Short-sightedness, it seems, is not a problem restricted to those advancing in years.Research released this week by the Financial Services Institute of Australia (Finsia) shows that younger people- defined as people under 40 - are worryingly short-sighted when it comes to their retirement. On the one hand the research shows that younger people understand that saving for retirement is important - 82% agreed with that idea - so this is not a case of people failing to hear about the issue. Yet less than one-third of the people under 40 regard themselves as being prepared for retirement. Women under 40 are a particular concern because more than half of the survey sample felt their superannuation was inadequate but despite understanding the issue were yet to do anything about it. That inaction was in spite of 82% of women saying super was "a good way to make me save". For the older baby boomer generation the biggest challenge was getting the message through that they needed to save more for retirement. For the next generation it seems the challenge is different - turning awareness of the issue into action. Perhaps one of the clues for the inaction of the younger generation is the primary savings goal for more than 50% of both men and women is housing. This is understandable at a time when housing affordability has slipped. Property is a powerful and emotional piece of consumption - owning your own home is a financial goal most Australians grow up with - but it is also viewed as an investment in for retirement. While half the survey respondents put housing forward as a primary savings goal about the same number conceded that if there was not a forced savings system for super they would probably not contribute voluntarily. In fact 82% of the respondents to the survey were aware that they can make additional voluntary contributions to super but only 33% are contributing above the 9% mandatory super level. Even more telling perhaps is that the government's co-contribution scheme - where eligible lower income workers can receive up to $1500 from the government if they contribute $1000 - had high awareness with 75% of people knowing about it but only 15% acting on it. Another interesting difference between the under 40s and the older baby boomers is that the notion of early retirement is no longer a strong ambition or expectation. The younger group expect to work longer - irrespective of gender or income - and about half of them anticipate working in some capacity even after they have retired. The Finsia research was also the subject of a further discussion paper by respected academic and author Dr Hazel Bateman from the School of Economics, Centre for Pensions and Superannuation at the University of New South Wales. Dr Bateman believes the reason that retirement savings for people under 40 is falling short is due to "short-sightedness or procrastination and the complexity of the calculations required to formulate an appropriate savings plan". She advocates a new form of voluntary contributions scheme above the 9% minimum contributions that take people's natural tendency to procrastinate and turn it to their advantage - the so-called autopilot or opt-out schemes that operate in the US and is being implemented in the New Zealand. Basically this would mean your contributions to super are (say) 12% unless you take the decision to opt out. Major academic studies in the US have demonstrated that even people who believe they cannot afford to save more for their retirement end up surprising themselves thanks simply to the power of the default option and their own inactivity. So perhaps the cure for short-sightedness about retirement savings may be to set a higher voluntary contribution level when people start work and then encourage them not to look at it for 30 to 40 years. Robin Bowerman
Principal & Head of Retail, Vanguard Investments Australia
www.vanguard.com.au
19th-July-2006 | 
