South Africa’s Two-Pot Retirement Savings Model Under Labor Market Uncertainty

Tichaona Chikore () and Farai Nyabadza
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Tichaona Chikore: Department of Mathematics and Applied Mathematics, University of Johannesburg, Auckland Park 2006, South Africa
Farai Nyabadza: Department of Mathematics and Applied Mathematics, University of Johannesburg, Auckland Park 2006, South Africa

Economies, 2025, vol. 13, issue 11, 1-13

Abstract: This study addresses the critical challenge of designing retirement savings systems that effectively balance liquidity needs and long-term accumulation in contexts characterized by high unemployment and labor market instability, with a focus on South Africa. Traditional pension schemes often assume uninterrupted careers and stable incomes, assumptions frequently violated in low- and middle-income countries, leading to inadequate retirement security and consumption volatility during working life. Motivated by this gap, we develop a stochastic two-pot retirement savings model that explicitly integrates labor market uncertainty using a Markov chain-based Monte Carlo simulation. The model allocates annual contributions between an accessible savings pot and a locked retirement pot, with individuals optimizing consumption and withdrawal decisions to maximize expected lifetime utility under Constant Relative Risk Aversion (CRRA) preferences. Our findings, derived from calibration to South African labor data, reveal that high unemployment and career uncertainty significantly increase the welfare-maximizing preference for liquidity. This result challenges conventional policies prescribing fixed contribution allocations, such as the one-third/two-thirds split in the new two-pot system, and underscores the importance of flexible retirement savings designs. We conclude that tailoring pension design to labor market realities can enhance both retirement security and welfare in volatile economies.

Keywords: retirement savings; labor market instability; two-pot model; consumption smoothing; South Africa (search for similar items in EconPapers)
JEL-codes: E F I J O Q (search for similar items in EconPapers)
Date: 2025
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