Good Judgment, Smart Design for the Global Pension Gap

Individuals are bearing an increasing share of the responsibility to fund their own retirement.

In such a world, it is more important than ever that people be given the help and tools they need to plan for, and achieve, long-term savings goals. A “financial fitness” revolution could be instrumental in helping individuals and societies meet those goals. But it could lead to the marketing of costly and poorly designed products—the equivalent of the fraudulent health and fitness equipment or fad diets featured in late-night infomercials—to the unsophisticated consumer.

Our view is that governments and employers have an important role to play in helping individuals recognize what “good” looks like when it comes to savings products, advice and decisions. Both governments and employers have responsibility to do this—and much greater capacity than do individuals to assess products, gather information and discriminate among financial intermediaries.

Many argue that financial wellness programs will reduce health care costs, improve productivity and reduce absenteeism. But such programs will be successful only if they are tailored to the needs of the particular employee base—which may be very different across and within companies—and are made engaging and easy for employees to adopt.

To gauge the potential productivity gains from placing greater focus on financial wellness programs, we considered how much time employees spend worrying about money at work. Through our Inside Employees’ Minds research, we found that, on average, people spend 13 hours per month worrying about money matters at work; the median is five hours, highlighting that some individuals spend much more time than others absorbed with financial issues.

Providing greater support to employees in making sound saving and investment choices will go a long way toward alleviating this worry and closing the long-term savings gap. However, given the many priorities competing for an individual’s paycheck and the primacy of the immediate over the future, voluntary contributions to long-term savings simply may not be enough.

Change is most likely to occur through small steps—that is, by making small financial decisions and building courage in financial decisionmaking gradually. Traditional approaches such as trying to build financial literacy by loading on information are less likely to promote financial wellness than simply providing employees with tools that help them make good decisions and take action—on their own—without needing advanced financial literacy.

A number of intelligent design-principles can be used to create the appropriate combination of growth and defensive investments to produce superior retirement outcomes. For example, the smartest of these products are designed to allow investments to keep growing during retirement. Rather than being fully invested in cash or de-risked on the day you retire, they look beyond your expected retirement date to ensure that savings can continue to accumulate even as being drawn down.

A New Take on Employment and Retirement

As societies age and the nature of work continues to evolve, it’s clear that old notions of employment and retirement will need to give way to a spectrum of new possibilities—for when and how to work and what it means to retire. Societies, employers and individuals will all benefit from greater acceptance of, and more accommodation for, working later into life. This may mean raising or even eliminating set retirement ages to reflect the fact that people live longer today than in the past.

The U.S., for example, faces a sizable long-term savings gap of U.S. $28 trillion that is projected to reach U.S. $137 trillion by 2050, according to the World Economic Forum, unless action is taken. The good news is that the U.S. has the levers it needs—wealth, moderate economic growth and an influx of immigrants adding to the work force and nudging up birth rates—to solve the problem.

At the other end of the economic spectrum, Denmark is considered a global leader, for the design of a long-term savings system capable of ensuring that its people have the income they need through old age. Given an “A” rating by the 2016 Melbourne Mercer Global Pension Index, Denmark’s multi-pillar pension system compels participation, encourages high savings rates, provides adequate replacement income to individuals and is sustainable.

Still, Denmark struggles, as do most countries, with the political reality of aligning long-term savings schemes with increased longevity. The country’s normal retirement age is scheduled to increase from the current 65 to 67 in 2022 and to 68 in 2030. It’s the sort of action that needs to be taken in more geographies—along with the bold commitment to helping people help themselves.  

Ultimately, a true revolution in financial fitness requires a “triple play”—that is, a combined approach between governments, employers and employees to mend the pension gap by taking action to support individuals building their long-term savings. Together, we can help these people secure their financial future, rather than fear it.