What makes some people better savers than others?
It’s a question experts have pondered long and hard about particularly in the face of the looming demographic problem of too many old people living longer and longer and too little Government savings to support them all in retirement.
The solution that many OECD nations have adopted, including Canada, the U.K., Australia, Japan and the U.S., is to extend the age of eligibility for Government superannuation schemes, forcing people to work longer (and thus pay more taxes to feed pension funds) and to save more for themselves.
Curiously, New Zealand is an exception to this rule. It’s consider political suicide. Ironically, the voters who disdain the idea the most wouldn’t be affected by it.
It’s younger generations that have the most to lose from Government’s continued neglect of this issue. If current health care cost estimates (like 40% of GDP!) and longevity projections are anywhere near accurate, the NZ Superannuation won’t be around in its current form. It will either be means tested (i.e. if you earn or have assets above a certain amount of money you won’t qualify even though you paid into the scheme for years through your taxes) or it will simply be lower than it already is, and it’s not a huge amount to begin with folks. If you are mortgage and rent free with no debts, you’ll be able to pay your food and power bills essentially but don’t count of booze or fancy ice creams being in your shopping basket.
You can check the current entitlements here.
KiwiSaver has been presented as one solution to this potential savings dilemma and some encouraging strides have been made thus far. But will it be enough? According to many of the providers of these products, the answer is no. Naturally, you could expect them to say that as the more money you save into KiwiSaver, the more money they stand to make from the fees they pull in year after year (regardless of performance) from your hard earned savings.
This is why how much you pay in fees is REALLY important over the long-term. Many would argue that fees are actually a bigger deal than fund performance because they are constant. That’s not to say that how much you pay into savings isn’t important. After all it’s your savings and the more you pay yourself the more you’ll end up with in old age.
Right now the minimum mandatory is 3%. I’m talking about KiwiSaver still. That compares to 9% in Australia and that figure is changing to 15% eventually. Overseas, among those working in the savings area, there is a general view that a safe savings rate should be anywhere between 10 and 20% of GROSS income. In New Zealand, we’re nowhere near that but it’s difficult to know how many will fare given there is such a massive investment in the property market, as form of potential retirement savings.
Most of us know that, just like eating healthy, saving money is a good thing. The problem lies in our knowing what is good for us and us acting to effect those positive changes. For vast chunks of the population, there is a huge disconnect. Humans are perplexing creatures because despite our huge intelligence, we tend to make really bad decisions for ourselves, particularly where money is concerned.
Anyway, rather than focus on the negative, it is generally understood these days that’s it better to look at the positive so we can understand what we are doing right and encourage more of the same in ourselves and others. No one wants to be chastised or belittled or be made to feel bad because ironically, it just brings out the same bad behaviour.
Where savings are concerned, there is some interesting work and researching being done comparing saving rates and behaviours among different countries. Experts have wanted to understand why the Finns, Chinese and Japanese are so savings savvy relative to the countries to New Zealand and the U.S. In 2012, New Zealand’s net national savings rate was around 2% of Gross Domestic Product, or about 15% gross. (Source NZ Treasury).
So what can we learn from OECD nations where national savings rates are 20-40% of GDP?
According to Keith Chen, who explains more in this interesting TED talk, language has a lot to do with it. Chinese is apparently a futureless language; that is, it doesn’t distinguish between past, present and future. When this comes to money behaviour, this has a significant advantage because there would appear to be less distance mentally between the idea of getting old and actually saving for that eventuality. Retirement is not something that exists in the far away future but is accepted as an immutable part of present reality.
No one wants to think of getting old but obviously it’s a fact of life. Presented with that fact, or perhaps being reminded of it would appear to promote good savings behaviour. Experiments along these lines have supported this. The TED talk linked to above also references a study where individuals presented with an image of themselves in old age saved way more when reminded regularly of who they were saving for.
It’s fascinating stuff really. Accepting our paradoxical behaviours, our human limitations and silliness with money is all the more reason to implement systems aimed at saving us from ourself and importantly educating ourselves on these topics. Still more people would rather talk about sex than money I guess. Go figure!
Amanda Morrall is a New Zealand based personal finance expert. Her first book Money Matters was published in 2013 by Penguin Random House in NZ.