Pick a Fund. Any Fund. But, Pick One Now!

“Many knowledge. Such cash. So wow.” I was having dinner with a friend after a twelve hour day of classes and this was the response from the aspiring engineer after I had explained to him the ins and outs of superannuation.

I was perplexed, for the friend in question had been in part-time work since he was 15; surely he would have taken the time to learn about his money? He had worked in retail for three years before moving to bartending, pays board to his mum, owns his own car (and has it insured) and recently booked a trip to Europe.

It’s clear he always knows where his dosh is stashed, but only had a vague idea when it came to his super. A recent survey, commissioned by AustralianSuper, revealed “43% of people don’t know their super balance, yet almost 50% know how many Facebook friends they have.”

Supporting this are results from a recent REST Industry Super poll, which surveyed 1,007 youth aged 18-30 and found almost half could not explain superannuation. One in five thought it was government funded and one in ten believed it was a form of workplace benefit offered at the discretion of an employer.

I find it difficult to believe that a generation which so frugally saves its hard earned cash (albeit usually for expensive purchases) has so little knowledge about saving for retirement.

Longevity risk creates further problems. In a 2013 paper released by the Association of Superannuation Funds of Australia, it was shown that there is a 50% chance one member in a couple would live to 95 years of age. Given that this information is based on the life expectancy of today’s 65 year olds, and using data from 2005-07 Australian Life tables, one can only imagine the retirement income issues that may arise when today’s youth move into retirement.

For a range of probabilities, the following table shows to what age 65 year old females, males and couples are expected to survive. 50% of females are expected to live to over 90, and males over 87.

It is crucial that young people take an active interest in their superannuation now. It is estimated that over 40 years, an extra annual return of 2% could accumulate to an additional $129,000 at retirement. Despite this, youth remain disengaged and uninterested in their superannuation.

The long time period for which superannuation money is saved away strengthens the effect of present bias, which is probably most evident when you choose to (repeatedly) hit the snooze button instead of going for a morning jog. The numerous tax breaks and concessions available to those who contribute to their super shows that the general population needs to be incentivised to save for retirement; youth are no different.

Here’s a scenario: Have you ever walked into the supermarket to buy a tube of toothpaste, only to be confronted with an entire selection of the product and then found it difficult to choose which to buy? It’s unlikely.

But the decision you are likely to have made was to make no decision at all. You will have picked up the one you usually purchase, without considering that for the same price you could have bought toothpaste that also has whitening properties or that a competing brand was offering a virtually identical product for half the price. The same can be said for superannuation.

American psychologist Barry Schwartz termed this the ‘paradox of choice.’ In his research, when two groups of shoppers were presented with either six or 24 jam varieties, those who had six options were 10 times more likely to make a purchase.

There are a plethora of funds available on the market and while it is good that consumers have so much choice, it is quite easy for less financially literate youth to be overwhelmed and make no decision at all. According to the REST poll, more than half the youth surveyed were in their employer’s default fund.

The introduction of MySuper funds is a step in the right direction but more needs to be done. I would like to see the government develop a biannual or even quarterly newsletter (to which youth are automatically subscribed when they enrol to vote) emailed directly to youth to help increase financial literacy.

It need not be littered with jargon, but must be informative and persuasive enough to make youth want to take action. I would also encourage the private sector to consult with youth to develop simple but accurate product information, as many are deterred by the complexity of the topic.

It is important that youth are able to understand and form an opinion when it comes to their super. Let’s make some changes to see that happen.

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