HOW TO ENCOURAGE LONG-TERM SAVINGS IN A SHORT-TERMIST ENVIRONMENT

Transcription

1 HOW TO ENCOURAGE LONG-TERM SAVINGS IN A SHORT-TERMIST ENVIRONMENT Annual Savings Workshop South African Savings Institute Olano Makhubela 2 September 2010

2 Focus of the presentation Long term saving always a hard and topical topic The focus will be on long-term savings within the context of individuals Bias towards saving for retirement Behavioural Economics approach to individual actions and decisions Can we trust the individual to always get things right? Can Government help? Does the financial sector have a role to play in dealing with shorttermism? Not focus on the numbers and statistics Not focus on the economic and emprical relationship between savings, investments and growth Government policies covered extensively in previous presentaion 2

3 Concepts What are we talking about? Savings - income not spent, or deferred consumption Need for broad approach to savings Long term saving should entail largely putting money aside for comfortable retirement than for short term future consumption But note importance of (risk) insurance; Medical aid; disability cover; life cover Buying (long term) insurance policy as a form of saving? What is short-termism? Focus on obtaining immediate gain/gratification at the expense of long term security/gratification Find it in individuals, politicians, companies, industries. 3

4 Percentage of GDP World savings South Africa Emerging & developing economies Euro area Asian NICs Developing Asia Low savings not unique to SA! Canada, UK, US, Australia Exception are Asian countries Source: SARB, IMF (World Economic Outlook) 4

5 Problem statement and behavioural economics How do we get individuals to save, save enough and save for the long haul Individuals are saving too low or not even saving No saving or low saving rate has two major implications; too low investments (macro) and we will not be able to retire comfortably (micro) Neoclassical economics of homo economicus (perfect economic human) assumes we are perfect beings; We save to maximise some lifetime utility function Perfect information and ability to process 5

6 This implies the following; Economic human always makes rational, logical, selfish Economic man is intelligent, analytical, effortlessly selfcontrolled But does the average, even sophisticated individual, behave rationally when it comes to long term savings? Unfortunately, NO! Reality and the real human being behaves differently depending on socialisation, values, attitudes star sign! We, therefore, must look at behavioural economics to understand the real human being behind these decisions and actions 6

7 Bounded rationality We are constrained by emotions, experience, ability! Bounded rationality Limited ability and intellect to acquire and process all information Evidence; overconfidence, optimism, heuristics, philanthropists We rely on peers for advice Bounded willpower Temptation and arousal Pain lingers more than the joy; myopic loss aversion Inertia Individuals have desire to behave well and save enough But come actual date, they struggle to behave themselves 7

8 Why do we struggle? Because we are human and not homo economicus Self control becomes elusive Just one chocolate today will not make me unhealthy R100 to buy that DVD will not break the bank Attitudes matter; I live now and therefore must enjoy life now SA has a low life expectancy rate of 49 years South Africa s political economy Unemployment high what do you save if you have no income Poverty could force short term survivalist tendencies Do we have a culture of trust Savings are an emotional issue! 8

9 Implications for policy Behavioural economics has major implications for policy when individual choices are characterised by bounded rationality and willpower If households have real problem making decisions, particularly long term decisions, then there is a legitimate role for Government intervention Best approach is holistic; Government, individuals, employers and financial industry have all a role to play 9

10 Possible interventions 1. Reporting, information and communication Give employees information; eg estimated values of their benefits now and upon retirement Give proper advice (FAIS Act) Firms/investors to focus more on activities driving performance and future prospects, than (past) earnings Focus on earnings encourages myopic behaviour Note real danger of focusing too much on earnings for DC members 2. Active ownership Encourage shareholders, largely institutional investors, to act like owners and hold on to the shares for longer Champion good governance, environmental and social issues 10

11 3. Education important for ALL Members need to know the risks of DC and DB plans How does one make choices if not informed guarantee could offer comfort to the mind, but know risk low return/replacement ratio Institutional investors to understand long term business of company and steer management But education is not panacea! FSB and Treasury working on a national consumer education and financial literacy strategy 4. Incentivise the private sector to promote savings Possible extension of tax incentives to cover savings vehicles beyond RAs 11

12 5. Design good saving plans and system Need for paternalism Consider the following; preservation of accumulated funds automatic enrolment and active decision Lifestyle Funds which assist with diversification automatic escalation link savings increase with pay rises Simplify saving instruments Inconvenience also helps! Discourages those frequent withdrawals 6. Strengthen consumer protection and trust Consider deposit insurance scheme Good and effective regulation and supervision Treat Customers Fairly! 12

13 THANK YOU 13

14 References -Richard H Thaler, Psychology and Savings Policies, Johnson Graduate School of Management, The Aspen Institute, Overcoming Short-termism: A call for more responsible approach to Investment and Business Management, 9 September Institute for Sustainable Futures, Solutions to Short-Termism in the Finance Sector, July J Leape, Behavioural Economics: Implications for Policy, Benartzi S and Thaler RH, Heuristics and Biases in Retirement Savings Behavior, Summer 2007, Journal of Economic Perspectives -Financial Mail, Enough to turn hair white, 27 August