World-renowned behavioural economist and UCLA Anderson School of Management professor Shlomo Benartzi has praised stapling as a piece of legislation that puts Australia in a leading position when it comes to instilling the idea of superannuation as a lifetime account.
However, he urged funds not to let some member behaviours that the super system fosters, mostly the set-and-forget mentality, turn into disadvantages during the retirement phase.
Benartzi said Australia is “far ahead of the curve” on addressing the small pension pot problem compared to the US and the UK.
“With the stapling legislation and especially as the workforce become more mobile, you could avoid a lot of small accounts,” he told an Investment Magazine roundtable sponsored by AIA Australia with representatives from major super funds.
“You’re doing it in a way that is very different from, say, how NEST is doing it in the UK or CalSavers in the US, because you’re not saying that the idea is to have one provider for all the people in Australia.
“You say we’re going to have multiple supers, it’s just that whoever you are starting with would be the default, and the market could still be competitive.”
Due to job switches and cashouts, Benartzi said that for “every dollar that gets into retirement accounts in the US, 40 cents goes out”.
Alongside Nobel Laureate Richard Thaler of the University of Chicago, Benartzi created the Save More Tomorrow (SMarT) initiative, which is designed to “nudge” employees to increase their retirement savings rates gradually over time.
It aims to help people avoid some behavioural biases such as present bias (asking people to commit now to saving more in the future), while making use of others like inertia (employees remain in the program unless they opt out).
But one thing Benartzi said retirement systems around the world are all still trying to figure out is decumulation.
“If I think about the strengths of a system like you have in Australia, that you have to save and everything is done for you, you got this huge issue later on of engagement,” he said.
“Because suddenly one day people wake up and they are like ‘oh, I have all this money, maybe I can go buy another boat’.
“My understanding is a lot of people don’t trust the system and cash out the account, which has significant tax disadvantage.”
Super funds recognise the importance of engaging in improving retirement outcomes, and funds present at the roundtable including REST, UniSuper, Australian Retirement Trust and Vanguard Super shared their individual approaches, such as introducing assisted journeys or leveraging financial adviser networks.
They also addressed the need to handle behavioural biases that members may experience, such as choice paralysis or perception of longevity risks.
“Australia and everyone else is struggle with that [retirement],” Benartzi said.
“But these [pension systems] were meant to be retirement plans. If we don’t solve decumulation, the entire system shouldn’t be there to begin with.”
Full report of the roundtable will be released on the Investment Magazine website in the coming weeks.
