans lost their jobs during the pandemic;
• 26% of employees experienced a reduction in income during lockdown;
• there was a 10% increase in employees reporting no income during lockdown; and
• 19% of respondents indicated that the lockdowns will have a major impact on their ability to meet their financial obligations.

There is, however, a glimmer of hope within the pressures the pandemic is exerting on those saving for retirement. The survey points out that millennials are well versed in managing the balancing act of spending money on education and making their children’s needs a priority as well as saving for retirement.

Discretionary spending

With discretionary spending under significant pressure, is there a focus on short-term survival over long-term preservation, especially for an event that most South Africans won’t be able to successfully navigate?

Moneyweb asked Kobus Klein, a certified financial planner at Kainos, if the public really is compromising on saving towards retirement.

“With disposable income dwindling [and in some cases, non-existent] retirement saving is an expense that has been shifted to the sidelines for the time being, and possibly for at least three to five years while our economy takes time to recover,” he says.

“It is indeed an unaffordable luxury for those not on company retirement funds with compulsory retirement contributions.”

He adds: “Even with company retirement funds, employees on structured packages and funds are changing to lower percentage contributions and lower pensionable income structures.”

Also Read: Are umbrella funds changing the retirement industry for the better?

He points out that with the risk of Covid-19, many a financial consumer would rather stay invested in risk protection and maintain premiums or take out more risk protection and drop their retirement contributions, as they feel they may not live long enough to enjoy retirement.

“Somewhere the budget must compromise on something to make ends meet. The objective with the lowest risk and longest-term will always be compromised,” he explains.

Lost generation?

It is becoming clear that we may inadvertently be heading towards the creation of a lost generation of South Africans who simply will not be able to retire comfortably.

“With an extended pandemic that has already lasted over 18 months, there is every indication that surviving the direct impacts of the pandemic will take at least 30 months. This means we will have resolved the health challenge of the pandemic by 2023,” says Klein.

“Then we must add the lagging economic and financial hardship impact of another six months beyond herd immunity. There would not be sufficient disposable income to contribute to the nice-to-have retirement plans of those hardest hit by the pandemic.”

He notes that with financial service providers allowing premium holiday periods of up to a year with no contributions, there is an opportunity lost on both contributions and allowable tax deductions.

“We may believe 12 months is not an extended period, but as Albert Einstein stated, compound growth is the eighth wonder of the world, and every year lost does make a difference,” says Klein.

“Add to this the concept of rand average costing buy-in on premiums lost with a very volatile market [including a crash of 33 % in March 2020] with a subsequent 72% recovery, there are more losses that will be suffered.” Klein adds that because of these losses, many consumers would see contributing to something that is a far distance objective as a luxury.

Surviving the pandemic

Klein points out that the public focus is on survival, and with the sandwich generation, it is about providing for their children and parents first, long before planning for their retirement. Covid could not have come at a worse time, exponentially increasing the problem due to loss of employment for children and early enforced retirement for the sandwich generation.

“A significant focus needs to be made on compulsory funding vehicles,” he says. “I believe the way forward is for government to make recommendations around mandatory funds for all companies with employees. I would add the compulsory preservation of funds to the mix to mitigate the enormous fund losses with tax negatives and compound growth losses when the retirement compound growth link is interrupted with resignations and retrenchments.”

Read: Covid-19 has led to increased risk aversion among retirees

He adds that the outlook for compulsory and voluntary savings was already abysmal. However, the pandemic has made it disastrous at best.

“I believe it requires a combined effort between government, private business and the financial services profession to make a concerted effort to reinvigorate the savings culture with innovative ideas, products and regulations to boost retirement savings,” Klein says.

The pandemic has created a dark cloud when it comes to retirement savings. However, to avoid the creation of a lost generation of South Africans who cannot retire, innovation will need to be brought into the market. This is something South Africans are known for. There is a glimmer of hope at the end of the tunnel.