Black Tax is real. I know because I pay it. The hashtag #blacktax has a way of making an appearance on Twitter reasonably often. It is one of those topics that never seems too far away from the discussion, especially among Black South African millennials and Generation Xers.
However, as much as we South Africans like to think that we are somehow unique or special, the reality is that Black Tax is a global phenomenon known elsewhere as the ‘Sandwich Generation’.
What is Black Tax?
Black Tax (BT) refers to those extra expenses that Black people have primarily as a result of being Black in South Africa today. It specifically refers to the money that we have to spend on our extended families; in the form of a monthly stipend to multiple households, or paying for the education a number of children that are not ours, or having to contribute significant lump sums for a funeral. BT is seen largely as a legacy of apartheid where our parents and grandparents were denied economic access, and as a result have largely become dependent on the current generation for subsistence and dignity.
What is the Sandwich Generation?
The sandwich generation refers to those people that find themselves sandwiched between their kids and their parents in that they have to support both financially. The growth of the sandwich generation is an international phenomenon, with developed countries such as the US and the UK experiencing massive growth in the number of people falling into this group. In the US it is largely the Baby Boomers and Generation X’ers that find themselves part of the sandwich generation, primarily as a result of longevity (their parents are living much longer) coupled with the fact that their children are staying at home longer due to increased unemployment and extended study schedules.
It is estimated that 36 million people in the UK live in multi-generational homes, while over 20 million baby boomers alone are classified as sandwich generation. In Australia more than 20% of households are multi-generational, while close on 23% of working South Africans are classified as sandwich generation. According to a Pew Research Centre study on the sandwich generation in the US, lower income households are more affected than higher income households, while white families experienced a lower incidence of sandwich generation compared to their black and Hispanic counterparts. The South African experience is similar to this according to research conducted by Old Mutual.
What’s the problem then?
BT is not always explicitly asked for, but there is often an implicit expectation especially from those that have ‘made it’. I, and most of the people in my network, find ourselves paying BT, and the issue tends to raise its head after a particularly bad month, where numerous unexpected BT payments have to be made, often causing financial strain. As the financial adviser in the group I am often asked about my thoughts on BT, and how one caters for it from a financial planning perspective. My response is not always appreciated and often generates significant debate. BT is problematic because BT payers often have to find out of budget lump sum amounts at short notice, and often there are numerous such payments needed in any one month. This can be very disruptive from a cash flow and budgeting perspective. These are often emotionally charged situations (funerals, illness, food shortages, etc) so there is often little room for negotiation or options for mitigating these costs.
Naturally a few months of excess BT payments can result in people starting to rebel and voice their displeasure at the unfairness of the situation. Why do we have to pay BT and our white contemporaries not (or so we think)? Why is this happening to me? #blacktax has trended on a number of occasions on Twitter, normally after some celebrity or personality has commented on or complained about BT. Then the pity party starts all over again. And misery loves company.
How to play the Black Tax hand that has been dealt?
I remember a conversation I had with an uncle of mine at a family gathering many years ago. I was still a teenager then. I lost my dad when I was 5 years old, and as many other young boys in my situation, I was bitter about the unfairness of the whole situation. Why me? What did I do to deserve this? I was having another moan and bitch session when my “uneducated” uncle called me aside for a one on one chat. Having heard me moan about the same issue on more than one occasion, he had one message for me. The hand has been dealt – you can either complain about it, or you can play it. One thing is certain though, you cannot undo it, you cannot ask for another hand. You’ve complained about your situation a few times now, but you are big enough to start playing the hand that you’ve been dealt. Complaining is not going to help your situation so you can stop that now. I remember that I did not take his message too heart immediately. In fact I was quite upset that he was not identifying with the unfairness of my situation. I wasn’t ready for the tough love being meted out, but fortunately his message stuck. I could not reverse my situation, so what was my role in the situation?
The same message applies to those of us that pay BT. The hand has been dealt, no amount of complaining will change that. The questions now are; what is our role in this situation? How should we respond to BT and the challenges it presents? How do we ensure that ours is the only generation that pays BT?
A strategic approach to planning for BT
Personally, I have taken the view that my role is to be the bridge between how things were and how things should be. I see my role as ensuring that the previous generation has dignity, subsistence and respect in their golden years, and that the next generation is teed up and readied for wealth creation and success. I have come to terms with the reality that I may not achieve great wealth for myself personally, and while it seems unfair, it is not as unfair as what the previous generation had to endure. They had a different role to play, now it is my turn to play my part. Otherwise BT will remain an issue for generations to come.
What will have the biggest impact on the financial position of a BT payer and their dependents? From our experience in dealing with many clients that find themselves paying BT, the answer has to be the protection of current and future income. In supporting the previous generation, the current generation, and the future generation, there are great demands placed on the incomes of the current generation. If this income stream is stopped for any reason, the effects are quite devastating. Therefore, protecting this income against any unforeseen issues is critical.
Looking forward though, numerous studies have found that the most powerful way to lift a family out of poverty is education. As the old Chinese proverb goes ‘give me a fish and I eat for a day, teach me to fish and I eat for a lifetime’. But education is a long process, and it takes time before the impact of education manifests for a poor family. But when it does it is often meaningful and sustainable.
So from a defensive perspective, protect income. From an offensive perspective, educate as many people in the family as possible. My role is to pay for this and try and hold everything together.
Protecting current and future incomes
We suggest a number of practical financial planning steps for those that find themselves paying BT:
- Draw up a family budget: budgeting remains the foundation and cornerstone of good money management, particularly when it comes to managing household income. It is advisable to involve those affected by the family budget and involve them in the process, particularly where one is supporting adult children. Also, include contingency funding in the budget, so that surprise BT payments can be sourced at short notice
- Consider tax planning: A qualified planner should be able to help structure finances in order to be tax efficient. A good tax planner is worth the fee where an individual has built up a big estate
- Ensure that all risks to income are mitigated: insurance plays a critical role in ensuring that household income continues in the event of death, disability, disease or retrenchment of income earners. A financial plan for a Black Tax payer should start with a thorough risk analysis and proper estate planning to ensure that intergenerational succession happens smoothly, and without unnecessary tax leakage.
- Retirement planning is key: if BT is to be a one generation phenomenon, then retirement planning is key to achieving this. A proper plan will ensure that the current generation does not become dependent on the next generation, and that future income is secured.
- Understand medical funding options: the cost of medical expenses in South Africa can be significant, especially for elderly people who often require some form of chronic medication or multiple hospital visits. There is often confusion around the issue of hospital insurance versus a hospital plan, and which is more suitable especially when it comes to covering an elderly parent or grandparent.
- Work with a Certified Financial Planner: a financial planner can help with appropriate goal-setting, budgeting, drafting and implement a proper and thorough financial plan. A financial product salesman on the other hand is more focused on selling product and has little consideration for the long term or the client’s interest.
Educate the next generation
While it is important to defend what you have i.e. protect the income that is coming, it is important to also prepare for a future where you are no longer around. Education remains the most powerful tool to lift families and communities out of poverty. The second and third round effects of education are more pronounced for a poor family or community, and remains the most robust long term option. Education trends are changing. Where qualifications used to be the key currency in the workplace, it is now skills that are sort after. Creativity is also attracting a premium price in the workplace with many companies looking beyond traditional roles to grow and innovate into the future.
Black tax is real. I know because I pay it. Complaining about it does not help anyone. Understanding what to do about it is arguably more important if we are to ensure that it is a one generation phenomenon. The hand has been dealt, however unfair it may seem, it still needs to be played.