Money: Education key to savings

By PHILIP MACALISTER

Forget about tax incentives for savings. One of the most powerful tools available to get people to save for their later years is good old-fashioned education.

Overseas research shows that financial education leads to good-quality investment decisions, and higher returns.

The Government wants us all to do our own saving, so it does not have to spend more on each of us in retirement than it has to. The problem is that it is doing little to help educate us about saving.

In the Budget, the Government reduced payment to its main financial education organisation, the Office of the Retirement Commissioner.

The result is that this year the office will have just $1.5 million to spend on public education and information so it won't be running its high-profile savings messages on television, and other parts of its work will be curbed.

To make matters worse, the private sector, which used to back the office to the tune of $1 million a year, has also stopped its funding.

If that isn't enough, the other Government body charged with education, the Securities Commission, is also underfunded in this area.

Investment Savings and Insurance Association chief executive Vance Arkinstall says New Zealand is different from other countries we like to compare ourselves with, such as Australia and Britain.

"In those countries regulators play a role in education as well as enforcement. They are not only the policemen, they are also the teachers," he says.

Retirement Commissioner Colin Blair is understandably disappointed that funding to his office has been cut.

He says there is a big need for education and it should be targeted at all socio-economic groups.

"From my observations over the last five years in this role and from experience gained from 40 years as a public accountant, I am convinced that financial management ability does not have a particularly close relationship to income, educational qualifications or occupations," he says.

"I would say that some of the worst money managers are highly successful professionals in fields such as law, medicine and even accountancy.

"Some of the best are lower-income people who have to work hard to balance the family budget and provide for future requirements."

Research from the US National Bureau of Economic Research shows that people in the lowest income groups do move up the income ladder.

Other research from the same organisation demonstrates that there can be huge differences in wealth accumulated by people who have enjoyed similar lifetime income levels.

It shows that people with a lifetime income of $740,000 (an annual income of about $20,000) have achieved totally different outcomes in terms of savings.

The best in the group accumulated about $440,000 while the bad savers had only $12,000 in savings.

Mr Blair says another interesting result in this research was that a surprising percentage of top income earners saved nothing or very little. "The choice of savings vehicle had some impact, but was only relatively minor," Mr Blair says.

There's an extra need for good savings education in New Zealand - that is the Government's proposed multibillion-dollar super fund designed to pay some of the future costs of New Zealand superannuation. Although the fund has not yet been established, the first payment into it was made on Wednesday.

In papers obtained under the Official Information Act about funding for the Retirement Commissioner, officials argue that public education is vitally important right now as people may think that the super fund is the final step to retirement nirvana.

Education "will help overcome any risk that the public will perceive the proposed pre-funding scheme as a justification for not making private provision," they say to Social Services Minister Steve Maharey.

"In New Zealand's unique situation of not having compulsion or tax-incentives, a commitment to education is a strong indication from the Government of the importance of private voluntary savings."

Mr Arkinstall says the Government has a real responsibility to boost its education programme and to tell people that New Zealand superannuation will be only a safety net.

While New Zealand superannuation for a married couple is set at 65 per cent of the average weekly wage, it is not particularly generous as it is split between a couple.

The officials also express concern that financial literacy is not part of the school curriculum, when overseas courses have shown that to be effective.

"Surprisingly, there is no requirement for New Zealand school students to undertake studies into financial literacy.

"This education is widely available in the United States, and is mandatory in some states. It was recently made part of a compulsory course in the United Kingdom."

At present, the only financial education provided to schools is a programme run by the Enterprise New Zealand Trust and sponsored by the Office of the Retirement Commissioner.

The programme is aimed at senior secondary school pupils and teaches 10 modules on topics of lifetime financial management, including budgeting, savings and long-term financial planning. It is taught to about 6500 of the 50,000 children who leave school each year.

"A further 45,000 to 50,000 New Zealand students leave school with minimal or no financial education," the Ministry of Social Policy says.

Although the Government has stepped back from its role of providing education through the Retirement Commissioner, the private sector is picking up some of the slack.

Part of the problem is that most private-sector education material is aimed at trying to entice people to buy their products.

"The private market is unlikely to provide independent savings advice," says the Ministry of Social Policy.

It says the provision of good, unbiased advice is a public good.

The reasoning goes that if people are well educated and make good savings decisions then there will be less pressure for increases in state provision and lower costs for income-related supplementary assistance.

Mr Arkinstall says that criticism of his members may have been right in the past, but it doesn't stack up any more.

He says some of them do a good job providing consumers with information that is not just straight product-promotion material.

As well as providing educational material for the public, companies in the savings industry spend significant sums educating advisers and financial planners who sell their products.

"Things have changed drastically in the last few years," he says.

One of the reasons things have changed is that there has been a growing trend for companies to sell their competitors' products.

Despite the lack of education, it seems many people believe New Zealanders are becoming more sophisticated with their investments.

While there is no hard-and-fast evidence to back up such claims, there is anecdotal evidence. For instance, there is a huge amount of "how-to-invest" information on the internet.

Years ago, when markets plummeted (as they did late last year and this year), investors panicked and cashed up their investments.

Advisers and fund managers report that this time the money has tended to stick.

Mr Arkinstall disagrees with the proposition that education is more important than tax incentives.

He says New Zealanders are different from other nationalities.

"There's no doubt in my mind that New Zealanders react very, very quickly to tax changes.

"We've seen money flood into goat farms, ostrich farms and forestry and they were all driven by some form of tax advantage."

Mr Arkinstall believes the key to getting people to save in this country is either tax incentives or compulsion, or a combination.

Colin Blair takes a different view. He believes education plays an important role in getting people to save.

While the Government won't give his office as much money as he would like to educate people, it is up to investors to find good-quality information to help them make sensible money management decisions.

Mr Blair says his office is using its limited funding to develop new programmes which will help people to make decisions about which sort of savings vehicles to use.

Don't wait for tax incentives to start saving - they are years away. Get educated and start making your own sensible savings decisions.

* Philip Macalister is the editor of online money management magazine Good Returns. Good Returns provides news on managed funds, mortgages, insurance, superannuation and financial planning.