LETTERS

In search of solutions

JOHN PLENDER, senior editorial writer and columnist on the Financial Times, discusses where the UK debate on ‘responsible’ share ownership is likely to go. The globallyrelevant
arguments will resonate with SA pension funds and their asset managers.

I found your article ‘Savings stalemate’ (TT March-May) most insightful and agree fully with
the position you’ve taken. Because the subject is close to my heart, I’d like to make a few observations.

1. Saving is a lifestyle to be cultivated. It’s in the individual’s state of mind. Where there’s a will to do something, the means must be found to do it;

2. With his after-tax income, an individual can either spend or save. People need to learn that they must live within their means. To achieve this, the individual’s starting point is to draw up a budget and stick to it;

3. Savings extend to the elimination of waste. Clearly, the less spending the greater the savings.
For instance, it’s estimated that some 30% of spending on foodstuffs go to waste;

4. Policymakers also have an important role. The state must itself eliminate waste and create a
climate that helps a savings culture to develop by not spending money that it doesn’t have. Perhaps this is a little exaggerated in the capital works programme, but the principle is healthy;

5. The middle to higher income groups can make a substantial difference to the savings pool. They must not be overtaxed and a climate should be created where the emigration of skilled personnel is discouraged. Think of the impact on the savings figure from people who earn over R500 000 a year. By losing these people, we aren’t losing only their expertise but productivity and the savings pool are negatively affected too;

6. The state must be careful not to adopt policies that harm savings and productivity. Table A shows what happened in the 1993-2005 period i.e. that the nett tax of individuals in the middle to higher income groups increased by some 250%. (I haven’t analysed figures for the period subsequent to 2005 but it can be assumed that the trend has inclusion of extra-budgetary
items creates a huge additional tax burden. We have many poor people in this country,
but the transfer of wealth is abnormally large. The numbers will only worsen unless we can achieve a higher growth rate. According to the Cobb-Douglas formula, a sufficiently high savings rate is one prerequisite for higher economic growth;

7. The state has a responsibility for the low savings rate. My calculations in Table B show the damage done to savings by the tax on certain incomes of pension funds during the 1996-2006 period. The tax caused R120bn of assets to be permanently removed from the balance sheets of pension funds, assets that would otherwise have earned income and swelled the savings pool;

8. Over the past few years we’ve sold our financial assets to overseas investors on a large scale. I have nothing against this, but then domestic institutions should be allowed similarly to buy assets abroad to the extent that exchange control is entirely abolished. As matters stand, that we’re increasingly paying interest and dividends to foreigners reduces our national income
and therefore also our savings rate. Our institutions should be allowed fully to earn interest and dividends abroad. Further, it will give a lead to the overvalued exchange rate that negatively impacts on companies’ profits and cost efficiencies.

9. Meanwhile, given the overvalued exchange rate, the loss in production and thus incomes is
large. This year our gdp should be around R3 trillion. For every one percentage point that the
country works below its full capacity, the loss of income runs at around R30bn. And I’m not even
talking here about the loss of job opportunities that flows from it. The subject is now of the greatest importance to SA. 

A J Jacobs, Pretoria
(Adam Jacobs, retired senior economist at Absa, is a
trustee of the Mineworkers Pension Fund.)