Retirement Readiness through Financial Literacy: A Sham?
Behavioral Insights and Civil Service: Prospects for Increased Retirement Preparedness Among University of the Philippines Diliman Employees
Chloe Angeli Nuelle G. Antonio, Luis Joshua N. Mendones, David Andrei A. Mendoza, Aira Isabelle J. Ortiz, and John Simone C. Yrastorza
Edited by Simone Yrastorza; Graphics by Jeulian Manalo
Retirement (Un)preparedness in the Philippines
According to former Bangko Sentral ng Pilipinas (BSP) Governor Diokno (2020), eight out of 10 Filipino senior citizens are not covered by any government-mandated pension programs — the Social Security System (SSS) and the Government Service Insurance System (GSIS). In the context of Philippine civil servants, the optional retirement age is 60, while the mandatory retirement age is 65 (Republic of the Philippines, 1997). On the other hand, the life expectancy of Filipinos as of 2020 is 72 years (World Bank, n.d.). Hence, it would be ideal for a Filipino retiree to save at least seven to 12 years’ worth of cost of living expenses to ensure that they will be able to meet their needs during retirement. However, a survey conducted by Manulife Philippines (2019) revealed that Filipinos only save 3.6 months’ worth of their income, which is way less than the 2.9-year average among neighboring countries for retirement.
Presently, around 78 percent of Filipino elderlies are still living with their children — the second highest in East Asia (Jackson & Peter, 2015). Miller (1981) refers to this phenomenon as the “sandwich generation,” which refers to adult children being responsible to their aging parents while also providing for the needs of their own families, thus being “sandwiched” between their two responsibilities. Possibly considered as an embedded culture, breaking this cycle would need behavioral modifications by ending the cycle of dependency on others for retirement.
Figure 1 shows the factors affecting the decisions of a person, which in this case are decisions on the financial retirement of an employee. In this study, the authors emphasize that there are cognitive and behavioral boundedness among humans — namely, bounded rationality, bounded willpower, and bounded self-interest — that are usually expected to negatively influence individuals’ financial decisions. However, external influences, such as behavioral interventions, can be effective in overturning the negative influence these boundedness have on their financial decisions.
In the Philippines, there is a wide research gap when it comes to the study of behavioral economics principles, more specifically in the application of these in public policies. In this paper, prospects for the use of behavioral economics principles in the workplace, especially in retirement planning will be presented.
Financial Literacy: Real or Sham?
In 2010, the Economic and Financial Literacy Program (EFLP) of the BSP was established to spread vital concepts in economics and finance in various localities in the Philippines (Bangko Sentral ng Pilipinas [BSP], n.d.). In line with Republic Act (R.A.) №10922, the Department of Education (DepEd) issued Order №22, series of 2021 or the Financial Education Policy, which underscores the provision of financial education, not only for students but also for teaching and non-teaching personnel of private and public schools (Department of Education, 2021). As the BSP (n.d.) puts it, financial literacy is the degree of a person’s financial knowledge, which leads to people’s financial capability or the application of financial concepts.
According to former BSP Governor Medalla (2022), only 2 out of 10 Filipinos surveyed are able to answer the most basic questions on financial literacy. In another study by the World Bank Group (2015), only two percent of the respondents correctly answered their seven-question financial literacy quiz. One of the most cited reasons in the literature for the generally low savings rate of people is the lack of financial literacy and lack of financial inclusion. However, the recent rise of behavioral economics and its subfield of behavioral finance have also gained popularity over the years as it is argued that humans are not homo economicus or rational men. Despite knowing the most optimal decision, people are widely affected by their emotions and biases. So, even if people are aware of the importance of preparing for retirement, still, the majority are not able to do so.
Despite the rapidly increasing research and initiatives that push for the promotion of financial education to increase financial literacy, the effectiveness of these programs has been argued by other scholars. In a meta-analysis study, Fernandes et al. (2014) assessed the outcomes of the mainstream approach of financial education provision in improving the behavior of people in terms of financial decision-making and found out that the financial behavior of those who received financial education only changed by 0.1 percent. Additionally, it was determined that what they have learned in their education programs on personal finance only had a minuscule impact on their behaviors 20 months after receiving such. Although the authors still pointed out the importance of this education, it should be purveyed only when needed in formulating financial decisions.
Based on the breakthrough studies of the Nobel Laureate in Economics Daniel Kahneman (2011), there are two systems in our brain which were coined “System 1” or the automatic error-prone system, and “System 2” or the logical and rational system, respectively. Fausto (2020) cited three boundaries and limitations that hinder people from being a homo economicus — bounded rationality, bounded willpower, and bounded self-interest. People have the tendency to make faulty decisions with “heuristics” or rules of thumb based on what they are used to. Thus, it is not enough for people to have several choices. Instead, these choices should also be presented in a manner that could encourage people to choose the best option, which is what Thaler and Sunstein (2021) call “choice architecture.” This is because as humans, people tend to make mistakes in line with the concept of bounded rationality. On the other hand, in line with the concept of bounded willpower, people tend to choose the most convenient option instead of the most optimal one, despite already knowing the latter.
Nudging: Towards Improved Retirement Preparedness
The Nudge Theory has been closely related to the field of behavioral economics. This theory takes into account the emotions and environment of individuals in their decisions. It argues that indirect suggestions through nudges, which are more subtle, as well as positive reinforcement may influence people’s behavior than direct suggestions, regulations, or coercion. The theory’s application on the matter at hand was first introduced by Thaler and Sunstein (2008) in their book Nudge.
In a separate study by Thaler and Benartzi (2004), they analyzed the effect of behavioral nudges in increasing the savings rate of employees after receiving a pay raise through the “Save More Tomorrow” (SMarT) program. It was discussed that based on the loss aversion bias in behavioral economics, when people lose something, they tend to feel twice the pain they feel when they get the same thing. Since previous savings programs tend to immediately reduce their income as part of savings, these are immediately felt as losses by employees, as well. Since companies were having a hard time encouraging workers to subscribe to retirement plans, the authors came up with strategies including automatic enrollment to a savings plan where they can opt-out from the program anytime if they do not want to be a part of it anymore.
Participants were also asked, instead of immediately deducting additional savings from their current incomes, whether they would want to save more after their next salary increase. Upon the implementation, 78 percent of the participants agreed to alter their savings rate to a higher level on their next pay raise. Of this number, four out of five of those who originally participated in the program continued increasing their allocations for retirement savings after four pay raises. Thus, the use of nudges in improving retirement savings outcomes may also be employed by organizations to ensure that their employees would have more savings during their retirement years.
Incorporating Behavioral Insights in the Civil Service
In line with the case study in Thaler and Benartzi’s (2004) SMaRT Program, the opportunity for government agencies to nudge their employees to improve the levels of retirement preparedness is evident. It is recommended for government agencies to automatically enroll their respective civil servants in savings programs offered by government financial institutions, while also giving them an opt-out option to maintain their personal freedoms. For instance, voluntary retirement savings programs, such as the Personal Equity and Retirement Account (PERA), which was institutionalized in 2008 by virtue of R.A. №9505 in 2008 (Republic of the Philippines, 2008) still remains to be unpenetrated with only 5,100 members as of 2022. Additionally, these agencies may also employ the auto-escalation savings rate among civil servants upon the latter’s pre-commitment to the program, in line as well with the success of the Thaler and Benartzi’s (2004) SMaRT Program. This may also be applied when performance bonuses and other incentives are provided to ensure that a part of those goes to their retirement savings.
On the other hand, the default savings rate in government-mandated pension programs, considering that it is inflexible, is also recommended to be made flexible instead of a single rate of 9 percent. It would also be better if they can also cater to non-plantilla staff of the government who are willing to avail their services instead of it being limited to employees holding plantilla positions. Finally, it might be beneficial to nudge members of the GSIS by sending regular updates on their accounts through text blasts or emailing statements of accounts to inform them of their current savings instead of assuming that they will open their online portals regularly. These subtle reminders may possibly encourage them to either increase their savings or be more hands-on with their own financial retirement preparations.
Antonio, Mendones, Mendoza, Ortiz, and Yrastorza are a group of undergraduate Public Administration students from the UP National College of Public Administration and Governance who took the course PA 121: Human Resource Management in the Public Sector during the 2nd Semester of Academic Year 2022–2023 under the instruction of Asst. Prof. Zita Concepcion P. Calugay, MPM.
References
Agcaoili, L. (2023, February 14). PERA contributions hit P330 million in 2022. Philstar.com. https://www.philstar.com/business/2023/02/15/2244934/pera-contributions-hit-p330-million-2022
Bangko Sentral ng Pilipinas (BSP). (n.d.). Inclusive Finance — Economic and Financial Education. Bangko Sentral Ng Pilipinas. Retrieved May 4, 2023, from https://www.bsp.gov.ph/Pages/InclusiveFinance/EconomicFinancialEducation.aspx
Department of Education (DepEd). (2021). DepEd Order №022, s. 2021: Financial Education Policy
Diokno, B. E. (2020, September 8). Promoting retirement savings through digital PERA — Convenient and Affordable Retirement Savings (CAReS) through Digital PERA #PERACAReS. Executive Briefing on Digital Transformation, Manila, National Capital Region, Philippines. https://www.bis.org/review/r200921l.htm
Fausto, R. F. (2020). Why Financial Education Alone Does Not Work: A Crash Course in Behavioral Economics (Vols. 2–3). ABS-CBN Books.
Fernandes, D. J., Lynch, J., & Netemeyer, R. G. (2014). Financial Literacy, Financial Education, and Downstream Financial Behaviors. Management Science, 60(8), 1861–1883. https://doi.org/10.1287/mnsc.2013.1849
Jackson, R., & Peter, T. (2015). From Challenge to Opportunity: The Future of Retirement in the Philippines. In Global Aging Institute. Retrieved June 4, 2023, from https://www.globalaginginstitute.org/assets/client-assets/gapi/downloads/country-reports/EARR-Wave2-Philippines-LR-EIINC.pdf
Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.
Manulife Philippines. (2019, April 5). Manulife Investor Sentiment Index. Manulife. Retrieved May 4, 2023, from https://www.manulife.com.ph/about-us/newsroom/latest-news/manulife-investor-sentiment-index.html
Republic of the Philippines. (1997). Republic Act №8291: The Government Service Insurance System Act of 1997
Republic of the Philippines. (2008). Republic Act №9505: Personal Equity and Retirement Account (PERA) Act of 2008
Thaler, R. H., & Benartzi, S. (2004). Save More TomorrowTM: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy, 112(S1), S164–S187. https://doi.org/10.1086/380085
Thaler, R. H., & Sunstein, C. (2008). Nudge: Improving Decisions About Health, Wealth, and Happiness. Penguin Books.
Thaler, R. H., & Sunstein, C. S. (2021). Nudge: The Final Edition. Penguin Books.
World Bank. (n.d.). World Bank Open Data. https://data.worldbank.org/indicator/SP.DYN.LE00.IN?locations=PH
World Bank Group. (2015). Enhancing Financial Capability and Inclusion in the Philippines: A Demand-Side Survey. In World Bank. Retrieved June 4, 2023, from https://openknowledge.worldbank.org/server/api/core/bitstreams/bfcb4f2d-2d62-5462-afb0-d7edb5e3edb6/content
