Sent: 10-11-2009 11:31:02
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Is Retirement Saving in the US Really Any Different? - Part 3
The previous two editions in this series illustrated how the US is now not so very different from Australia in terms of its retirement savings approach. I would sum then up as being two sides of if not the same coin, a very similar one. However, will the new US approach work. To provide some insight it would be useful to look at the Aussie experience.
Unfortunately, whilst the current system in Australia has improved the situation it has not improved household savings and there is still a significant retirement savings gap. The average account balance illustrates a wide variation. According to the Australian Prudential Regulation Authority, the overall average account balance has grown by almost 70% in the 8 years to the end of June 2005. However the average figures are not representative as the small funds (those with less than 5 members) held in excess of A$213 billion spread across 600,000 accounts whilst the much more common industry funds, held less than A$155 billion spread across more than 9.5 million accounts. Consequently whilst the average account balance for the small funds was close to A$300,000, for the majority of individual accounts, it was less than A$20,000.
As a result whilst in a better situation than many countries, Australia still has a retirement savings problem. To paraphrase the introduction of my Doctoral Thesis:
The majority of older working Australians have given little or no thought to planning for retirement and only 37% have made any attempt to work out how much they need in retirement. Approximately a third of the non retired population has not planned for their retirement and only 7% of pre-retirees considered that financial planning for their future was a top priority. Two thirds of Australians are not confident of having enough money to retire comfortably on, 30% have made little preparation for retirement, while 33% have given it some thought, but admit they have done little in terms of preparation for retirement.
A paper published by the Australian Securities & Investment Commission in July 2008 on the superannuation (retirement savings) system noted that:
There is evidence that some Australians do not fully engage with superannuation and planning for retirement. While compulsory superannuation has increased Australians' level of retirement savings, most people do not engage fully with their superannuation. They have little idea of how much they will have when they retire, and how this compares to the amount they will need.
The paper went on to quote recent research that found almost 80% of workers are under prepared for their retirement, in a system that forces members to contribute 9% of their pre tax earnings into their retirement savings plan. Reasons for such findings were discussed in November 2008 report the Australia Institute Industry Super network. The report noted that being automatically enrolled in a retirement savings system is not conducive to active consumer decision-making. Instead they found that the number of accounts per employee has been increasing, suggesting consumers have not been 'empowered' to take even the most basic action to improve their superannuation (retirement savings) arrangements.
Consequently, whilst the Australian system has been hailed by the World Bank as a model system, questions have been raised as to whether overall household saving has increased since the introduction of mandatory saving. The Chief Executive of the Australian Chamber of Commerce & Industry has suggested that whilst the legislation was designed to add to Australia's domestic savings it appears to have had the opposite effect. He points out that savings as a proportion of household disposable income have fallen substantially below the level that had existed when the legislation was first introduced and has actually been negative for several years.
Such figures suggest that substitution may be a factor with modeling conducted in 2004 indicating retirement savings contributions have offset by reductions in other savings. Research has also found that whilst investing in home ownership may be a significant factor in retirement plans; this is not necessarily translated into utilising funds thus accumulated by realising the asset upon retirement, especially As many now aim to take mortgage debt into retirement (to be paid for with their 'retirement' savings).
I therefore question whether the 2006 Pension Protection Act will produce the transformation in retirement saving in the US that many expect unless other action is also taken. Understanding these issues and finding ways to tackle them was the foundation of my Doctoral research. As was noted in the McKinsey report "Cracking the Consumer Retirement Code", whilst the retirement market represents the single largest driver of growth and profitability for the financial services industry for the coming decades, without an understanding of the drivers underlying consumer's attitudes and behaviors, the retirement opportunity may actually represent a threat.
So, if and when you go to the US FPA conference, you will be able to give US planners the benefits of your experience as for many, the current system are uncharted waters.
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