Will you be wealthy enough to retire?

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05 Jul 2013

The global financial recession of 2008/2009 reduced the real value of household wealth significantly and the knock-on effects of this are due to be keenly felt. 

According to the report, the main driving force behind the increase in nominal household wealth was a strong increase in the value of South African household assets.

Expressed in years, the recession wiped out five years of household wealth and this will have consequences for the retirement age of individuals and the contributions they are making towards their retirement funds, according to the Momentum/UNISA Household Wealth Index Q4 2012 report.

What this really means is that to realise pre-recession expectations, individuals are going to have to save and invest more and work longer. 

A scary factor indeed, considering that whatever money you make, the tax man is lining up first to pay himself, so much for paying yourself first.

Although the report findings reveal a second consecutive (quarterly) strong increase in the value of nominal wealth in Q4 2012, the data also shows that households are worse off due to relatively recent recessionary factors. 

The report notes that household wealth is not performing well at all – especially against the background of real growth in disposable income over the mentioned period.

On average, real household wealth per household decreased over the period 1975 to 2012.

However, the report points out that the good news is that it seems as if a turning point had been reached post-1994 as real net wealth per household on average increased by 1.75 percent per annum for the period between 1994 and 2012.

Household wealth

According to the report, the main driving force behind the increase in nominal household wealth was a strong increase in the value of South African household assets. 

Valued at current prices (nominal terms), the Momentum/UNISA South African household asset index increased by 28 percent in Q4 2012, while the Momentum/UNISA liabilities index increased by 25 percent and Momentum/UNISA estimated the nominal value of South African household assets at R7.8 trillion at the end of 2012, while liabilities approximated R1.5 trillion.

Expressed in real terms (2005 prices), real household wealth increased by 14.2 percent in Q4 2012 quarter over quarter seasonally adjusted and annualised percentage change (QoQSAA) to R4.1 trillion. 

This was mainly as a result of real household assets increasing by 13.6% in Q4 2012, outpacing the real increase of 10.9% in household liabilities (both increases in QoQSAA % change).

The main source of the increase in the value of South African household assets was the strong performance of financial assets, which constituted 72 percent of the value of total nominal assets by the end of 2012, driven by the performance of share prices and equity holdings. 

On an annualised basis, the Johannesburg Securities Exchange All Share Index increased by 45.2 percent in Q4 2012 (quarterly increase annualised).

In 1975 non-financial assets comprised 53.8 percent of household assets, consisting of residential assets (28.4 percent) and non-residential assets (25.4 percent). 

Financial assets (46.2 percent) comprised of cash (16.4 percent), investments in retirement funds and long-term insurers (13.4 percent) and other financial assets e.g. direct investments in the stock and bond exchanges (also 16.4 percent), according to the report.

By 2012, financial assets comprised 71.9 percent of total assets while the share of investments in retirement funds and long-term insurers almost tripled to 38.4 percent and that of other financial assets to 24.5 percent, cash holdings declined to 9 percent and the share of residential assets declined to 23.4 percent, and that of other non-financial assets to 4.7 percent.

Household liabilities

In 1975 mortgages comprised 62.5 percent of total liabilities and although this percentage declined substantially to just more than 40 percent in 1984, it gradually increased to 62.3 percent in 2009. 

An increase in other debt such as unsecured debt contributed to the share of mortgages declining again to 54 percent in 2012, reveals the report.

Salaries in South Africa

According to the report, it is important to note that the data indicate a representation of average numbers – given the unequal distribution of income in South Africa, chances are good that some households possess very high net wealth values while the majority possess net wealth values significantly lower than the averages represented in the report findings.

In 1975 non-financial assets comprised 53.8 percent of household assets, consisting of residential assets (28.4 percent) and non-residential assets (25.4 percent).

I always think life is unfair, then again if we all got paid huge salaries or were super wealthy, reports of this nature wouldn’t be necessary.

Too often, I hear people complain of being broke on pay day – sounds familiar? Debit orders for home loans, vehicle repayments, store cards, credit cards, insurance policies, and the list is endless.

But hang on, the tax man has already paid himself when you get your salary, money that actually goes into the bank, and your provident/retirement fund and medical aid too will have been deducted.

When battling to make ends meet, many fall into the trap of acquiring more debt that they actually cannot service.

A recent survey by BankservAfrica Disposable Salary Index (BDSI) shows that the index is up by 3.8 percent on a year-ago, but after inflation an actual decline is revealed.

This is the fifth month in a row whereby actual real disposable salaries declined on a year-ago basis, and the eighth time in the last nine months.

At present, South African employees are in the longest period of decline of real salaries since 2005, when our data series began, according to the report.

While nominal disposable salaries are still increasing, these increases have averaged less than 5 percent over the last few months, a clear indication that disposable salaries are again not increasing as quickly as gross salaries, says BankservAfrica.

Why you may ask? BankservAfrica says this is likely to be due to deductions such as medical insurance, which has shown an increase of 10.2 percent year-on-year (Statistics South Africa) and personal income tax, which has also increased by over 10 percent, taking a higher amount of employees’ disposable salaries.

“Research has shown that taxes, medical insurance, pensions and garnishee orders are the four biggest deductions from disposable salaries, followed by UIF and other statutory deductions, as well as loans in some cases.”

It is estimated that these deductions take a chunk of over 30 percent from the average gross salary in South Africa.

According to BankservAfrica, the average disposable salary was R10 848 in May (R10 440 in January) and 2013 has seen one of the lowest rises in nominal terms in a very long time.

Prof Bernadene de Clercq, head of the personal finance research unit at UNISA’s Bureau of Market Research, says despite nominal increases in net wealth, real household wealth per household is not at all sufficient for the purposes of independent retirement or maintaining current living standards.

With the exception of December 2012, there has been an overall declining trend in real disposable salaries, indicating that households will remain under pressure and that the average South African consumer is in all likelihood having to cut back on their budgets.

The median disposable salary on a monthly basis remains between R6 000 and R7 000 per month for formal sector employees, while about 30 percent of employees earn the average disposable salary or more.

On retirement savings

Prof Bernadene de Clercq, head of the personal finance research unit at UNISA’s Bureau of Market Research, says despite nominal increases in net wealth, real household wealth per household is not at all sufficient for the purposes of independent retirement or maintaining current living standards.

“Too many households – especially those who are in a position to accumulate assets thanks to strong increases in their real disposable income over the past decade – apportion insufficient shares of their income towards asset accumulating investments as they rather purchase consumption goods.”

She notes that in Q4 2012, according to the index, nominal household wealth increased at a seasonally adjusted and annualised rate of 28.8 percent following an increase of 16 percent in Q3 2012.

These increases contributed to the value of nominal household wealth surpassing the R6 trillion level for the first time.

The BankservAfrica Disposable Pensions Index reveals that the average pension payment going through the BankservAfrica payments system was R5 025 in May 2013 compared to R4 257 in May 2012 – an increase of 18 percent.

BankservAfrica cautions that the data series is not yet long enough for smoothing as there do seem to be outliers in the time series every few months.

On average, 655 000 private pensioners are paid via the system, which is about 20 percent of the estimated number of people who receive salaries via the BankservAfrica payment system.

It does, however, indicate that private pensions have increased from around 46 percent of total disposable salaries to around 48 percent, indicating that South Africans do not invest enough for their old age.

The Momentum/UNISA report indicates that there is still considerable concern about the health of South African households’ real wealth, as the majority of households seem not to have sufficient assets to retire financially independent.  

“The decrease in the real net wealth per household over the period 1975 to 2012 is a real cause for concern and policy makers, the private sector, trade unions and households themselves should all take responsibility in ensuring a larger emphasis on household asset accumulation,” says Prof De Clercq.

She says currently, most of the authorities’ policy focus is on income improvements whereas there is a clear and urgent need for household balance sheet improvements. 

Hopefully the data can contribute towards making the household balance sheet part of the policy debate, as well as being a catalyst for mindful change, she adds. – Denise Mhlanga

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