There was a time when many workers didn’t have to worry about saving money for retirement. After all, that’s what their DB pension plan was for. Then the pendulum shifted and companies began switching to DC plans, putting more of the responsibility on employees to make investment decisions for their retirement savings.
Today, companies across the western world are starting to adopt more hybrid approaches, offering support for employees in their DC plans and helping them to set aside enough for their retirement years.
The compromise comes amid worries about a mismatch in intentions and actions when it comes to retirement savings, said David Laibson, Robert I. Goldman professor of economics at Harvard University, and the keynote speaker at Benefits Canada’s 15th annual DC Plan Summit in Whistler, B.C., in February.
“The typical worker isn’t saving enough to maintain their quality of life into retirement,” he explained. “I’m pessimistic. We have a demographic nightmare coming down the pipe as we switch from the DB world—where it was all done for you—to the DC world, where it’s not done for you, and people aren’t doing it for themselves.”
Some countries have mandated savings, such as Australia and Singapore, while the U.S. and Canada are more libertarian. “The retirement savings system is not working as well as it could in Canada and the U.S.,” Laibson added.
While he doesn’t believe that mandated savings are politically feasible in North America, there are tools that companies can use to encourage savings, such as auto-enrollment (which is now legally required in the U.K.) and auto-escalation of contributions.
Citing behavioural economics research, Laibson said these measures are working to encourage employees to set aside money for their future. He cited data showing that participation rates for opt-in programs in the U.S. are 40% but surge to 90% for opt-out plans, where employees who behave passively stay in the savings plan.
“We need retirement income products that succeed,” Laibson noted. “We need to help passive workers save.”
Why do people procrastinate when it comes to savings? Laibson said his research shows that people put off decisions, believing their finances will improve and they will have more time to enrol in savings plans down the road. “We humans are convinced our lives will get easier. We are perpetually thinking we are going to get our lives in order—just not today.”
Self-control problems prevent people from saving enough for retirement, he explained, calling on plan sponsors to adopt automated tools and higher default savings rates. Low participation and leakage from RRSPs are “undercutting the wealth accumulation phase” of workers, he argued.
“We have a social interest…in compelling people to annuitize wealth so the rest of us don’t end up paying their bills when they run out of money in retirement.”
Additional videos from the DC Plan Summit can be found here.
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