Monday 19 June

Speech by Retirement Commissioner
Forum 2000 : Enterprise Education Conference, Auckland

Financial Literacy Essential for Young New Zealanders

I doubt that many in this room would disagree with the proposition that educating our younger generations is one of the best investments we can make. Also the time and money that young people spend on their own tertiary education has to represent one of life’s best investment decisions.

But I wonder how many of you would agree that programmes covering personal financial management skills should be available at some point to every secondary school student.

I know the principles and teachers of nearly four and a half thousand New Zealand secondary school students consider it important; because they have just told us that in a survey we completed only last week. They said things like:

“All school leavers need such skills.”
“The financial literacy programme teaches valuable skills.”
“We’ve received positive feedback from past students.”
“It is an insightful programme for teachers and students.”

I am delighted that the Financial Literacy Programme developed and managed by Enterprise New Zealand Trust is being taken by 4300 students in 103 secondary schools.

But I am concerned that every year close to 50,000 secondary students are leaving school without having had that opportunity. They have not had the opportunity to learn more about one of life’s basic challenges in our competitive open market economy; that is, managing one’s own finances.

Because of those numbers, I think I am on safe ground in assuming I am not preaching to the totally converted. I hope I am on fertile ground. In any event I will sow a few seeds and hope for positive results.

I had better declare my interest.

My job is to encourage New Zealanders to plan well ahead for retirement. It is important that most income earners take voluntary action which will provide retirement income over and above New Zealand Superannuation.

For most, that simply means saving for retirement. Sacrificing some current consumption to enhance their retirement years.

You may well ask what has that got to do with 16 and 17 year olds. That is a very fair question. I can recall, somewhat vaguely I must admit, when I was 17 a teacher of 30 appeared to be very old. My time horizon did not go much beyond next Saturday’s rugby game and more importantly the after match activities.

Recent visits to some secondary schools suggest that’s still the case for many and lead me to believe that getting teenagers to imagine themselves as old as I am may be a near-impossible challenge.

So why does the Office of the Retirement Commissioner put hard-earned taxpayers money into supporting the Financial Literacy Programme? It’s because of a very simple view we have about financial preparation for retirement.

If you start off early in life with a sound approach to money management then retirement needs will tend to look after themselves. Of course there is more to life than money, but as Woody Allen said; “money is better than poverty, if only for financial reasons”.

Good money management or financial planning requires some basic knowledge and disciplines.

 Planning ahead-setting targets and goals
 Borrowing wisely and avoiding high cost debt to finance current consumption.
 Making deliberate and sensible choices between spending now and providing for future requirements, foreseen or unforeseen.
 Understanding the benefit of regular savings-the power of compound interest.
 Understanding the relationship between investment rewards and investment risks. Ie get quick schemes generally have the opposite result for everyone except the promoter.
 Taking into account risks such as periods out of work, illness, being let down financially by a partner or flat mate.

Those are the sorts of issues that we emphasise in our planning for retirement programmes. But they are certainly not peculiar to retirement issues.

They apply to those earning pocket money today, they apply to those facing the costs of tertiary education, to those contemplating overseas travel, marriage, buying a car or a home, entering into an agreement to rent a student flat.

They are the same sorts of issues, which are dealt with in the financial literacy programme. But there they are dealt with in a way that makes the issues relevant to the student. There are case studies and exercises which relate to situations which young people are likely to experience or be aware of through their family or social contacts.

The Financial Literacy Programme has only been operating for 3 years. It is too early to assess its impact on students. However results of research carried out in the USA are very encouraging. The research was carried out by the National Bureau of Economic Research – an internationally recognised leader in its area of activity.

The objective of the research was to determine whether mandatory high school programmes relating to household financial decision making had any discernable effect on adult decisions regarding saving.

The researchers were able to compare the situations of those exposed to mandated financial literacy programmes at high school and those not exposed. Here is what they concluded:

“Over the last forty years, the majority of states have adopted consumer education policies, and a sizeable minority have specifically mandated that high school students receive instruction on topics related to household financial decision making (budgeting, credit management, saving and investment and so forth).

The evidence indicates that mandates have significantly raised both exposure to financial curricula and subsequent asset accumulation once exposed students reach adulthood.”

The results contribute to the growing body of evidence that education may be a powerful tool for stimulating personal saving.”
Source: U.S. National Bureau of Economic Research, 1996

Findings like this, coupled with the positive response from participating schools, will encourage my office to put more resources into the continuing development of the Financial Literacy Programme.

But it needs more than just money. We need to get a number of parties to work together in the development promotion and delivery of a programme that can be an international leader in its class.

Your input and enthusiastic support is essential.

I want to touch briefly on a few of the barriers we face.

Firstly there is a tendency, when dealing with issues like budgeting and saving, to assume that people from certain socio-ecnomic groups or of certain levels of academic achievement need the education more than others.

From my observations over the last 5 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.

In fact I would say that some of the worst money managers are highly successful professionals in fields such as law, medicine and even accountancy and some of the best are lower income people who have to work hard to balance the family budget and provide for future requirements.

There is no doubt that income levels are a significant factor in determining the average level of savings. In addition there is evidence that children often pick up the habits of parents in this area. But many other factors can influence the quality of financial decision making by people from all categories.

My proposition is that education in this area can only be positive for people from all walks of life.

I want to demonstrate the danger of categorising people according to income levels and the like.

Again I need to refer to research conducted by the National Bureau of Economic Research. Regrettably we have not invested enough in this type of research in New Zealand and therefore run the risk of making important policy decisions based on incomplete information – that’s something my office is also working on.

Movement between income quintiles, 1975 - 1991

Source: U.S. National Bureau of Labour Statistics

The results summarised on this chart show the significant extent to which individuals move between income earning levels over a period of time. This study tracked the position of the same people over the period 1975 to 1991.

Look at that first quintile line – that is the lowest income group. The numbers across the page add up to 100% and show the position in 1991 of those who were in the lowest income group in 1975.

Observe how only 5.1 % of those in the lowest income group at the start were still there at the end. Twenty nine percent of them had actually moved to the top quintile.

People often say to me you are wasting money trying to educate some people on savings issues –they will never be able to save. My response is that at any point in time there will be people who have no capacity to save. But in a year or two, the composition of that group can change dramatically.

Another important point is that financial management is not just about saving. It is also about all of those other issues I mentioned earlier – using borrowings wisely, budgeting etc.

Another interesting piece of research from the same organisation compares individual’s savings levels on retirement with their lifetime income.

Here is a graphic example of the findings.

Total wealth at retirement for households with lifetime income of US$740,000

Source: Choice, Chance & Wealth Dispersion at Retirement, National Bureau of Economic Research, February 2000

This demonstrates the huge range in wealth accumulated by people who have enjoyed similar lifetime income levels. We are looking at the group with lifetime income (in current dollars) of around $740,000. I guess that to be an annual average of around $20,000.

The high savers in the group accumulated assets worth $440,000. Low savers saved only $12,000. Of course some had saved nothing.

This research showed that at all income levels there were significant differences between the high and low savers. A surprising percentage of top income earners saved nothing or very little. I have seen this myself in successful business and professional people- “I’m making good money, I’m indestructible and do not need to save – that is for poor people.”

Abnormal features such as inheritance and good luck did not have a significant influence on the results. By far the most important factor was the simple decision to start saving or accumulating assets early in life and maintaining a pattern of regular saving.

The choice of savings vehicle had some impact but that was also relatively minor.

The messages I take out of this research are:
 educate people on this issue early in life;
 do not try and select who needs the education and guidance. You will probably be wrong.

Getting back to financial literacy in schools, I would simply make the point that this is a programme which will provide lasting benefits to all students.

It is not just helpful for those who will have very tight budgets to manage. It is relevant to those who may wish to develop their own business in order to gain a living and it is relevant to those high academic achievers who may be faced with very high student loans from the higher cost courses they tend to pursue.

Finally, I would argue that education in this area is more important in New Zealand than in most other OECD countries.

In most other countries, a high percentage of the workforce are compelled or coerced into joining superannuation schemes for the duration of their working lives. They are also enticed to save by tax incentives.

In New Zealand the approach is very simple but also gives rise to tough personal decisions. The simple bit is that government says “we will provide a basic income to all in retirement, if you want more than that then you have to make your own arrangements”.

The complexity is for individuals to work out what extra they need and how to go about accumulating the necessary level of savings. Those decisions are not easy for the vast majority of people whom otherwise have little contact with savings and investment issues.

Education is essential under the New Zealand policy approach. And the earlier the better.

George Burns, the American comedian said in his nineties “if I had known I was going to live this long I would have taken better care of myself”

The young of today are very likely to live that long. Telling them to start saving now to celebrate their ninetieth birthday may not be a winning strategy. We need to be a bit more subtle.

Programmes such as financial literacy in schools teach children about saving for retirement without them realising it.

I am proud to be associated with it and I commend it to you.

End

For further information, contact:
Liz Read
Communications Manager
Office of the Retirement Commissioner
Ph (04) 499-7396 (work)

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