Financial advisors have long battled to educate clients on the importance of proper retirement planning but one leading economist has said this has “shockingly little” impact on behaviour and the industry can learn to cater to investors’ poor self-control.
Speaking at a pension forum held in Toronto just yesterday, Harvard economist David Laibson said: “People know they have self-control problems and they like the idea of an account that ties up their money.” According Laibson, behavioural economics indicates that people are more likely to contribute to a plan that prevents them from withdrawing money out early and the industry needs operate in line with this information.
The theory is becoming increasingly important to product design especially at a time where Canada is struggling to figure out the big pension problem – how to get people to save more for retirement in lieu of mandatory workplace plans which are gradually falling by the wayside.
“One problem with voluntary retirement savings plans is that too few people contribute, while people also take their savings out early to pay for things like kitchen renovations,” Laibson said.
As a specialist in “nudge” behaviour, Laibson theorizes that people can be driven to make better decisions without facing penalties but disagreed with Sun Life Financial’s CEO Dean Connor, who identified improved financial literacy as a key to bettering Canadians’ retirement savings.
In separate speeches, both Connor and Laibson told the Second National Summit on Pension Reform that high consumer debt loads are a significant factor in Canadians’ ability to save for retirement.
“I’m very worried about levels of household debt in Canada,” said Laibson, who thinks the nation has created a system in which it’s becoming easier and easier to both borrow and spend your future wealth.