Superannuation and the future of work on The Future, This Week

This week: “death and taxes,” the future of retirement and superannuation. Sandra Peter (Sydney Business Insights) and Kai Riemer (Digital Disruption Research Group) meet once a week to put their own spin on news that is impacting the future of business in The Future, This Week.

Our guest this week: Professor Susan Thorp.

The stories this week

02:46 What is super for?

20:26 How to make your coffee count for retirement

Other stories we bring up

Why a retirement savings review is necessary for the nation’s future

What a retirement savings inquiry needs to answer

Our previous conversation of the four-day work week

Our previous conversation of exponential growth

Questionable fintech superfunds

The history of retirement (including Chancellor Otto Von Bismarck)

The battle between your present and future self, Daniel Goldstein’s TED talk

Resources

Exponential growth bias

McKenzie, C. R., & Liersch, M. J. (2011). Misunderstanding savings growth: Implications for retirement savings behaviorJournal of Marketing Research48(SPL), S1-S13.

Rendering the future self older to encourage saving

Hershfield, H. E., Goldstein, D. G., Sharpe, W. F., Fox, J., Yeykelis, L., Carstensen, L. L., & Bailenson, J. N. (2011). Increasing saving behavior through age-progressed renderings of the future selfJournal of Marketing Research48(SPL), S23-S37.

Ersner-Hershfield, H., & Goldstein, D. (2011). Making the Future Self More Vivid to Increase Retirement SavingACR North American Advances.

Connectedness with the future self to influence saving

Bartels, D. M., & Rips, L. J. (2010). Psychological connectedness and intertemporal choiceJournal of Experimental Psychology: General139(1), 49.

Bartels, D. M., & Urminsky, O. (2011). On intertemporal selfishness: How the perceived instability of identity underlies impatient consumptionJournal of Consumer Research38(1), 182-198.

 


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Intro This is The Future, This Week on Sydney Business Insights. I'm Sandra Peter, and I'm Kai Riemer. Every week we get together and look at the news of the week. We discuss technology, the future of business, the weird and the wonderful, and things that change the world. Okay, let's start. Let's start!

Sandra Today on The Future, This Week: death and taxes the future of superannuation and retirement. I'm Sandra Peter. I'm the Director of Sydney Business Insights.

Kai I'm Kai Riemer, professor at the Business School and leader of the Digital Disruption Research Group. So we've been thinking, what's the most future thing we could talk about?

Sandra And we've gone through artificial intelligence...

Kai Automation...

Sandra Spaceships, flying cars...

Kai Well it is space week. But that's not actually what we came up with. It's actually retirement and superannuation pension schemes.

Sandra So we thought we don't know a whole lot about that.

Kai No, we better bring some backup.

Susan I'm Susan Thorp. I'm a professor of Finance at the University of Sydney Business School.

Kai Well a lot is being written at the moment about this review of the retirement system in Australia coming up, so we should talk about that.

Sandra We should start by talking about what super is actually for in the first place. How do we even think about what we'll be doing after we retire? We tend not to make forecasts and predictions. This is real far out in the future.

Kai Yeah, for some of us. You know, younger people entering the system, 30 years that's a long planning horizon. No wonder young people don't actually want to engage with this. So what do we do about that?

Sandra Surprisingly this seems to be related to a lot of things we talked about changes in preferences for work new types of work things like the gig economy fintech innovation automation less apps that nudge people we've talked about nudging exponential growth is a real thing here we've talked about that on the podcasts previously and I'm sure we'll also find a way to bring in deep fix.

Susan I'm Susan Thorp, I'm a Professor of Finance at the University of Sydney Business School and for the past 15 years or so I've been studying the way that people make complicated financial decisions. A lot of my work's associated with superannuation decision making and I'm interested in understanding how people make choices around this when they're confronted with decisions about things that often they don't want to think about and that a quite complicated to understand.

Sandra Susan, welcome to the podcast.

Susan Thanks Sandra.

Kai So Sandra, what happened in the future this week?

Sandra So our first story for this week is actually going to tackle something that we all want to know, but never really have the time to ask, or the inclination. And our first story is from The Sydney Morning Herald, it comes from Peter Martin who is the economics editor for The Age, and its titled "So, what is superannuation actually for?". The government's new retirement incomes review will come along very, very quickly. It's only seven months after the issues paper is due that is expected that we'll have a final report. This is by June next year, so the deadline is quite tight, and it's looking at Australia's superannuation system. So, we thought we would ask today, before we have any conversation around the report, what is superannuation and what is it for?

Susan In the most basic sense, superannuation is actually a system of tax incentives. It's really set up to encourage people to save, in terms of saving for retirement. And it does that by all sorts of tax incentives. Some of these tax incentives work on employers, they're incentivised to make contributions on behalf of their employees, and some of them are applied to the superannuation funds themselves, where they're given tax incentives on the money that those savings earn when they're invested. And some of them are incentives that apply to people when they're retired, so that once you're retired you get tax concessions by spending your superannuation, or drawing an income out of it.

Kai So just to clarify, also for our international listeners. So I grew up in Germany, and in Germany most people when they retire they receive a retirement income or a pension, which is basically a direct tax redistribution system. And then it has a bit of, you know, I saved my own on top of that component. Australia doesn't have that, right. So for the most part, most of us in Australia actually pay during our lifetime, and the employer puts a bit of money towards that, and then we actually accumulate something that we live on when we retire. So that's quite a different system.

Susan It is different in the way that you said Kai, yes. So we don't have what European and US people would think of as a compulsory Social Security system, where people are almost paying a tax that's linked to their income that then provides them with a pension when they get older. But we do actually have two very similar components to our retirement system. The first one is the aged pension which is a safety net, and it's designed to prevent people from living in poverty when they are older. Although in Australia it's paid out to a very large percentage of the retired population, almost three quarters of retired people will be getting the aged pension at some point.

Kai That's currently, right.

Susan Yes, currently.

Kai The idea is, forward-looking we want less people to rely on this.

Susan Yeah though the anticipation is not so much that fewer people will necessarily be reliant on the aged pension, is that people will rely less on the aged pension. So we'll probably have a bigger proportion of retired folk who are on a part-pension, because the pension that you get depends on how well off you are, and fewer people that are getting a full pension. So we have a pension component, and then we have as you described this superannuation component which is a peculiarly Australian…

Kai Name.

Susan Word, name. And we always have to describe what we mean.

Kai When I first came to this country and people at work said 'Have you looked into your super?' And I was like 'super? Super?' The only time we used this in Germany is because one of our petrol types is called super benzine, and I was like 'what are they talking about, right?'. So it took a while to get into that.

Susan And one of the difficulties with figuring out what super is for, is that we need to always think about this distinction. So the age pension is a redistributive vehicle, so it's there to prevent people from falling into poverty. And it does that by taking money from people that are currently working and giving it to the elderly who are less well-off. The superannuation system doesn't operate like that. It's where I save up for my own future. So it's a funded scheme rather than being paid for out of taxation, and its goal is actually not redistributive, and I think that this is really hard for people to understand. The goal of the superannuation system is actually what's called 'consumption smoothing'. In other words, it's really there to actually give you a retirement that's comparable with the standard of living that you enjoyed while you were working. So the superannuation system is not really trying to make poor people better off, or rich people worse off. It's actually trying to help people enjoy a reasonably constant standard of living over the course of their lifetime.

Sandra But compulsory super really has had different purposes at different times, right? This is our current understanding of what we want it for, because it's been at times justified as a means of restraining wage growth, at other times of restraining government spending on the pension. At other times as a way to boost national savings in general, so we don't always agree on what it's for.

Susan That's right. And you make a really important point because at the time it was first introduced, really in the very late 80s and the early 90s, it was indeed a wage-control device that was designed to keep the lid on inflationary pressures when Australia had a highly centralised wage fixing system. And at the time people were very concerned about the low levels of saving in the economy in general. So it was also motivated towards that goal. Now, over time it's really been very difficult for people to ascribe a single purpose to the superannuation system, and that's partly because it does do many things. It operates on a macroeconomic level to influence the level of savings, both in the private sector and in the public sector. It acts on the individual level to affect my financial welfare over the course of my lifetime. And it acts on a cross-sectional social level as a redistributive vehicle as well, because the tax incentives work differently on different people.

Sandra So part of the upcoming inquiry in Australia and part of the conversation about what we need to save for retirement, is having to figure out what exactly would people need to live in retirement and how do we think about issues that are far in the future for some of us, not so far for others, but quite often on this podcast we refrain from making predictions and forecasts into the future trying to imagine what these futures would be, but we actually really need to do that in the case of superannuation.

Kai We see five years in technology, five years can be a long time in super. We sometimes talk 25, 30 years in the future for young people entering the system. That's not a straightforward system to set up to work for everyone.

Susan No indeed it isn't, and it's always going to be an approximation. And as you point out for some people this is a smooth path through 30 years of work, and for other people it's a very interrupted path through a working life of some random length that they can't even anticipate. So indeed it is very difficult to set up a system that's compulsory that will work in this situation, which is one good reason why it's only one component of our provision for retirement. So we need the aged pension, we need the super system to some extent, but we also need other things at work to allow for this flexibility that all of us are going to increasingly need in the workforce.

Kai So there's a number of assumptions, right, that we tend to have about what a typical work life will be, and those assumptions are changing and can be questioned. And they're changing because more people change jobs more frequently. We have new forms of working, we have the gig economy, we have freelancing entrepreneurs. So we have many different forms of employment, and yet the model seems to be predicated on someone on a very stable lifelong employment, which then goes into the modelling. So how do you keep a system working that doesn't necessarily fit the reality of many people?

Susan I think that's such an important point. And it's been really highlighted the failures of the system, in that respect in the last couple of years, particularly when the Productivity Commission and other inquiries have looked at the way the is operating for different groups of people. So for example take the idea of people changing jobs. At the moment when you change jobs unless you decide otherwise you're defaulted probably into a different superannuation fund than the one that you had in your last employer. Now this is unequivocally costly to people because when they accumulate more superannuation funds they tend to pay more fees. They're often paying additional insurance premiums that don't necessarily help them, that they don't necessarily need, and they may be moving from a better performing superannuation fund into a worst performing fund or vice versa. A lot of people have more than one superannuation fund, a very large proportion of people do. And that's exactly the sort of structural problem that doesn't fit an economy where people are changing jobs more, and moving in and out of the system. But in addition, the point that you make about assuming that people have smooth working lives also doesn't work well, because the system that just assumes that you make a compulsory percentage contribution out of your wages every fortnight or every month is not set up for people that have lumpy income streams. So if we take women for example, who tend to have periods of their working life when they're working part-time or not working at all, and then have other periods of their life, typically when they are middle-aged, when they're working much more intensively, the rules around contributions and the tax incentives are not favourable to people in that situation and they can significantly disadvantage them. So there are things that really need to change. I think people are aware of this, and there are some changes afoot. There have been changes to insurance recently that have been legislated where young people are no longer opted in to insurance outcomes, but these are really complex problems. And you know you can fix it on one margin and that will cause a problem on another.

Sandra So we were talking about the purpose of superannuation in general, and all the answers have something to do with life after retirement. Is it worth considering, should we be retiring at all? Is retirement something that we've just mythologised as, you know, some kind of relief from work when we get to a certain age, work that has put such a burden on us. Should we be discussing whether or not we should retire at all? I'm reminded here of a conversation I had with Ian Hickie, who's the Director of the Brain and Mind Centre at the University of Sydney, who was saying that actually one of the best ways to improve health and to improve mental health would be to abolish the idea of retirement altogether. And of course he wasn't arguing that we should stay in the same job and die in the same job, stay in it forever. But that we should have a number of careers, work would become quite flexible, we could do it for three days a week, maybe two days a week as we get older. But the fact was that people's health we know deteriorates quite quickly when they go into retirement. And there is a wealth of studies in the UK and France that have consistently showed that as people move into retirement they suffer because there is a lack of challenge, a lack of social connection. So should we challenge the idea of retirement altogether, when we look at superannuation?

Susan It's interesting isn't it that our expectation about retirement is very binary. So we think of life as being either retired or not retired, whereas I think the reality for a lot of people is somewhere in the grey space that you've been describing Sandra, where people are working part-time, changing jobs, adapting to a different style of life, and perhaps adapting to less capacity for physical work. Kai, you mentioned at one point earlier the idea that superannuation systems were instituted at a time when people died much younger.

Kai It's actually of course all the Germans fault. I looked up the history of retirement and I found an interesting article in The New York Times which made the point that it was actually Chancellor Otto von Bismarck in Germany in 1883 who created the first state-wide retirement scheme. He was fighting off Marxists, who were you know apparently taking over Europe at that time, and he wanted to appease the population. And so he created a tax-based retirement system, a similar system still exists in Germany today. And interestingly he picked as the retirement age the age of 65, which in many countries is still the retirement age. But he picked it because he knew that almost no one would live past the age of 65, when in fact today many people or most people live past that age, and by a quite considerable margin. And so it's quite interesting that we, you know on one hand still stick with that age, but also that this is an invention that made some sense politically, and then in terms of the working reality as industrialisation kicked in 20, 50 years later, made a lot of sense because a lot of the labour that people did was so physically taxing that they needed a break at some point in their life. And so retirement schemes actually served that purpose. But as we move to a service economy we can question the idea of whether that is necessarily still true.

Susan That's right. So one of the areas that we really need to think about is how people can continue to work should they want to, and what sort of framing we do actually have around retirement. So your point Sandra about retirement not necessarily having great benefits for health in fact quite the reverse, I think this is not necessarily widely understood. And the way that retirements depicted to us in media and by retirement providers is some sort of secular alternative to a paradise that a lot of people no longer believe in. But I think most of us are much more realistic about that, and particularly as we get older and we see people retired, we come to understand this phase of life, and people need to understand how they can manage it. And although we realise that we've got this extending longevity that has been such a major change to society, what we don't necessarily see is that people's health has also kept up with the extension in their life expectancy. This seems to still be a slightly unclear question. The other thing that we see, that isn't actually talked about a lot in relation to longevity, is the fact that it's fairly unequally distributed across the wealth groups in our population. So poorer and less wealthy people enjoy shorter lives than those who are wealthier.

Kai And receive less tax benefits from the superannuation scheme. Let's put that out there.

Susan And receive less tax benefits from the superannuation scheme. So there are lots of important political and social questions around retirement, and what our expectations are. So it's one thing to say that the aged pension age should rise from 67 to 70, which was being proposed for some time, and then was rescinded as a decision a few months ago. Who is affected by that. For some people the age pension at 70 is probably not such a disadvantage. But there will be people in our society for whom that extension to an aged pension age would have been quite a high cost in terms of their lifetime wealth.

Kai I recently learned that the University will not retire us as academics. Apparently if you can you know make your way into a classroom and be half-coherent and what you have to say, and operate a typewriter, they'll keep you on for you know, as long as you don't...

Susan Well we can look forward to you being here a long time, Kai.

Sandra But it's interesting how superannuation and retirement raise the same questions of inequality that we see in other parts as well, and how for instance groups like women are disadvantaged with retirement. But another consideration around inequality there's also this idea of the inequality of leisure. Why should we wait until we're at 70 years old to have that? So many people are disadvantaged early in their career when they make significant contributions, but they also have significantly less free time.

Kai And I have a bit of a déjà vu because I think we discussed this previously on the podcast, the idea of a three-day or four-day work week where instead of doing all our work at some period time, and then all our leisure after that magical date when we received the key to paradise. Why not actually spread out work longer in life, and then work less early and have the same amount of work done in a lifetime, but maybe three or four days of free time during the week? And so that's some proposals that we might consider.

Susan So it's an interesting idea isn't it? But again I think the concept of your physical and mental capacity for work is still to some extent a binding constraint on us, we just can't get rid of the biological constraints.

Kai This argument actually feeds into that and says that in many professions that rely on mental work, it'd be much more productive to only work three or four days and have more downtime to then actually be more productive by working less hours. So I think this is becoming more difficult as our work life no longer comply with the assumptions that originally underpinned the whole idea of retirement.

Susan I've got to say that the economics and finance of retirement would be made far easier if there were no retirement. So if it were just the case that all we had to do was manage some combination of work and leisure, that at some optimal level across the whole of our lives...

Kai And I apologise if we we're discussing away your area of research here.

Susan It's fine with me. So this idea that somehow you could smooth your work life over your life would make a lot of things a lot easier, because the whole idea of superannuation is to smooth consumption. And if you can smooth your work you smooth consumption automatically without having to confront this saving problem. I think the reality is though Kai that still our capacity for work changes and certainly as we get into older ages our cognitive capacity as well as our physical capacity changes. Certainly there is a time path on that.

Kai Which absolutely brings us to our second story which looks at the individual perspective on making those decisions about super, because if I'm a young person I get on with my life. First job, second job, early in my career, I'm not thinking about, you know, old age and disease and death and all of these kind of things. So, you know I just sign those forms and they'll put me in some default super, and I might make really important decisions by not engaging with the decision at all right. So how do we actually engage people with a topic around superannuation that most people don't want to think about because it is associated with that time of life that we want to sort of push away.

Susan Yeah.

Sandra So the second story comes from Yahoo Finance and it's titled "How to turn your daily coffee habit into a 105 thousand dollars. We've all heard of apps like Acorns, I think it's currently known as Raiz, or ING Bank's app that rounds up leftover change from small purchases and puts them either in a savings or an investment type of account. So this article talks about FairVine a super fund designed for Australian women in particular. We've spoken about how women are disadvantaged. This is a roundup style app that tries to take small amounts of money but put them away in your super.

Kai So this is one of those stories that does not want to do away with our avocado toast and daily coffees, but actually uses the leftover roundup money to make the point that even very small contributions, if put away, through some magical construct that's called compound interest, can actually accumulate to a decent nest egg. And so since we have the expert here and you already mentioned it earlier in our pre discussion this compound interest thing is a big deal that most people do not understand.

Susan Most of us find it almost impossible to visualise what an exponential growth in savings actually looks like. So it's very difficult for us to imagine the sort of growth that our savings would take if we put it in early and wait for a long time. So for example, for every dollar that someone contributes in their 30s, if they didn't contribute that dollar they'd have to contribute three to make the equivalent growth in their 50s. So the trade-off is very high. The exchange rate that exponential growth gets you in terms of value is very very high. But there are two things at work here in what you've mentioned Kai. First of all is the painful part of making a sacrifice now. Very few of us have the level of patience or forward-lookingness, to think that sacrificing something now is worth something more to us in the future. And then secondly there's the other part that you've mentioned, which is that we have trouble really anticipating the huge growth in value that's available to us by waiting. So the system rewards waiting, and it rewards sacrifice, but those rewards are hard for us to accept and they're difficult to visualise.

Kai Oh yeah I'd rather have a croissant with my coffee than put the money away.

Susan Which is the wisdom in those rounding apps, because one of the interesting things that they do is actually put a complementarity around savings in consumption. So we usually think of savings in consumption as a trade-off. If I buy something now, then I save less. And that's largely true. But the way these apps work is if I buy something now, I save something now. What we don't realise is that we're not saving the bit that we're spending at the same time. But those rounding errors associated with consumption are a very painless way of saving.

Kai So I can actually go and have a coffee to just save something for old age.

Susan I really think that's the way they're pitching it.

Kai I really should drink more coffee.

Susan This is a genius of marketing that I buy something and save something at the same time.

Kai But this exponential growth thing, we've discussed this on the podcast previously that we're really not good at that and we had the opposite example around these exponential phenomena in technology, where every startup company has to argue that they are growing exponentially, and signing up new customers for our app at an exponential rate, and people forget that exponential growth, you know, while starting slowly then sort of blows out suddenly to magnificent proportions. And if you actually put a exponential growth rate under it you'd sign up the entire population of the planet in the matter of weeks. So you know we have this there where these kind of bullshit narratives around exponential growth are being told without understanding what that means. And while we can dismiss it there, when it comes to super, it has real implications for what we do in the present.

Susan Yeah. The experimental work that people do in this area shows that what we do is draw straight lines to project things that are happening in the future, instead of during these steeply increasing curves, that actually describe the way that these savings and investments grow. There's an interesting experiment that some marketers did a few years ago where they asked people to estimate what 400 dollars a month paid into an account at a modest interest rate would grow to, and most people just applied the interest rate to the total capital amount and came up with a number like about 200000, whereas the actual exponential growth estimate was more in the order of 2 million. So the errors are very large when you miss these growth rates. The difficulty is how do you help people with this. So there are two things at work here. One is actually calculating what compound interest can do. So you need to understand compound interest and know how to do the calculation, but more importantly there's this concept of how a straight line looks compared with how an exponentially increasing line looks, a curve that's growing very sharply. And it appears that the problem that most of us have is with the concept, rather than the calculation. So we can teach first year finance students how to compute compound interest, and we can provide them with a calculator. In fact that doesn't actually seem to help them project these growth paths, because the actual concept is hard to get and hard to visualise. So a better way, and one that actually works is actually to supply people with projections.

Sandra So if we come back to apps like FairVine, do these help in any way with people's understanding of these concepts and with them visualising these concepts.

Susan That's an interesting question and I don't know the answer to that in relation to the apps. I think the apps are really clever because they work on passivity, and they deal with the present bias problem. Whether they actually help people with the concept of how an investment is growing is a very interesting question and one that I'd love to do some research on, because they do actually see their investments changing over time, and if they're looking at an app regularly then maybe they can track the paths. So one of the other aspects of that research that I was just referring to was that they tried to teach people how these paths would look. These experimenters tried to help people map the paths, and basically they came up with some interventions that would help people track this path growth over time, and get the idea of the exponential curve. So I think it can be done. Whether the apps are doing it is a really great question.

Kai You mentioned the present bias. Can you explain that for us?

Susan The present bias is based around the idea that we place too much value on experiences now, and too little on our pain in the future. And that causes us to behave in ways that are basically unhelpful for ourselves, when we look at ourselves in aggregate over time. So actually just preferring something now to tomorrow, is in many ways a rational behaviour because I can't even be sure that I'm going to be alive tomorrow. Present bias is a more serious problem where I place so much weight on today that I actually make myself worse off in the future, and life becomes a strategic game where I'm trying to trade-off between now and later in a way that is unhelpful to me overall.

Kai So what you're saying is we don't really value our future-self that much. So that person in the future we will basically screw over by, you know, not saving that extra bit of money on my coffee.

Susan So I think all of us have had this experience haven't we, when it comes to getting out of bed when the alarm clock goes off? That we're actually quite willing to hit the snooze button and be late for something important, in some instances rather than get up and go...

Kai No. I'm German, I've never had that.

Susan So this question about our relationship with our future-self is very interesting and deep, and I think that while I'm not a psychologist, what I have read suggests exactly what you say Kai. And that is that our future-self is something of a stranger to us, and particularly while we're young that future-self is a person that we're not very empathetic towards because we just can't imagine being that old, and we don't know what it will feel like to be that old. That's probably not so much of a challenge to someone in their late 40s. They're probably more able to anticipate themselves in 15 year’s time. But other work that's been done, and really interestingly, to compensate for this tendency to not empathize with the future-self tends to be experimental interventions that show people what they might look like when they're older, or give them the experience of being their older self in some sort of digitised way.

Kai So what we're saying is this app should really show an aged picture of myself, which we can do now with this deep fakes technology that we've talked about on the podcast previously. So it should show an older version of myself and then, basically have a little moment where, you know, he wants to drink coffee too, so why not spare a few cents for him because you know, in his 60s, he also likes to drink.

Susan And indeed there's psychologists like Dan Goldstein who've done exactly that, and demonstrated that people confronted with this image of themselves are more empathetic to their future-self and will behave differently. There's really interesting work done where some of the psychologists delivered two different narratives to students about their graduation date. One describing a continuation of the self through the graduation date and one describing a discontinuity of the self through the graduation date, and then asking questions about behaviour. And so narratives around continuity also seem to be a bit of an antidote for this lack of empathy for the future-self.

Sandra So on the whole we seem to be quite bad at making these decisions for ourselves. Is there an argument then that maybe we shouldn't be in charge of directly make the decisions about our superannuation or our retirement, but that maybe we should be nudged into making these right decisions, or there should be automated systems that make these decisions for us?

Susan And that's the way that a lot of this has gone, as you describe Sandra, so the tendency around the world in systems where people are having to contribute for their own retirement has been to move towards automation. And automation works. It works incredibly effectively in the retirement income space. So in Australia we have basically a compulsory situation, but in other countries around the world like the United States people are automatically enrolled into the equivalent of the superannuation fund there which is called a retirement plan, also in the United Kingdom, and they have the option to opt out if they don't like it. And what we observe is that very few people opt out. Most people stick with it. A lot of people are happy to have the decision made for them, and in fact there's research to suggest that they would be happy to be even more compelled. So some research around whether you should be allowed to withdraw from your retirement plan, suggests that people are more happy in situations where they're not able to do that than when they are. So we sort of like being told what to do when our self-control is being challenged by the situation.

Sandra So if there was one thing that people could do to basically have a better retirement, or feel more secure what would that be?

Susan Adapt. So it seems that most people are pretty happy in their retirement. I think that there is a level of anxiety associated with the period leading up to retirement, particularly where people are worried about their finances, and then perhaps a big exhale after it's happened, where they realise that they are able to make ends meet and that that things are going to pretty much continue the way they have. And for most people it's not necessarily the ideal retirement, but it's manageable and it's satisfactory.

Kai And I think maybe there can be a case made for more flexibility around retirement, much in the same way as we now see more flexibility around work, and different models of work. So if those models would evolve to allow more flexible retirement configurations, where there's some employment that would go to, you know, means testing and when can I access my retirement savings and all of these kind of things, I think there's a bit of adaptation in the system right, both on the individual and on the systems side needed.

Susan Yeah absolutely. So what you don't want to do is have a system that prevents people from reaching their best outcome. And there are aspects of the system that we have now that are obstacles to that. Things that we've already mentioned around inflexibility, around gig economy workers or part time workers, inflexibility about the retirement of my savings contributions when I might want to do bunching of them later in my life. But the system really relies on me making them when I'm younger. There's all sorts of changes that we can make to improve the flexibility of the system and allow people to get their own best outcome.

Kai So if we take up this idea of flexibility in the system, the current review of the retirement system in Australia that will look at super, one of the ideas on the table seems to be whether it should be compulsory or optional, whether it should be fully compulsory or whether it should be a dynamic system. So what does your research say?

Susan The research that I have suggests that a certain level of compulsion is probably desirable and necessary when we have a system that provides a safety net for people for free, effectively, through the aged pension. So in a way the aged pension is a big disincentive to save. I know the government's going to look after me to some reasonable extent when I get older, so why should I then add to my own savings which actually decrease the amount of aged pension I'm going to be eligible for. So if we as a society don't want people to operate too heavily on that margin, then some level of compulsion towards savings is desirable. And we do want some tax incentives around that as well.

Kai Also considering that, you know, we have that present bias and if we don't have a little bit of that compulsory element we wouldn't actually do it.

Susan That's right. So there's a general acceptance I think among most economists and behaviourists who think about this is that those tendencies that we have towards focusing too much on the present, and our undervaluation of the future do need some sort of compensation, or at least incentive.

Sandra But what's the right level?

Susan So this is the really important question, and this is sort of where we started which is what's the superannuation system for. And as you noted Sandra, it's never had a single goal, it's never had a quantitative goal at all. It seems to exist in this base where it says 'oh, it's there to substitute and supplement the aged pension, which seems like the sort of weakly-framed goal for such a large social program.

Sandra So in your research what would be a good level to have it?

Susan So if our goal is basically to maintain a minimum-level standard of living through working life and retirement, then the level that we have it at now, when it's combined with the aged pension is probably achieving a reasonable outcome for most people, though it's not a super-generous outcome. Some groups, particularly those that are associated with the superannuation industry, are more likely to go for higher contribution rates. Other groups, that are perhaps more concerned about the transfers of wealth and the tax incentives that are provided to better-off people, are likely to go for a lower level. You have to be sure that if a public system is compulsory, that it's working efficiently. And I think that's what this review is really being tasked to look at when making people do this, it doesn't have even effects across the distribution of wealth. Is it working well? Can it be improved?

Kai And part of that will be fees for example and what kind of investment products this goes into. I found an interesting yet concerning article around some of the FinTech innovations, or the extent to which they are innovations. There have been a number of, and I won't name them, new glitz very hyped up funds that have opened, associated with an app targeted at young people that basically repackage index funds that have very low fees, and then add a fee margin on top that covers the marketing, so basically a shopfront that arguably might do something good for the younger customers to get them engaged with super, but are no better than other funds because they add fairly unnecessary fees to something that is a low-fee product.

Susan That's a great example of what the Productivity Commission was definitely trying to attack when it was writing its report about underperformance because we know that high fees have big impacts on people's outcomes particularly if you're a person in your 20s. That 1 percentage point difference in fees means hundreds of thousands of dollars of difference once you reach retirement and their concern of course is the one that you raised that people can be perhaps not in that case but in other cases automatically put into these sorts of funds. And what we actually need is much more scrutiny both from the regulator and from the government and from the members of the superannuation funds to take a long hard look at this and say 'am I getting value for money?'. Because this is a taxpayer-supported system, it really needs to work well for everybody.

Kai And so before we thank you Susan, for what was really interesting and a very diverse insight into superannuation, here's something that we've been doing on the podcast, formulate a research topic for our listenership. How about this title: "Your future self wants coffee to empathy creation with deep fakes to increase routine retirement savings".

Susan I love it.

Sandra Perfect, I think we'll leave it there.

Susan Especially the coffee bit.

Kai I think we're all due for a coffee. So thank you Susan.

Susan Thank you Kai. Thanks Sandra.

Sandra Thanks Susan.

Kai And that's all we have time for today. See you soon.

Sandra On the Future...

Kai Not this week, not next week. Stay tuned for a couple of specials.

Sandra Thanks for listening.

Kai Thanks for listening.

Outro This was The Future, This Week, made possible by the Sydney Business Insights team and members of the Digital Disruption Research Group. And every week right here with us our sound editor Megan Wedge who makes us sound good, and keeps us honest. Our theme music was composed and played live on a set of garden hoses by Linsey Pollak. You can subscribe to this podcast on iTunes, Stitcher, Spotify, YouTube, Soundcloud or wherever you got your podcasts. You can follow us online on Flipboard, Twitter, or sbi.sydney.edu.au. If you have any news that you want us to discuss please send them to sbi@sydney.edu.au.

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