Contrary to the common message that retirement saving should start young, there are good reasons why the proportion of earnings set aside for retirement should increase substantially through working life for many people according to a report out today by the Institute for Fiscal Studies
Many employees experience earnings growth over their lifetimes, and would therefore prefer to save more at older ages when earnings are higher.
Parents would also be expected to save more for retirement after their children have left home and expenses are lower.
Automatic enrolment into workplace pensions does not currently encourage contribution rates that increase with age, but future adjustments to automatic enrolment or other policies to encourage retirement saving should carefully consider these issues.
Examples of policies that should be considered say the findings include default employee contribution rates that rise with age, increases in employee contribution rates that are triggered by earnings increases, and nudges to encourage individuals to increase their pension saving when their children leave home or when they finish debt repayments such as student loans or mortgages.
Rowena Crawford, an Associate Director at IFS and one of the authors of the report, said:
“There are good reasons why individuals should not want to save a constant share of their earnings for retirement over their entire working life. This does not make automatic enrolment, with its single default minimum contribution rate, a bad policy. But as policy makers consider how to increase retirement saving further, focus should be on policies that increase retirement saving at the best time in people’s lives rather than just increasing saving irrespective of their circumstances. Default minimum employee contributions to workplace pensions that rise with age are an obvious option. A smart, joined up, approach across Government could also involve employee pension contributions rising when an individual’s student loan repayments come to an end.”
Alex Beer, Welfare Programme Head at the Nuffield Foundation said:
“This important analysis demonstrates how people’s ability to save can change as they age, as their earnings grow, and as their family circumstances change. Policies to optimise pensions saving might therefore take a more holistic view of saving across the life course, to consider when and how to capitalise on opportunities to change the rate at which people save.”
