The Role of Financial Education in Retirement Planning

Article excerpt


Governments in many countries are facing the challenge of providing sufficient retirement incomes for a population that is ageing as a result of lower mortality and fertility rates. An ageing population places considerable financial stress on government budgets as spending on welfare increases, further compounded by a proportional reduction in working-age taxpayers. Exposure to financial education programs can positively influence the retirement planning and savings behaviour of individuals. Research indicates that seminars, written communications and website information are effective methods in communicating financial education. In this study an investigation is conducted into the views of retirement fund members regarding elements of financial education resources made available to them through their retirement fund. Four aspects are investigated, that is, whether there are differences with respect to members' views between the genders, older and younger members, levels of qualification, and size of superannuation balances. Empirical evidence suggests that gender and age are important factors with females and younger people less likely to utilise educational information and more at risk of not accumulating sufficient funds for retirement.

Keywords: Ageing population; Retirement incomes; Financial education

JEL Classification: D14.


This study was motivated by the growing literature that suggests that a substantial number of Australians lack adequate levels of financial literacy to structure a retirement savings plan properly. Indeed, survey evidence suggests (ANZ, 2008; Mercer, 2006) that many Australians are not adequately saving for retirement and that a number of groups within the community will not accumulate sufficient funds to provide them with a comfortable retirement lifestyle.

Evidence from behavioural research indicates that individuals exhibit peculiar characteristics when it comes to saving and investing for their retirement. Behavioural lifecycle theory suggests that individuals will deviate from the standard economic model because they have limited cognitive abilities to solve the multi-period retirement saving problems (branded 'bounded rationality') and further, they lack the necessary willpower to execute a long-term retirement savings plan (Shefrin, 2002). Inertia and procrastination in decision making appear to be behavioural influences that inhibit the retirement savings behaviour of individuals (Madrian & Shea, 2001; Choi et al., 2002; Gallery & Gallery, 2005). Other behavioural influences such as heuristics, decision framing and loss aversion have also been identified as behavioural influences that can potentially inhibit efficient decision making. The implications of financial behaviour when it comes to retirement savings decisions was emphasised by Kahneman (2003, p. 1468) in his Nobel lecture where he refers to the study of Benartzi and Thaler (2001) as part of a "...growing literature of field research and field experiments that documents large and systematic mistakes in some of the most consequential financial decisions that people make, including choices of investments...".

Lusardi and Mitchell (2006) suggested that those with more financial knowledge are more likely to plan for retirement. The importance of this matter is reinforced by an OECD report (OECD 2005) titled: 'Improving Financial Literacy' where it is stated that "there is much more to do and learn about financial education programmes and how to make them better" (p. 16). Research also shows that different types of financial education programs and the dissemination of information can positively influence retirement savings behaviour (Bayer, Bernheim & Scholz, 1996; Clark & Schieber, 1998; Lusardi, 2005; Clark et al., 2006). Educational seminars, written communications and website information have all been found to be effective educational tools in this process. …