FULL OF LIFE - JSE MAGAZINE

FULL OF LIFE

People are living longer (and sometimes running out of money in the process). Should retirement be delayed by law? If so, what are the benefits?

FULL OF LIFE

Australia recently caused a global buzz by raising its national retirement age to 70 for all Australians born after 1965. The move was intended to help the country reduce the impact of rising pension liabilities. Australia’s population is ageing rapidly and living longer, and the country has a generous public pension programme that would have strained government budgets to the breaking point in the absence of reform. Since many countries face a similar storm of ageing populations and growing public pension obligations, more and more nations are considering following Australia’s lead.

In SA, there is a great deal of controversy around reforming the country’s retirement funding system. Much debate focuses on encouraging individual South Africans to save for retirement, and industry to lower costs and improve retirement products.

Government has also said that it would like to remove ‘any biases in retirement funds, which may discourage individuals from working past the retirement age of their funds’.

In other words, the state would like to ensure that South Africans who want to work beyond normal retirement age are able to do so. This has sparked some discussion in the press about the idea of raising the retirement age in the country.

SA’s situation differs from Australia’s. For example, SA has no mandatory retirement age. Craig Aitchison, corporate GM of member solutions at Old Mutual, says: ‘Currently in SA, there’s no legislation that tells us what the retirement age is. The Labour Relations Act doesn’t govern [the retirement age]; all it says is that it’s “as agreed”.’

Retire infoGovernment wants to ensure that South Africans who want to work beyond retirement age can do so

It’s thus misleading to talk about raising the retirement age; South African retirement ages are typically agreed upon between a company and its employees and is not mandated by law.

The country also does not have a comprehensive public pension system like many others. Instead, government provides elderly South Africans with a modest old age grant; the grant is currently R1 350 a month, and intended to help the aged who are living in poverty.

The state recently announced plans to change the eligibility rules for this grant. Previously, men had to be older than 65 and women older than 60 to qualify. Applicants also had to pass a means test to prove that they did not have enough money to independently support themselves. In future, both men and women will qualify for the grant at age 60 and the means test will be scrapped. This will increase the financial burden the grant places on public finances, but it will still be significantly less onerous than is the case for pension liabilities in places such as the UK or the US.

Finally, SA has a lower life expectancy than many developed countries. According to Statistics South Africa (Stats SA), life expectancy at birth is 59.1 years for males and 63.1 years for females. Hence, having a retirement age of 70 seems counter-intuitive. Despite these issues, however, there is still a strong case to change retirement norms in the country.

Although life expectancy is lower in SA, this is unlikely to remain the case. According to Stats SA’s 1997 to 2004 adult mortality survey, this rate has been driven primarily by an Aids-related spike in deaths between 20 and 35, particularly among females. Considerable improvements in HIV and Aids prevention and treatment are likely to change this pattern dramatically.

Viresh Maharaj, chief marketing actuary at Sanlam Employee Benefits, says: ‘Increasing the retirement age is an increasingly relevant policy choice in SA despite the current depressed life expectancy, as this is driven largely by the effect of HIV/Aids on mortality, and this is an area where significant change is being experienced.

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‘The average South African only starts planning for retirement 11.2 years before retirement age’

VIRESH MAHARAJ, CHIEF MARKETING ACTUARY, SANLAM EMPLOYEE BENEFITS

‘Recent research released by the Centre for Actuarial Research revealed that HIV-positive South Africans on ARV treatments will live for, on average, 70% to 86% as long as HIV-negative individuals. This, combined with the intended impact of the National Health Insurance on public health, and anticipated improvements in medical technology, suggests that SA is on the cusp of a life expectancy boom.’

While life expectancy at birth is 61 years, a South African who reaches 65 can expect to live for another 14 years, says Willem le Roux, head of investment consulting at Simeka Consultants & Actuaries.

Someone who retires at a healthy 60, then, can likely expect almost 20 years of retirement. As the impact of Aids eases and more South Africans survive to age 65, the country will therefore see more and more people facing a long retirement. Unfortunately, many are unprepared for this.

Unlike Australia, SA provides very limited pension support and individuals must save for their own retirement. Many have retirement savings plans through their employers.

Generally, both workers and employers make monthy contributions to either a defined-benefit pension fund or a defined-contribution provident fund. But many individuals do not have access to employer-sponsored funds, and many more have inadequate savings.

Aitchison says: ‘What’s the average pension that people, [who are] in defined-contribution funds, are on track for, looking at what they have saved and assuming that they stay in that fund until they retire?

Compound interest could reduce the number of years the member would be dependent on savings

‘The answer is scary. On average, people are on track for a pension that is about one-third of what they will be earning at retirement. In other words, they’re on track to see a two-thirds drop in their earnings. And that’s the average, so there are some people that are better off than that, and a lot of people who are worse off,’ he says.

Many South Africans, therefore, are facing a long retirement with inadequate savings. For these people, delaying retirement makes a lot of sense. But delayed retirement can generate huge benefits. Postponing it by even a few years can have a dramatic impact on retirement savings. Maharaj says: ‘According to the 2014 Sanlam Benchmark Survey, the average South African only starts planning for retirement 11.2 years before retirement age.

‘This is not long enough to make a material difference in the quality of their retirement savings. Moving out the retirement age provides more opportunity for employees to benefit from the power of compound interest within a tax effective vehicle.’

Five years may not sound like much, but the difference they can make is enormous. Take, for example, a 60-year-old female with a R300 000 salary, with 13% going to a defined contribution fund already worth R100 000. Factor in a salary increase of 7% a year, and an annual return on the fund of 8%. Delaying retirement by six years will almost double those savings. Waiting until 70 will nearly triple it.

Le Roux says: ‘Delaying retirement [assuming a guaranteed annuity] from 60 to 65 can increase an individual’s retirement income by almost 50%, assuming that the individual continues contributing to a retirement arrangement. But even if no contributions are made and the capital is invested, it could make a very big difference to the income in retirement.’

Postponing retirement would also benefit employers. ‘Employers stand to gain as older employees tend to have a greater degree of institutional knowledge that can be used directly for economic purposes or indirectly to mentor younger employees in a structured manner in order to expedite their development. Given the transformation imperative in SA, this may be a means to transfer skills from the established advantaged to the ambitious previously disad-vantaged while also addressing retirement issues,’ says Maharaj.

Unfortunately, while delaying retirement can dramatically improve individuals’ retirement savings and benefit workplaces, many funds have mandatory retirement ages. Members are required to stop contributing and start withdrawing benefits at a certain age, typically between 60 and 65. Thus, funds would need to increase their flexibility.

Aitchison says that ideally funds would change their rules to enable members to continue working and contributing into their 60s, or to opt for a phased retirement. In this instance, a member would retire from their primary job and stop contributing to the fund, but would not withdraw benefits. Instead, he or she would work a secondary, lower-paying and less onerous job, and delay tapping into their retirement savings for a few years.

This would allow compound interest to accrue and reduce the total number of years that the member would be dependent on savings. Aitchison says that Old Mutual intends to promote such flexibility in its interactions with government in the retirement reform debate.

There are, of course, some problems with delayed retirement. Le Roux says: ‘If later retirement is still in an individual’s main career, it would obviously lead to a higher concentration of older employees in business. These employees tend to be higher paid and not necessarily as productive as their younger counterparts.’ Furthermore, if many older workers delay retirement, it could potentially hurt prospects for younger workers looking for jobs.

However, Maharaj says that it is a fallacy that raising the retirement age will result in increased or sustained youth unemployment. ‘The National Bureau of Economic Research in the US conducted a meta-analysis in 2013 researching the alleged link between increasing the retirement age and youth unemployment. Across 13 countries, the researchers were not able to find any significant link between these constructs.’

Finally, for those workers who are in physically intense occupations, delayed retirement may not be possible. However, such individuals could still consider phased retirement and delay full retirement for a few years.

By Felicity Duncan
Image: Andreas Eiselen/HSMimages