Can South Africans save for a rainy day?
By: Tariro Mudzamiri
Tags: Behavioral Economics, Tax Free Savings Account, Nudge Theory, Covid 19 Crisis, Saving Money

Saving for a rainy day.

Article commissioned by BreadCrumbs Linguistics — a Behavioural Linguistics firm specialising in nudge-based communication www.thebreadcrumbs.co.za.

Can South Africans save for a rainy day?

Speaking to journalists at Tuynhuys in Cape Town, President Cyril Ramaphosa was quoted in a News24 article as saying, “South Africa isn’t a country of savers. Our pension funds are effectively the only pots of money left”. Two days later, on the 5th of March, the National Institute for Communicable Diseases (NICD) announced to the nation that the first positive case of COVID-19 in the country had been reported and confirmed.

Fast forward to the 15th of March, with the number of confirmed positive cases having risen to 61, President Ramaphosa declared a national state of disaster. Giving a clear signal of the gravity the COVID-19 virus posed to public health. To mitigate its exponential spread, government would embark on mass communications focusing on good hygiene and effective prevention methods. To this end, he said, “in essence, we are calling for a change of behavior amongst South Africans”. In this prepared speech declaring a national state of disaster, the President acknowledged that beyond the public health impact, the COVID-19 pandemic would have a potentially disastrous effect on the country’s economy. In order to minimise this, he said they would later announce, “…comprehensive package of interventions to mitigate the expected impact of COVID-19 on our economy…which will consist of various fiscal and other measures…”.

For context, consider this: for the past five years, key metrics of the economy which have dominated popular discourse have been the low growth rates and budget deficits, which both imply a low national savings rate. Now, as the country grapples with the economic fallout from this global pandemic, the truth is that South Africa’s fiscal policy space is extremely limited. This will be further exacerbated by the constraints of high cost of debt service following Moody’s recent downgrade of the country’s credit rating to sub-investment grade with a negative outlook.

Amongst many other fundamental flaws that the COVID-19 pandemic has revealed about the structure of the South African economy and its impact on society, it has exposed and magnified the issue of not saving for a rainy day both on a household and on a national level.

When this pandemic passes, as it surely will, we should not return to business as usual with regards to the saving habits of South Africans. To enable the country and its people to save, some of the changes will have to be structural (requiring definitive reforms) but others can be immediate. Here I am referring to behavioral changes which can be affected as soon as July, traditionally the month dedicated to savings in South Africa. Just as the President called for change of behavior amongst all South Africans in the interest of public health, he can do the same in the interest of the financial wellbeing of South Africans with the help of behavioral science practitioners in crafting effective messages that will resonate with our population.

In 2015, Tax-Free Savings Accounts (TFSAs) were introduced. Since the inception, the South African government through national treasury has been trying to encourage individual savings, but, despite this effort, uptake of TFSAs has remained stubbornly low. As a savings and investment vehicle there is consensus amongst financial advisors that TFSAs were an appropriate policy response by Treasury to increase individual savings and investments. Furthermore, personal finance bloggers have written extensively on the benefits of this product. Notwithstanding these facts, a great product and accompanying information on its benefits, uptake of TFSAs has been slow. This can be explained by behavioral biases. A good example of this is present bias which is the tendency to focus on the now, or the current self, to the detriment of the later, or future self. This adverse behavior can be treated by nudging people towards better saving decisions, for example by using short-term incentives/rewards which are more tangible.

Nudge theory is a branch of economics designed to get us to do the right thing by making it easier and more beneficial. It is, therefore, perhaps time that Treasury in collaboration with the South African Savings Institute (SASI), explore the use of nudges. This suggestion is not unprecedented, as nudge theory is already broadly utilised by governments elsewhere, who aim to change social norms or instill better habits. The theory gained traction in 2008, at the time of the publication of the book Nudge by US-based academics Richard Thaler and Cass Sunstein.

Post the COVID-19 crisis, the world will undoubtedly adopt a new way of living and in this new period it will be important for South Africans to adopt nudging at scale to fix the stubborn old problem of a poor savings culture.