Retirement savings
Firstly, authors like Douglas Bernheim suggest that people’s savings rates are influenced by what they think the ‘authorities’ suggest that they should save, and that people take the tax incentives as a suggestion from the ‘authorities’.
Secondly, if a tax subsidy is presented clearly so that savers can understand the benefit, then it may improve savings behaviour.
Under the new proposals9 for taxation of retirement fund contributions, employer contributions will be taxed as a fringe benefit and individuals will be permitted deductions of up to 22.5% of their income if aged under 45 and 27.5% of their income if aged 45 and over. These deductions will be limited to R250 000 per year if aged under 45 and R300 000 per year if aged over 45.
However, if you start from the premise that tax incentives change behaviour, and bigger incentives yield larger results, the equity of the tax subsidy becomes important. In other words, policymakers would want to consider whether the subsidies are targeted at the right groups of people.
The proposed tax subsidy system benefits wealthier individuals more than lower-income earners. The graphic below shows the tax benefit for two savers both saving 22.5% of their income. In one US study, lower and middle-income households were much more likely to make voluntary retirement savings and to contribute more towards these plans if offered an additional contribution towards their retirement savings instead of a traditional tax subsidy10.
An alternative way to express the tax subsidy may be a 25% contribution match, based on the tax profile in the 2011 Tax Statistics11. The contribution match would involve the current tax benefit on contributions being removed entirely, which would mean that retirement savings are made from post-tax money. However, the South African Revenue Service (SARS) would then contribute 25c for every R1 each saver contributes from their post-tax income to their retirement fund, with a maximum annual contribution from SARS of say R100 000. The figure of 25% and the maximum annual contribution would need to be revised from year to year as the taxpayer demographics evolve.