17 January 2019
Saving Regret
Do you wish you had put more aside?
by Frank O’Nomics
If you wait long enough economists will come up with a term for almost every financial phenomenon. It should be no surprise then that some clever chaps at the National Bureau of Economic Research in the US have come up with a term, which would seem particularly to apply to the baby boomer generation, to describe the wish to have saved more earlier in life – defined as “saving regret”. Hindsight is a wonderful thing, but generally of little use unless we are able to define what the causes of past misjudgements are, and hence learn some lessons that future generations can apply. In the case of savings regret the lessons could be key to retirement savings policies. This is particularly pertinent for the UK, where the shift from defined benefit to defined contribution pensions, and the advent of auto-enrolment has meant that people have to think a great deal more about planning for retirement.
The NBER researchers have identified two cause of savings regret. The first is procrastination or other psychological factors – how many of us have delayed putting money into an ISA or put off making additional, tax effective, contributions to our pensions? For many, having money to spend now is sufficient justification to postpone saving. It is only when we come to retire that many of us realise that we have not set aside enough to maintain our lifestyle, necessitating continued employment (not always possible) or reduced circumstances – hence the regret. The other key driver of regret is a failure to provide for the unexpected, a financial shock such as unemployment, ill health or divorce.
The NBER research showed that around 60% of the individuals aged 60-79 who they interviewed said that, in hindsight, they wished that they had saved more. Now to some extent this may be just cheap talk, and there was a strong correlation between savings regret and wealth and/or income. The extent to which households were seen to be under-saving was around 20%. Whether this level extrapolates to the UK is hard to say with out seeing a parallel study here, but a similar level would seem a reasonable assumption. From a policy point of view the issue is more the reason why people under-saved.
If the reason is mainly procrastination, or an unwillingness to defer current consumption, then there is a need to focus more on auto-enrolment or mandatory savings. It is unlikely that forced saving will be introduced here, but the level of employer contributions for auto-enrolment is increasing from 2% to 3% this April and it will be interesting to see how many employees increase their own contributions, from 2.4% to 4% (an additional 1% comes from the government in the form of tax relief). The initial auto-enrolment take-up gives cause for hope. If, on the other hand the reason for under-saving is a result of the shock of divorce, ill health or unemployment the policy implications are more difficult to extrapolate. Either there has to be an effort to increase education to help people assess the probability of experiencing these events, combined with tax incentives to support products that insure against them, or there has to be an increase in social insurance against these events, which would necessitate raising more tax.
The US research demonstrates that the shock of divorce, unemployment or ill health, rather than procrastination, produced by far the highest levels of savings regret. Baby boomers had a 70% chance of having 3 periods of unemployment between the ages of 18 and 48, and a 48% chance of divorce. This suggests that pretty well everyone needs to make some increase in saving provision to protect their income against unforeseen circumstances. Does the same apply to the UK? The UK unemployment rate, while slightly above it currently, may have spent the last few years below that in the US, but there have been long periods where it has been significantly above, so the probability of some period of being unemployed remains high. The chances of staying married may be a little higher in the UK, but 42% of marriages still end in divorce. As for the ill-health issue, the costs of medical treatment may be a lot cheaper here, but many have no insurance for the loss of income experienced while unwell.
It seems clear that people will need to be nudged or forced to increase their savings. When considering what to set aside, ask yourself this question: Will I have too much money when I retire? For most people the answer is likely to be: “No”. For some this may still be cheap talk – for many baby boomers in the UK there is reasonable chance that they do actually have enough even if they don’t think so. They are the last generation to benefit from final salary pension schemes and have had considerable wealth benefits from home ownership. Recent data shows that 1 in 5 baby boomers is a millionaire. Looking outside the UK and the US there is evidence of over-saving in nations where there are more generous public pensions, such as Germany, Italy and Japan. For the US and the UK, even for baby boomers, where state provision is much more modest, the issue of pension poverty is not negligible, particularly for women who, through gaps in pensions contributions and pay differentials, are in general much less well off than men. The much bigger issue of under-saving is likely to sit with those that are under 55 and for them the incidence of saving regret seems only likely to rise.
