Association of Investment Management Companies
ÊÁÒ¤ÁºÃÔÉÑ·¨Ñ´¡ÒÃŧ·Ø¹
| Are we saving enough for retirement? by:AIMC |
|
Print This Page  |
|
Are we saving enough for retirement?
Popular financial advice often suggests that households should aim to replace between 65 and 85 percent of pre-retirement income in retirement in order to maintain their pre-retirement living standards. Some households can achieve replacement rates that are in the recommended range through social security and pension income alone. Other can reach these replacement rates with the additional income from part-time work during retirement, housing equity and inheritances. But most households will need to rely on their savings to supplement their other retirement income. Yet, reports in the popular press often warn that people are currently not saving enough for retirement. How accurate are these warnings? Are people jeopardizing their well-being in their later years through inadequate retirement preparation? This article in brief provides an overview of the available evidence on whether Americans, Europeans and Asians are saving enough for their retirement.
First, let’s start with the United States, the world largest economy. In the phenomenon that may seem counter-intuitive, people in developed countries may well consider household savings to be less necessary in the presence of social security, employer-provided pensions, public assistance and disability payment. For the past decades, U.S. household saving rates have been so far south, from around 7 percent of household disposable income in 1990 to only 0.42 percent in 2007, making the Americans one of lowest savers among the OECD countries. The household saving rates are forecasted to increase slightly the next few years due to the current recession, but still should not be higher than 2 percent. However, even without saving a large share of income, some households can achieve replacement rates that are within the recommended range. For instance, the combination of social security, pension and insurance savings can provide all or most of the income needed to finance an adequate retirement for some households. However, most households will need to supplement their social security and pension income with income from other sources, especially since more than half of retired households receive pension income. This is consistent with the fact that personal insurance and pension are the forth largest expenditures of households in the United States. According to the U.S. Bureau of Labor Statistic, October 2008, American contributes a high portion, on average, of 10.8 percent of their income in personal insurance and pension expenditure, and the trend is slightly increasing year by year. In other words, Americans are somewhat concerned about saving for old age and they are mostly relying upon social security and pension income in order to maintain their standard of living after retirement. Evidently, there are 47 percent of workers who have not saved at all and are confident that they will have enough for retirement, which means that many of them count on employer-provided benefits that are increasing unavailable.
Nevertheless, many studies suggested that Americans nearing retirement have inadequate retirement savings and will need additional savings to allow them to maintain their current living standards in retirement. Moreover, many workers feel that they are behind schedules for planning and saving for retirement especially household with low wealth to earning ratio. Yet, the questions of whether Americans are saving enough will become even more important over time. Social security’s long term financial imbalance may lead to a decrease in social security benefits. And the shift in private pensions from defined benefit plans to defined contribution plans, which leave more discretion to the worker, may result in a reduction in pension income. Additionally, with the incoming demographic transition of aging population worldwide, social security and pension benefit may be reduced in term of coverage and sustainability of pension system. As a result, future retirees may need to rely more heavily on household savings to fund their retirement years. Therefore, it will be important to continue monitoring household savings behavior to assess whether it is adequate to meet future retirement needs. Still, with the current and projected household saving rates, it is not exaggerated to say that U.S. households will have inadequate savings for future retirement.
Similarly, the United Kingdom has related concerns that the current generations of workers are not saving enough for their retirement, particularly in the context of an aging population, which may result in relative poverty in old age, or a need to continue working much longer, or a higher burden on future taxpayers as future pensioners rely increasingly heavily on mean-tested state benefit. This concern also amplifies by the trend in recent years towards many employers scaling back their provision of occupational pensions. Although over 60 percent of British workers belong to a private pension plan at any time and over 75 percent of workers will retire with some private pension plan entitlement, there is still a concern about the adequacy of saving for retirement. Moreover, households spend approximately 14.23 percent of household disposable income on personal pension and life insurance, which is one of the top three spending of household and a higher spending comparable to the U.S. In addition, household saving rate in the UK also fall by approximately the same extent, which is consistent with the fact that UK has the highest level of household debt in recent years. According to OECD fact book 2008, household saving rate dramatically decline from almost 8 percent in 1990 to 2.93 in 2007. Hence, it can be implied that people tend to accumulate less household and personal savings in the availability of social security and pension payment system.
Household Saving Rates between 1990-2008 in Canada, United State and United Kingdom
Source: OECD (www.oecd.org)
In addition, according to a study sponsored by the Canadian Institute of Actuaries, only one in three Canadians expecting to retire in 2030 are savings at levels required to meet basic household expenses in their retirement, and many may need to sharply increase their annual savings or continue working past age 65 to avoid financial hardship. The message for most Canadians in their early to mid-40s is they will need to save more if they expect to enjoy an independent retirement. Additionally, those households saving adequately are doing so using some combination of home equity, company sponsored pension plans, registered retirement savings and personal saving to supplement the modest base income they will get from old age security. However, those relying solely on one type of savings vehicles are consistently identified among those falling short, and will either have to increase their savings significantly or continue to work past age 65. On average, Canadians households spend around 7.93 percent of their disposable income on pension and personal insurance, the fifth largest expenditures, while spend majority of their income, almost 40 percent, on housing. According to Statistics Canada, seven out of ten Canadian households, or about 9.4 million households, have some form of pension asset in 2005. Though pension saving in Canada may not be as high as in the U.S. and the UK, the household saving rates are also not as low as those two countries. In 2007, household saving rate is at 1.51 percent, which is over 10 percent decrease from 1990. Nevertheless, the adequacy of retirement saving is still a widespread debate.
Source: OECD (www.oecd.org)
Asian countries such as Singapore, Hong Kong and Thailand, on the other hand, though have many savings options for old age, the present system is inadequate in terms of coverage. Perhaps the most significant difference is that there are still problems of a large number of poor elderly, worker in informal sector and income disparity. Therefore, government policies are not mutually exclusive for the total population. People in Asia, as a result, face greater difficulties in meeting their retirement needs.
Having been forced to save so much for so long, many Singaporeans are as yet ill-prepared for rapidly approaching retirement. The first consequence of this is that savings have not in practice earned anything, so balances are now far from adequate to sustain a reasonable standard of life for low income retiree, despite the fact that contributions to the central provident fund in Singapore are 36 percent of income and were once as high as 40 percent. Middle income earners, however, have been able to take advantage of their ability to place some of the savings directly into stocks and mutual funds, which have earned much higher rates of return, but that has not applied to lower income earner who must first accumulates enough in their own funds before investing elsewhere.
According to OCBC bank Singapore, the study founds that 74 percent of Singaporeans wish to retire before the current mandatory retirement age of 62. However, most of them are ill-prepared for their golden years. Whilst 90 percent are not content to spend 700 SGD or less per month during their retirement years, many do not have enough saving to supplement additional monthly allowances. As savings are unlikely to be sufficient for retirement, it is critical that Singaporeans save and invest actively during their working years. Yet, Singaporeans are poor money mangers and are overly dependent on their earned income as the main source of wealth accumulation. They invest too little and too late to be able to enjoy quality retirement. In fact, many who are aged 55 only have 40,000 SGD in liquid asset and 20,000 SGD in invested assets to help fund their retirement. This is insufficient. In addition, Singaporeans who are most likely to face financial problems are those in the lower income quintile. This is because they are overly conservative in their investment and are not willing to take risks to grow their savings. This income group has relatively low savings and more than 37 percent do not have regular savings on a monthly basis and about 60 percent have an expense coverage ratio of less than six months to cover their needs. What this means is that this group is more likely to suffer in the long run when faced with the aging population during retirement since their investment would not generate sufficient returns and they have minimal savings to cover their needs.
Besides, other rapidly aging places in Asia, particularly Hong Kong, are even less equipped to face the twin challenges of aging and longer life spans. The lower income groups in both Singapore and Hong Kong societies are in the worst situation and will continue to get an especially raw deal. Like Singapore, Hong Kong has a serious problem with widening income distribution which can only get worse as the number of old people increase unless there is a major commitment to changes which help the latter. However, so far the tendency has been the reverse, with welfare spending lagging numbers of recipients and charges being threatened for health services. While Hong Kong resident have not been subjected to forced savings with a low-return government agency, they have in practice been only slightly better off. Middle and higher income groups have been able to invest in stocks, mutual and insurance funds, and buy their own properties. However, lower income groups have mostly been able to save only through bank deposits, and particularly saving bank accounts, which have struggled even to keep up with inflation.
Compared to their counterparts in the U.S., most Hong Kong workers have not developed adequate plans to secure a comfortable retirement, and they are not making the most of the available saving and investment options. According to Hong Kong Investment Association, 41 percent of retirees and 23 percent of workers had never thought or calculated the amount needed to live a comfortable retirement. Of those workers who were on retirement plan, more than two third (71 percent) believe that their current contribution to the employee provident fund or mandatory provident fund were inadequate for their retirement. However, despite this, 70 percent of people did not make any voluntary contribution. Moreover, not only Hong Kong workers are not saving enough, they are not taking enough care of their existing investments. Of those workers who could select fund choice in retirement plan, 59 percent are seldom or never reviewed their investments in the retirement plan. Of 800 workers, 68 percent never seek assistance available in the market, such as information from the bank or professional financial planner, for the retirement plan. The US 2006 Retirement Confidence Survey showed that nearly 9 out of 10 U.S. workers had a clear idea of how much they needed for a comfortable retirement, compared to 69 percent of Hong Kong workers. While 19 percent of U.S. workers sought professional assistance from a financial advisor to estimate the amount needed for retirement, only 4 percent of Hong Kong workers got professional help from a financial planner. In another contrast, 68 percent of U.S. workers were confident of a comfortable retirement, compared to only 56 percent of Hong Kong workers.
Source: Hong Kong Investment Funds Association, “Save for Rainy Days”, January 17, 2007
Hong Kong people, especially the older generation, prefer a more conservative asset, cash. Instead of more sophisticated investment vehicles such as funds and bonds, which may be better suited to help individuals reach their retirement goals, many of the older generation prefer cash. Despite, most current worker would look more at time deposit as a form of investment, followed by stocks and fund, 25percent of the workers. As a consequence, over 40 percent of Hong Kong retirees still continued counted on financial support from their children and other family members as their main source of income. This, therefore, explain why Hong Kong is behind the U.S and other developed countries in term of retirement planning.
Source: Hong Kong Investment Funds Association, “Save for Rainy Days”, January 17, 2007
Likewise, Thailand is one of the countries in Asia that encounter similar problems as in Singapore and Hong Kong about the adequacy of retirement saving. Thailand is becoming an aging society with old population increasing faster than other countries in Asia. Living arrangement is also changing, the reliance on family support, like the traditional Chinese virtue, is no longer sustainable to attain quality retirement. Therefore, while social assistance from the government is not sufficient, it is important to save for old age as source of income security.
For most of the last decade, average household income rose by approximately 7.09 percent between 1999 and 2006. Consumption, on the other hand, rose 7.17 percent per annum during the same period, raising the average propensity to consume to 85.5 percent in 2006 compared with 85.25 percent in 1999. As a consequence, average household savings shrink by 6.9 percent in 2006, lowering average propensity to save to 17.56 percent. Most savings and wealth usually remain in the form of deposit at commercial banks, financial institutions or saving cooperatives, an ineffective investment vehicle for creating wealth accumulation, which amounted to 80 percent of the total saving. Some people may also consider using secondary saving options such as life insurance saving, government bonds, and provident funds. However, in Thailand, these saving options are not yet very popular, indicating by the low saving level of only 4 percent in both life insurance savings and provident funds.
Source: Socio- Economic Survey 2005-2006
Moreover, on saving rationale, most households tend to save for general purposes including education, culture and recreation, and acquisition of other assets. The percentage of people who intended to save for old age is much lower at 33 percent. Though, Thais have positive view in their retirement but they do not have much preparation for retirement and start preparing themselves at average aged of 43 years and expect their retirement income to be lower than their last salary. This indicates that people do not prioritize life after retirement as the most important reason to save. Additionally, saving option for old age is mostly based on life insurance saving of 24 percent, which is then followed by 14.48 percent of provident funds. Retirement mutual funds and long term funds make up only a small portion of the total saving. Unsurprisingly, saving for old age is mainly contributed by the group of people with income equivalent to 15,000bht/mth or higher, compared with only 22 percent of those with income less than 15,000bht/mth. Nevertheless, there are still quite a significant number of people who have none saving, at approximately 27 percent. People especially the low income earners, low financial literacy or low education tend to have lack of saving option awareness and lower frequency of saving, which went hand in hand with the low percentage of total saving option for old age. Thus, these groups of people are currently not saving enough for their retirement needs, and among low income retirees, the standards of living have actually decreased for 40 percent.
According to the survey of savings for old age of private employees and civil servants by Center for Contemporary Asian Studies (CCAS), Kyoto in 2007, 35.4 percent of the elderly in Thailand does not earn enough monthly income to support their household expenses. At the same time, there are only 30 percent of people who have adequate saving for old age while there are more than double of people who either have inadequate savings or unsure of their saving status. One of the main reasons is that they underestimate their retirement income need, causing them to start saving when too late. Thais have not much prepare for retirement, where only 4 out of 10 workers have already begun preparing for retirement, on average at aged 43. Those, who have not yet started, plan to do so around aged 50. Besides, having inadequate savings for retirement, approximately 40 percent of the elderly have to continue working as their main source of income security whereas over 35 percent of them still have to rely on their family support. Worryingly, there are only 4 percent of them use pension as source of income security. Nevertheless, for those who have inadequate saving or unsure of their saving status, over 30 percent still have no plan to save for old age while less than half indicate that they will save more. Similarly, 30.9 percent of people plan to continue working after their retirement with around 4 percent of people hoping to get assistance from either government or their own children. Being developing countries, Thailand has major problem of a large number of poor elderly, workers in informal sector, and income disparity. These groups of people tend to spend majority of their income on food and beverages, as well as transportation. Hence, saving tend to diminish as the level of income declined.
Source: National Statistic Office of Thailand: Report of the Elderly Survey 2002
All in all, saving is critical for all of us. Even with the presence of social security benefit and pension income like those in developed countries, the adequacy and quality of retirement is not yet guaranteed. Hence, people in developing countries like Thailand need to be better prepare for retirement saving through effective retirement planning and investment vehicles, such as funds, in order to maintain their pre-retirement standard of living. Saving is not complicated; it is just a matter of priorities. So, start saving as early as possible and be disciplined, then, quality retirement is much closer than you think!
References 1. “Are Americans saving enough for retirement?” by Corl E. Uccello, Center for retirement research, Boston College, July 2001 2. “Are we saving enough?: Household and Retirement” by Doug Campbell and John A. Weinberg, U.S. Federal Reserve Bank of Richmond 2007 annual report 3. Consumer Expenditure in 2006, U.S. Department of labor, U.S. Bureau of Labor Statistics, October 2008 4. Employee benefit research institute, “EDRI data book on employee benefit”, updated February 2009, www.ebri.org 5. “Falling debt and rising saving-how big a problem?” by AMP Capital Investors, February 2009 6. Price water house Coopers UK Economics Outlook, March 2005, “is the UK saving enough?”, www.pwc.co.uk 7. “Are British workers saving enough for their retirement?” by Richard Disney, Professor of Economics, University of Nottingham 8. “Risk transfer to household and long term saving challenges”, International conference on financial education, Washington, May 7-8, 2008 by Nicholas Blancher, International Monetary Funds 9. Canadian Institute of Actuaries, “Planning for retirement: are Canadians saving enough?”, June 14, 2007 10. “Singapore, Hong Kong and Inadequate Pension Plans”, Asia sentinel consulting, 31 August 2007, www.asiasentinel.com 11. Independent research commission by OCBC bank, Media release 18 July 2005, “Research study finds Singaporeans poor money mangers” 12. Hong Kong Investment Funds Association, “Save for Rainy Days”, January 17, 2007 13. OECD Fact book 2008: Household saving rate 1990-2008, www.sourceoecd.org 14. “Today’s research on Aging: saving and the elderly”, 3 May 2007, Population Reference Bureau 15. National Statistic Office (NSO), Thailand, The 2007 Households Socio-economic Survey: Table 7.1 Average Monthly expenditure per household by expenditure group and region, 2007, www.nso.go.th 16. Macro Savings and Investment Policy Division, Bureau of Savings and Investment Policy, Ministry of Finance, www.fpo.go.th 17. Center of Contemporary Asian studies (CCAS), Kyoto: Survey of Attitude and Practice of Savings for Old Age (Private employees and Government officials), 2007 18. Krungthai AXA Life Insurance: New release as of February 11, 2008, “Thais have a positive view in retirement but being the latest preparing” 19. Watson, farley& Williams: “Life Insurance in Thailand-The Road Ahead”, www.wfw.com 20. Investment Wiki, “¡ÒÃÍÍÁà¾×èÍÇÑÂà¡ÉÕ³” â´Â ¤Ø³ ÇÕÃÐªÒµÔ ªØµÔ¹Ñ¹·ìÇâôÁ, http://edu.tsi-thailand.org/wiki/index 21. Bank of Thailand, Inflationary Report October 2005, “The adequacy of saving in Thailand”, www.bot.or.th
|
|
|
