The great middle-class squeeze

The great middle-class squeezeThe average middle-class South African has run out of runway, having already depleted savings and now tapping into whatever credit facilities they may have. These are the figures revealed in the 2019 Old Mutual Savings and Investment Monitor which is conducted each year and examines the financial attitude of urban, working South African households.

The Monitor has built up ten years of data, and watching the trends and change in behaviour provides insight into the financial attitude and situation of ordinary people. What is particularly concerning this year is the significant decrease in savings and increase in personal loans for households earning between R14 000 and R39 999.

This is no doubt a reflection of the increasing number of retrenchments this year. The report highlights that South Africa’s unemployment rate increased to 27.6 percent in the first quarter of 2019, with several large-scale retrenchments already implemented, and more to come. In March, Standard Bank announced dozens of branch closures affecting 1 200 jobs. Group Five filed for bankruptcy protection and announced further retrenchments (having already lost 1 000 jobs in 2018). In May, Tongaat Hulett issued S189 letters to 5 000 employees, and June saw Sibanye-Stillwater announce 3 000 retrenchments and Multichoice announce that it will retrench 2 000 call-centre and service-centre staff.

It is not surprising, then, that this year’s survey found that breadwinners are increasingly looked to by non-working family for financial assistance. This has resulted in an increase in the number of people supporting adult dependents with the knock-on increase of those who find themselves part of the so-called ‘sandwich generation’ – now at the highest level since the inception of this study in 2009.

The term ‘sandwich generation’ has been coined to describe those who are supporting not only children but also parents and/or other older dependents.  This has increased significantly and now over a third of households describe themselves as part of the sandwich generation, which represents a 26% increase from last year. The increase in dependents is driven by an increase in dependent parents, with over one in four people now supporting their parents.

While supporting family members has a higher incidence among black households, even white respondents have seen the number of households supporting adult family more than doubling from 8% to 17%. Sixty percent of those surveyed said they were either planning on, or expecting to, support their parents one day.

Not covering monthly expenses

When it came to the question of whether your household income takes care of all your expenses, with a bit of money to spare at month end, for households earning R14 000 – R20 000, only 26% were managing to come out each month with the percentage climbing to 38% for individuals earning up to R40 000. Even for the higher-income households, earning more than R40 000, less than half said they were regularly managing to meet all their expenses. This is concerning both from the perspective of affordability but could also indicate a lack of budgeting and planning.

No back-up plan

In terms of emergencies, households have very little in terms of a buffer to manage an unforeseen expense. For households in the R14 000 – R20 000 range, 43% said they would not manage an expense of R10 000. Only 4% of them would be able to tap into savings for the R10 000 and the rest would use credit lines or borrow from family  – which effectively means they are one paycheque away from financial disaster.

A similar trend was seen for household earning up to R40 000 a month with only 2% saying they have savings to cover a R50 000 unforeseen expense, and nearly two-thirds saying they have neither savings nor credit lines to manage with that kind of unexpected expense.

Since 2016 respondents have been asked directly whether they save for financial emergencies and if they do, where these funds are saved. Only half of the respondents are saving for emergencies and this is a sharp decline from previous years. This suggests that savings levels are being depleted and emergency savings are now a luxury for some.

Increasing reliance on credit

This possibly explains the increase in personal loans in this year’s survey, especially for middle-class household earning R14 000 – R40 000. In the R14 000 -R19 999 income range, the use of personal loans has doubled from last year. What is interesting to note is that the incidence of car finance is decreasing, which suggests that for many households, borrowing is now more about survival than asset acquisition.

This is also supported by the way people are using their credit cards. Only 16% of people pay their credit card off in full at the end of the month while two out of three people pay the minimum only.

The survey found that credit is being used to finance everyday purchases, not just emergencies and large-ticket items. Only 18% of those who use their credit card mainly for everyday purchases like groceries pay their card off in full at the end of the month and nearly half who use their credit cards to buy groceries pay the minimum.

By only paying off the minimum instalment on a credit card, those consumers could be financing their groceries over decades without realising it.

While the weak economy is having a major impact on our pockets, we still have choices around financing and managing our money. Now, more than ever, people need to start budgeting, planning and finding ways to earn a bit of extra income. If we continue to kick our problems down the road with more credit, we will very soon reach a point where we are trapped in a black hole of indebtedness from which it becomes impossible to escape.

Conversations to break the poverty trap

Analysing this year’s Old Mutual Savings and Investment Monitor, two figures jumped out at me. Firstly, the continuing increase in the number of single mothers with a lack of financial support from the fathers, and secondly how much we are spending on burying the dead, rather than educating children or preparing for our own old age. There are perhaps conversations around these trends that we need to be having as they are negatively impacting upward mobility and possibly creating poverty traps.

More than half of the mothers in the survey are raising their children alone and consider themselves ‘single mothers’. This tends to be higher in poorer households, however the survey also noted that the increase in single motherhood this year was driven primarily by increases amongst higher-earning and white households.

What is even more concerning is that of those mothers who are raising their children alone, only 20% receive regular support from the father of the child. In many cases single mothers face major financial constraints and this has a knock-on impact on the quality of education and opportunities they can provide for their children. Apart from a wider discussion around why South Africa has one of the highest number of single mothers in the world, questions have to be asked about the role, both financially and emotionally, that the fathers should be playing.

In terms of how much we spend on funerals, when asked about savings objectives, across most income groups saving for a funeral was the number-one priority ‒ more than children’s education. The bias towards funeral savings was greatest among black households with 45% of savings going to bury the dead. For lower-income households, substantially more money is saved for funerals than children’s education.

Even for more affluent households earning between R20 000 and R39 999, the amount saved for funerals was equal to what they put away for retirement. Lynette Nicholson, Research Manager at Old Mutual said that when asked whether death, funeral and disability cover is more important to them than saving for retirement, 57% of households answered yes. This just gives another confirmation of the importance of funeral cover. Currently funeral policies continue to be the most prevalent among formal policies, with three out of four working metro households having at least one such policy. Funerals are big business ‒ not only for funeral providers, but also for insurers.

Again, we need to be asking questions and understanding whether this status quo is sustainable and whether it serves the aspirations of many South African households.

This article first appeared in City Press.

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