In the 2011 Budget address Finance Minister Gordhan announced that National Treasury was considering a R200 000 cap on the tax deductibility for retirement savings. It is widely expected that this will be addressed in his budget speech on 22 February.

The retirement industry has raised concerns about the cap as it penalizes high income earners who may be accelerating their retirement funding in their latter years having under saved during their early years of employment.

The real argument however is that restricting national savings hurts the poor and that National Treasury is confusing two policy directives.

In the National Planning Commission’s Vision 2030 paper it stated that South Africa has to significantly increase fixed capital investment but that “given the country’s low savings ratio, capital is relatively scarce”.

South Africa desperately needs more savings in order to generate the investment capital to grow the economy and create jobs. It is the wealthy who can afford to save, so why limit their saving?

Our households save less than 1% of their income and as a result South Africa is heavily dependent on foreign investment flows to fund investment in major projects. For example last month the South African government raised US$2bn in the global capital markets.

International funding costs are determined by the vagaries of the market and influenced by our notoriously volatile exchange rate, international perceptions of South Africa and the general risk rating of emerging markets. In a global credit crisis access to this type of funding dries up and along with any major capital projects.

The inflows and outflows into our bond and equity markets are notoriously fickle and add to the volatility of our currency. The high participation of foreign investors in our markets increases the volatility. It also means dividends are expatriated which negatively influences our current account balance; however we remain highly reliant on this type of funding. Higher local savings would reduce the relative percentage of foreign investment and it’s potentially destabilizing affects.

The bottom line is that relying on foreigners to fund our fixed investment is not first prize and a strong domestic savings pool is highly desired. On that point everyone agrees.

The ideal funding pool for large capital expenditure projects is retirement money due to its fixed term nature. A person investing in a retirement annuity for example cannot touch those funds until retirement, so the length of investment is clearly defined unlike discretionary funds.

Retirement funds are the biggest investors in government bonds as well as large shareholders on the JSE and the dividends and income are all re-invested back into the fund, not transferred offshore or spent. The more money that is held by retirement funds, the more money we have available for the investment we require creating jobs and developing the economy.

In order to convince an investor to lock their money in for a specific term, there has to be an incentive which is why the government provides a tax incentive for retirement funds. Telling someone that they are “too rich” to contribute to our retirement savings is short sighted and politically motivated rather than focused on creating real growth and employment.

It would be a worthy exercise for Treasury to calculate the cost deferential between local and foreign funding over a twenty year period to decide if the saving on interest and dependency on foreign capital outweighs the lost tax revenue.

Another point Treasury may want to consider is that retirement funds are not the big tax dodge that Treasury supposes. As any private bank will tell you, many self-employed high income earners do not utilize retirement funds as a tax incentive as they can often structure their taxes more efficiently.

Our tax tip for Pravin Gordhan is to look at the big picture and encourage the wealthy to save in fixed term investments so that their wealth can be used to invest in the country’s future.

This article by Maya Fisher-French first appeared in Mail&Guardian