Why government is the big winner with new two-pot retirement system coming next month
The new two-pot retirement system is coming next month, and two projected scenarios show that the government would gain billions of rands in tax revenue as a result.
This was highlighted in an economic bulletin published by the South African Reserve Bank (SARB) on Friday (2 August).
Under the new system, an individual’s retirement fund contributions would be split between three components (or ‘pots’): the vested, savings, and retirement components.
The vested component contains all accumulated retirement fund contributions made until 31 August 2024.
After the implementation date, a one-time seed capital transfer of 10% (capped at R30,000) of an individual’s vested funds will be made to their savings account.
The remaining funds will stay invested, and access to these funds will only be permitted after retirement or upon resignation, as per the current legislation.
An individual’s retirement savings “pot” will consist of one-third of their net annual contributions made after the implementation date, including the seed capital transfer and future capital growth.
Access to the funds is allowed before retirement, with one withdrawal permitted per tax year, taxed at the individual’s marginal tax rate.
An individual’s retirement fund will comprise the remaining two-thirds of their net annual retirement contributions made after the implementation date, including future capital growth.
Under this new system, the Reserve Bank noted that this reform is expected to have significant economic and fiscal impacts, particularly through increased tax revenues. Here’s an overview of the potential outcomes, focusing on the tax benefits and economic effects.
In the high withdrawal scenario, many people are expected to withdraw substantial amounts from their pension funds.
It’s estimated that by the fourth quarter of 2024, an additional R100 billion will be withdrawn from pension funds due to the new legislation.
This will be on top of an expected R110 billion from resignations throughout 2024.
In 2025, withdrawals are projected to drop to R40 billion, leaving R46.8 billion in the savings pot. Withdrawals might rise to R42 billion in 2026 due to fund growth and annual wage increases.
After taxes, household disposable income could increase by R79 billion in 2024Q4, R31.5 billion in 2025, and R33.1 billion in 2026.
This boost in disposable income will likely increase household consumption by 0.8 percentage points (pp) in 2024 and 1.8 pp in 2025, with a stable growth rate in 2026.
Initially, the withdrawals might lead to higher inflation and interest rates, potentially curtailing the positive effects on fixed investments.
Growth in private sector fixed capital formation is expected to decline marginally by 0.2 pp in both 2024 and 2025, then increase by 0.1 pp in 2026. GDP is forecasted to grow by an additional 0.3 pp in 2024 and 0.7 pp in 2025, returning to pre-reform growth rates in 2026.
Inflation is expected to increase by 0.2 pp in 2025 and 0.3 pp in 2026, necessitating a rise in interest rates by 60 basis points (bp) in 2025 and 90 bp in 2026.
Personal income taxes (PIT) are expected to increase by R41.0 billion in 2024/25 and R32.4 billion in 2025/26. Corporate income taxes (CIT) are expected to grow by R2.0 billion and R5.3 billion, respectively.
These increases are due to pension fund withdrawals, higher employment, and wage settlements.
In the more likely and moderate withdrawal scenario, individuals are expected to be more prudent with their withdrawals
An additional R40 billion is expected to be withdrawn in 2024Q4. In 2025, withdrawals are projected to drop to R20 billion, increasing to R21 billion in 2026.
Household disposable income is expected to increase by R31.5 billion in 2024Q4, R15.8 billion in 2025, and R16.6 billion in 2026.
This would lead to a smaller increase in household consumption, by 0.3 pp in 2024 and 0.7 pp in 2025.
Growth in private sector fixed capital formation is expected to decline marginally by 0.1 pp in 2024 and 0.2 pp in 2025, then remain unchanged in 2026.
GDP should grow by an additional 0.1 pp in 2024 and 0.3 pp in 2025 but remain unchanged in 2026.
Inflation increases by 0.1 pp in both 2025 and 2026, leading to a rise in interest rates by 20 bp in 2025 and 40 bp in 2026.
PIT is expected to increase by R19.9 billion in 2024/25 and R16.3 billion in 2025/26. CIT is projected to grow by R0.8 billion and R2.1 billion, respectively.
The additional tax revenues will improve the primary balance to GDP ratios by 0.2 pp in 2024/25 and 0.4 pp in 2025/26.
Government debt to GDP ratios are expected to improve by 0.5 pp in 2024/25 and 1.0 pp in 2025/26.
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