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Saving for tomorrow is hard... but what about the days and years after tomorrow?

28 February 2019

Been thinking about your retirement savings lately? You’re not alone. The Productivity Commission’s recent 722 page report on superannuation and retirement savings has put it front of mind for plenty of Australians.

Probably because it points out that many people find it hard to plan for retirement. Whatever your age or situation, at some point you’ve probably been confronted with the reality that the state of your future self will depend on your present self.

Australia’s retirement system is built on three key pillars; means-tested welfare, compulsory superannuation and voluntary savings. The latter two are completely bound by individual behaviour. Behavioural economics tells us that despite our compulsory savings system, we will still find it hard to save effectively.

Richard Thaler, who won the 2017 Nobel Prize in economics, explores these behavioural biases in ‘Save more tomorrow’, his seminal research into retirement savings behaviour. There are four behavioural factors that impact your saving decisions.

  • Bounded rationality is the idea that people have limited time and cognitive abilities to make decisions. Complexities in a savings program can make it hard for us to decide how much to save. We feel this in decisions about which super funds to pick and how much to save, as well as compulsory superannuation.
  • Hyperbolic discounting is a tendency for people to choose a smaller-sooner reward over a larger-later reward. If a reward occurs in the distant future, it ceases to be valuable. In a nutshell, we love instant gratification.
  • Procrastination of making a savings decision produces inertia. This is your tendency to stick with the status quo and accept your current situation rather than think about different options. This is a problem in our superannuation system because most of us are defaulted into a fund, or multiple funds, without any thought. By sticking with the default, we might be missing better saving opportunities.
  • Lastly, we also face loss aversion biases. We generally have a tendency to care more about losses than the equivalent gains. Thaler describes how loss aversion means people tend to view less money to spend now, as a greater loss than the equivalent gains to their future savings.

As Thaler and his long-time collaborator Cass Sunstein put it, saving for retirement is like solving a complicated mathematical problem. We need to know how much to save, then exert a lot of willpower for a long time to follow through with it.

With the right information and a behavioural push we can all do our future selves a favour. When was the last time you checked your balance or did something for your savings for tomorrow, or the days and years after tomorrow?

Further reading

Australian Government, Productivity Commission, Superannuation: Assessing Efficiency and Competitiveness, Productivity Commission Inquiry Report No 91 (Productivity Commission: Canberra, 2018)

Australian Government, Royal Commission, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Royal Commission Final Report (Royal Commission: Canberra, 2019)

Bailey, J. J., Nofsinger, J. R., & O'neill, M. (2003). A review of major influences on employee retirement investment decisions. Journal of Financial Services Research, 23(2), 149-165.

R.H. Thaler and C.R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and Happiness (Penguin: London, 2009)

R.K. Weaver, Retirement Security and Financial Literacy in New Zealand: Policy Lessons from Abroad

Thaler, R. H., & Benartzi, S. (2004). Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of political Economy, 112(S1), S164-S187.