Overcoming barriers to retirement savings: behavioural factors and existing schemes

Individuals face difficulties in making savings decisions due to the complexity of determining savings amounts and how to allocate assets, compounded by behavioural issues like ‘present bias’ and procrastination. Many savers also prioritise having immediate access to liquid savings, which can hinder their commitment to long term retirement savings.

Marie Briere, Head of Investors’ Intelligence Academic Partnership, at Amundi Investment Institute has reviewed the effects of various reforms implemented in different countries to promote private retirement savings.

In this paper, she notes that tax incentives have proven to be an efficient tool to boost retirement contributions especially for the most ‘active’ savers, and older and wealthier individuals. Encouraging automatic contributions from employers to retirement plans may be more effective to support a wider range of individuals to invest on the long term. Providing information on retirement saving needs can also be beneficial.

The paper reports that under-saving for retirement is a major issue for many economies. Benartzi and Thaler (2013) have long diagnosed a ‘retirement savings crisis’. In the US, according to the National Retirement Risk Index, 39% of working-age households will not be able to maintain their standard of living in retirement.

In Europe, more than 19.8% of people aged 65 years or older are at risk of poverty or social exclusion, and women are particularly at risk.

To address these issues, many countries have introduced reforms to encourage private saving by providing tax incentives for voluntary pension contributions, automatic enrolment in pension plans, or trying to raise awareness about the importance of pension saving through retirement education material.

What are the lessons learned from these reforms and how do the various incentives affect saving?

Briere adds that evidence on the effectiveness of retirement information provision and financial education is mixed. Some experiments show that providing easily accessible information on one’s pension entitlements has a significant impact. In Germany, for example, a policy of systematic information on pension entitlements was introduced between 2002 and 2005, with annual letters presenting projected retirement incomes for all individuals over the age of 27. This reform led to an increase in tax-deductible retirement savings and a rise in earned income.

Getting people to save and invest for retirement is not an easy task and there are many reasons for that, she notes.

“Saving decisions are complicated: people don’t know how much to save, or how to allocate their assets for retirement. The easy solution is to leave the money in their bank account. Present bias and procrastination explain the lack of decisions. In addition, savers like to have access to liquid savings that they can use when needed. However, most retirement saving vehicles lock the money until retirement, unless there are exceptional reasons to withdraw.

“This raises the question of the optimal degree of liquidity offered by retirement savings plans. Tax incentives can have an impact on retirement savings. They tend to have a bigger impact on savers that are already ‘active’ savers or wealthy individuals. Incentivising automatic contributions from employers to retirement savings plans might be more effective to touch a wider audience of potential investors. Finally, the provision of information on retirement saving needs (perhaps combined with engaging ‘virtual reality’ tools) can be useful, especially if it is channelled through financial advisors or easily accessible digital tools such as robo-advisors.”

Read the paper.