How to build financial resilience: insurance and retirement savings are the most effective tools in South Africa – study

Imagine you’ve found yourself in a difficult financial situation and needed to raise R40,000 (more than US$2,000) on the spot. Where and how would you raise these funds? Or what if a financial emergency has just taken a grip of your household? Which resources would you draw upon to address the problem?

If these scenarios ring true, you’re not alone. Many households are struggling to cope with unexpected financial expenses as interest rates and costs of living rise. With the global economy recovering from the impact of the COVID-19 pandemic, developing countries have been worse off. As many as 64% of households reported a decrease in income. And South Africa was no exception.

A recent study found that 61% of South Africans were financially stressed and struggled to meet their basic financial commitments due to a shortage of money. Further, close to 40% of respondents believed that their financial situation had worsened since 2022.

This points to a need for financial resilience.

Financial resilience is the ability to withstand and recover from financial shocks, such as an unexpected expense in a time of crisis. To understand the state of financial resilience, and the financial resources that build financial resilience, we studied a nationally representative sample of 4,880 South African households across nine provinces.

We have been researching financial planning in South Africa and are interested in the gender dynamics in household savings. Our research found that women were, in general, more likely than men to be financially vulnerable. We also found that insurance and retirement savings were the most effective tools for increasing financial resilience.

Measuring resilience

We constructed an index to measure financial resilience. It was made up of the availability of savings, insurance, credit and retirement savings. Access to these instruments is a financial safety net that one can rely on in times of need. We considered access to both formal and informal sources of finance for savings, including banks, non-banks, informal savings clubs and savings at home.

We also included in our analysis credit from banks, non-banks, informal credit providers, and family or friends. Insurance encompassed both life and medical insurance. Finally, we examined retirement savings as contributions towards compulsory retirement funds (such as pension or provident funds) and/or voluntary retirement annuity funds.

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Our research also sought to examine the demographic and socioeconomic factors that could explain the differences in the levels of financial resilience between households.

What we found

Overall, we found low levels of financial resilience across the sample. Surprisingly, we found that insurance is the greatest contributor to building household financial resilience, followed by retirement provisions, savings and credit. However, we found that a gender gap in financial resilience exists, with men being more financially resilient than women.

We also found that the demographic and socioeconomic characteristics that are common between men and women also differentiate their resources levels in building financial resilience. In other words, some demographic groups have better access to financial products than others. For example, men between the ages of 45 and 59 have the highest levels of financial resilience compared to women across all age groups. Since men have higher rates of labour market participation and greater access to financial services, they also accumulate more wealth and have greater financial security.

On the other hand, when race is considered, we found that black and white men were more financially resilient than their female counterparts. White women remained more financially resilient than black women. Black women need to contend with the double burden of race and gender to overcome financial vulnerability.

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We also observed a gender gap in financial resilience, in favour of men, across urban and rural areas (such as farming areas and traditional villages). Financial resilience was highest among people residing in urban areas. Households in rural or farming areas tend to be excluded from mainstream financial markets, which makes it difficult to build financial resilience.

We found that access to economic and education opportunities increased financial resilience for women. Women with jobs and those with tertiary education were more financially resilient than their male counterparts. This reiterates the importance of women having independent access to income as it improves their economic bargaining power.

How to improve resilience

To improve the ability to withstand financial shocks, a few key interventions are necessary.

First, the uptake of life and medical insurance is strongly connected to financial resilience and can help South African households overcome an unexpected crisis. Further, policies aimed at building reserves in savings and enhancing access to credit facilities among vulnerable households can improve levels of financial resilience and economic security.

Since we also established that retirement provisions are a driver of financial resilience, premature access to retirement savings should be discouraged. Particularly if it’s consumption driven. The new two-pot retirement saving system – which proposes that a portion of retirement benefits can be withdrawn prematurely – may be helpful in the short term. But it could lead to financial vulnerability during one’s retirement years.

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Second, evidence of a gender gap in financial resilience calls for the design of gender-inclusive policies and interventions. More specifically in the access and use of financial services. Current practices of charging higher interest rates to those who are financially excluded typically disadvantages women as they have less access to financial services than men. Eliminating this policy can contribute towards improving access to financial products in a way that’s both gender-neutral and equitable.

In addition, racial and geographic location gaps in financial resilience are underpinned by gaps in access to financial services. This needs to be considered in national policies, such as the financial inclusion strategy, with clear targets set for closing such gaps.

Exposure to economic risks, whether anticipated or unexpected, is a reality we must all contend with. The ability to withstand and overcome these risks is a good indicator of financial resilience. Having adequate and equitable access to financial products and services remains the cornerstone of financial resilience.