Most people in Western countries fail to plan sufficiently for retirement, according to two researchers at Ben Gurion University of the Negev. As a result, most OECD countries will be faced in coming years with large social security expenditures to support aging populations at a time of expanding life-expectancy.
In The Effect of Attitudes Regarding Retirement on Pension Savings, published Wednesday in the current edition of the Review of Economics & Finance, Dr. Ravit Rubinstein-Levi and Prof. Haim Kedar-Levy, both of the Guilford Glazer Faculty of Business and Management, say that a majority of residents of OECD countries fail to maintain pension funds or other savings plans during their working years that are aimed at sustaining them in retirement.
They point to two main factors as main contributors to explain the phenomenon. One, in contradiction to the principals of the defined contribution savings system which is implemented in most OECD countries and holds workers responsible for their pension savings, workers attribute responsibility for maintaining a reasonable standard of living for them after retirement on the government.
Second, workers tend not to acknowledge the need to retire at a certain age.
“Most individuals are interested in maximizing personal benefit. Yet, while the classical economics approach stipulates that maximizing personal benefit would be carried out based on rational thinking only, the conscious balance theory maintains that individuals would act in every way to maximize benefit and reach a state of balance, including choosing an irrational behavior,” the authors say.
In other words, “psychological theories suggesting that people without savings will more likely avoid the cognitive dissonance by ignoring the troubling information.”
The researchers note that since 2008, Israeli law has required employers to pay into pension funds on behalf of their workers. This is similar to requirements in other OECD countries including Belgium, Norway, Germany, Italy, France, Austria, Sweden and Great Britain.
However, they also show that enforcement of the law is lax, particularly with regard to small businesses and temp workers. Furthermore, they add that throughout the Western world, only a minority of people save enough during their working careers to avoid a drop in living standards after retirement. As a result, poverty among senior citizens will present a growing fiscal and social challenge for governments in the coming decades.
“Throughout the industrialized world, governments have shifted the onus of preparing for old age onto the shoulders of private individuals,” says Dr. Rubinstein-Levi. “In Israel, this means that 50 percent of Israeli senior citizens would live below the poverty line were it not for National Insurance Institute (NII) payments. That figure goes down to 30 percent after the payments are made.
“As a result, the cost to the public coffers is large. Social security (national insurance) payments to senior citizens represents more than 6 percent of the national budget, more than 21 percent of the social programs budget and about 93 percent of the total NII budget, with more than NIS 2.25 billion paid out for support payments to the elderly population in 2014 alone.
“At the same time, the senior citizen pension stipend that our National Insurance Institute pays is very low, so many people cannot afford to maintain the lifestyles as retirees that they enjoyed during their working years. Many are left in dire poverty,” Rubinstein-Levi says.
To address the issue, the researchers recommend that policymakers act to improve financial education and stress the role of personal responsibility in maintaining standards of leaving after retirement. Accordingly, individuals will give more thought to their retirement and start planning it at a younger age, possibly by seeking aid from experts.
“It is true that public awareness about financial planning has gone up in recent years, but behavior has not changed significantly. In Israel, as in the U.S., Canada and other countries, people are not saving enough for retirement. As life expectancy continues to grow it is going to become more and more important to address this issue effectively in coming years,’ Dr. Rubinstein-Levi says.