South Africans have long been considered as being amongst the world’s worst savers for retirement, but the reasons may have more to do with high levels of indebtedness rather than a poor savings culture.
“Most South Africans want to save for their retirement, but the reality for many middle-income South Africans is that once they’ve paid for essentials most of what’s left is spent on repaying debt. Debt repayments make up a substantial portion of what consumers need to spend. That makes saving difficult, if not impossible,” explains Benay Sager, head of DebtBusters.
The company’s most recent quarterly Debt Index found that people applying for debt counselling with take-home pay of over R20 000 per month are spending 60% of their monthly net income servicing debt. Their total debt-to-income ratio is over 130%. While in other countries the total debt-to-income ratio is similar, most of the debt in other countries is low-interest bond debt – in South Africa most of the debt is high-interest unsecured debt.
He says there are a few reasons for this. One of the main ones is that real incomes have declined by 17% over the past five years as a result of inflation, and the latest CPI numbers will exacerbate the situation.
A related reason is many consumers had to take significant, and in some cases permanent, salary cuts during the past year to keep their jobs. At the same time, the cost of essentials has gone up, forcing the consumers to borrow to make up the shortfall. Evidence of this is the 76% increase in unsecured debt levels since 2016 amongst consumers earning over R20 000 or more.
“Clearly the situation is unsustainable,” says Sager. “Lack of savings makes consumers vulnerable should they be faced with an unexpected expense, lose their income or are forced to stop working. It also has broader economic implications. Ideally consumers should build savings of three-to-six months’ worth of salary, but currently this is almost impossible as a result of high debt levels.”
He says that debt counselling is the most effective and sustainable way to restructure debt, allowing consumers to spend less of their net income on debt repayments and giving them the opportunity to save towards a sound financial future.
Interest rate reductions during 2020 are benefitting people who successfully apply for debt counselling. The record-low rates enable DebtBusters to negotiate significant reduction in interest rates for unsecured debt, such as personal loans, from an average of 21% to 1-2%.
“These reductions provide substantial savings for consumers, freeing up some income to pay off debt and regain some financial equilibrium and ultimately build some financial reserves.”