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Pensioners inflation is higher than average inflation

Pensioners under severe pressure as administrative prices rise

By Bruce Cameron
Co-author to The Ultimate Guide to Retirement in South Africa

Administrative costs of taxes and rates are pushing inflation the hardest

Pensioners are under severe pressure as administrative charges by all levels of government affect people on fixed incomes.

There are two old rules that those governing us should remember:

Never charge in and change things before checking for collateral damage; and, Cut your cloak according to your cloth.

It seems all the political parties, particularly those in the coalition Government of National Unity, do not do proper research into the consequences of their decisions.

A good example is the current make-up in the cost of living. One of the current main contributors to increasing inflation is administered prices. An administered price is anything where government, at any level, sets taxes, rates and price changes for services.

The problem with administered prices is that you have no choice. You must pay even if you must sell assets or change the way you live.

Neither the main GNU parties - the ANC and the Democratic Alliance – seem at all concerned about the collateral effects. And what makes it worse it affects poorer people in different ways and is probably unconstitutional because of clear discrimination, particularly against older people.

Here is what supports this:

Inflation

Respected Old Mutual chief economist, Johann Els, interpreted the latest inflation figures, which he says shows that one of the main reasons for rising inflation is increases in administered prices, particularly for electricity and municipal rates and taxes.

And, he says, pensioner inflation is way ahead of headline inflation. With the latest figures is at 3.5 percent for the past year and pensioner inflation is at four percent.

Another cause is the ongoing rise in health costs. He however says these have slowed down.

He says public sector inflation (administered prices without the impact of fuel prices) against headline inflation is now up at seven percent as against 3,5 percent.

Fixed income

Now comes the first of the collateral damage. Using municipal rates and services increases as an example. This is both where the increases are fuelled by extensive corruption of the ANC, leaving most of these municipalities bankrupt; or, the Democratic Alliance where corruption is minimal and the higher rates accounts pay for increased services.

The Democratic Party did fight the two percent increase in VAT (also an administrative cost) but agreed to a more limited 0,5 percent increase at 15.5 percent.

The increase in administrative prices across municipalities has a major effect on people on a fixed income.

This includes pensioners, widows/widowers and orphans, people who have been disabled (who only receive 75 percent of their last earned income without any allowances).

In most cases fixed income individuals cannot generate more income so they have to in many cases significantly rearrange their finances.

Many of these people, even if they own their own properties, are likely to be asset rich but income poor. This is a tax on what you own, not on what you earn. It is a wealth tax.

And it made much worse as the Sanlam Benchmark Survey shows that less than 10 percent of pensioners retire financially secure. Most are already broke, virtually at retirement, and many others will become broke before they die.

The choices for fixed income individuals include:

Downscaling their property. This involves costs, such as commissions, legal fees, approval of electricity fittings, and particularly Capital Gains Tax, which essentially is a tax on property inflation. And then the cost of a new home.
Reducing medical aid costs. This year’s Sanlam Benchmark Survey shows a massive trend to reducing the choice level in medical aids or of getting out altogether – this at the very time when retirees need healthcare the most. And Discovery for the past two years has seen option downgrades or getting out of medical aid.
Reducing other costs. An example: The domestic labour company, SweepSouth, chief executive, Lourandi Kriel, shows that from pre-Covid 19, the number of domestic workers has reduced from 1,2 domestic workers to 839 000 in the second quarter of this year. Over the last year 19 percent of domestic workers lost jobs. The main reason is that employers could no longer afford to pay them. And when minimum pay levels are increased cutbacks (savings) on domestic servants also weathers.

Secondary collateral effects

The secondary effects are enormous. It includes:

Loss of jobs: As with the employment of domestic workers more people will lose jobs. So even if they are granted debt relief or lower payments, the result is they lose their jobs.
Immigration: The second biggest reason for domestic worker unemployment is the number of people leaving the country. And one of the reasons is mainly crime, but also the lack of increasing earnings and inflation. Now you have all these unemployed domestic workers and their families (which must increase crime).
Unemployment: The increase in administered prices will also affect many businesses, particularly small businesses, who may go bankrupt or employ less workers. And this effect can already be seen in job employment figures.

And it must also be remembered that there is the compounding of the figures. If a administered price goes up by say four percent over inflation. The next year’s figure, which may be one percent above inflation means that over the two years, in simple terms, you have a five percent increase.

Misleading averages

What makes the situation worse is that averages can often be misleading. Take for instance the rates and services increase in Cape Town. The average increase is about eight percent (but there have higher and lower figures). This average is thrown out because people with a property value of under R7 million get let off part of the increase. This pushing up the average above the eight percent for those whose property values are above R7 million. And then they are then pushed even higher by the debt forgiveness program of the Council.

Some people, particularly those with life rights in Cape Town retirement villages, are seeing increases of 30 percent, because they are based on contract prices and not property values.

So, take a retiree whose only income is from a pension, who 20 years ago bought a house for R1 million, and the house is now valued at R15 million. And, say the retiree also did not save enough for retirement. What does that retiree do?

Els says it is a difficult position. All he can suggest is that:

Retirement fund members, still to retire, must save as much as they can and from early as possible and ensure they take some risk with investments. An over cautious investment is as dangerous as high-risk investment.
People, who are retired or about to retire, must try to generate extra income, particularly in their initial retirement years. But, Els says the problem will only be solved when there is substantial growth in jobs with more people contributing to taxes and rates, keeping down increase in administered prices.

Els says he expects inflation to increase to between four and 4,5 percent in 2026 but then to go lower in 2027.

He says a number of things are moving in the right direction. Three big issues are the increased competition with the private sector being included in electricity supply; dropping medical costs; and, improvements to Transnet.

Els is absolutely right – increase jobs and many problems will be solved. But to simply apply taxes without any proper research is plain dumb. It is also ageism at its worst.

For a lot more detail on this read the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on the website www.retirementplanning.co.za

https://retirementplanning.co.za/cape-town-wealth-tax-rates-increase/

https://retirementplanning.co.za/what-99-of-retirees-regret-and-how-you-can-avoid-it/

https://retirementplanning.co.za/you-may-need-to-be-80-before-you-retire/

https://ascor.co.za/how-to-draft-a-will/

Share this post

Pensioners inflation is higher than average inflation

Pensioners under severe pressure as administrative prices rise

By Bruce Cameron Co-author to The Ultimate Guide to Retirement in South Africa

Administrative costs of taxes and rates are pushing inflation the hardest

Pensioners are under severe pressure as administrative charges by all levels of government affect people on fixed incomes.

There are two old rules that those governing us should remember:

Never charge in and change things before checking for collateral damage; and, Cut your cloak according to your cloth.

It seems all the political parties, particularly those in the coalition Government of National Unity, do not do proper research into the consequences of their decisions.

A good example is the current make-up in the cost of living. One of the current main contributors to increasing inflation is administered prices. An administered price is anything where government, at any level, sets taxes, rates and price changes for services.

The problem with administered prices is that you have no choice. You must pay even if you must sell assets or change the way you live.

Neither the main GNU parties - the ANC and the Democratic Alliance – seem at all concerned about the collateral effects. And what makes it worse it affects poorer people in different ways and is probably unconstitutional because of clear discrimination, particularly against older people.

Here is what supports this:

Inflation

Respected Old Mutual chief economist, Johann Els, interpreted the latest inflation figures, which he says shows that one of the main reasons for rising inflation is increases in administered prices, particularly for electricity and municipal rates and taxes.

And, he says, pensioner inflation is way ahead of headline inflation. With the latest figures is at 3.5 percent for the past year and pensioner inflation is at four percent.

Another cause is the ongoing rise in health costs. He however says these have slowed down.

He says public sector inflation (administered prices without the impact of fuel prices) against headline inflation is now up at seven percent as against 3,5 percent.

Fixed income

The Democratic Party did fight the two percent increase in VAT (also an administrative cost) but agreed to a more limited 0,5 percent increase at 15.5 percent.

The increase in administrative prices across municipalities has a major effect on people on a fixed income.

This includes pensioners, widows/widowers and orphans, people who have been disabled (who only receive 75 percent of their last earned income without any allowances).

In most cases fixed income individuals cannot generate more income so they have to in many cases significantly rearrange their finances.

Many of these people, even if they own their own properties, are likely to be asset rich but income poor. This is a tax on what you own, not on what you earn. It is a wealth tax.

And it made much worse as the Sanlam Benchmark Survey shows that less than 10 percent of pensioners retire financially secure. Most are already broke, virtually at retirement, and many others will become broke before they die.

The choices for fixed income individuals include:

Downscaling their property. This involves costs, such as commissions, legal fees, approval of electricity fittings, and particularly Capital Gains Tax, which essentially is a tax on property inflation. And then the cost of a new home.

Secondary collateral effects

The secondary effects are enormous. It includes:

Loss of jobs: As with the employment of domestic workers more people will lose jobs. So even if they are granted debt relief or lower payments, the result is they lose their jobs.

Unemployment: The increase in administered prices will also affect many businesses, particularly small businesses, who may go bankrupt or employ less workers. And this effect can already be seen in job employment figures.

And it must also be remembered that there is the compounding of the figures. If a administered price goes up by say four percent over inflation. The next year’s figure, which may be one percent above inflation means that over the two years, in simple terms, you have a five percent increase.

Misleading averages

Some people, particularly those with life rights in Cape Town retirement villages, are seeing increases of 30 percent, because they are based on contract prices and not property values.

So, take a retiree whose only income is from a pension, who 20 years ago bought a house for R1 million, and the house is now valued at R15 million. And, say the retiree also did not save enough for retirement. What does that retiree do?

Els says it is a difficult position. All he can suggest is that:

Retirement fund members, still to retire, must save as much as they can and from early as possible and ensure they take some risk with investments. An over cautious investment is as dangerous as high-risk investment.

Els says he expects inflation to increase to between four and 4,5 percent in 2026 but then to go lower in 2027.

He says a number of things are moving in the right direction. Three big issues are the increased competition with the private sector being included in electricity supply; dropping medical costs; and, improvements to Transnet.

Els is absolutely right – increase jobs and many problems will be solved. But to simply apply taxes without any proper research is plain dumb. It is also ageism at its worst.

For a lot more detail on this read the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on the website www.retirementplanning.co.za

Read more on other topics here:

https://retirementplanning.co.za/cape-town-wealth-tax-rates-increase/

https://retirementplanning.co.za/what-99-of-retirees-regret-and-how-you-can-avoid-it/

https://retirementplanning.co.za/you-may-need-to-be-80-before-you-retire/

https://ascor.co.za/how-to-draft-a-will/

By Bruce Cameron
Co-author to The Ultimate Guide to Retirement in South Africa