Young people need to save 20% of their wages in order to match the retirement income of baby boomers, a wide-ranging international study has found.
Think tank, the International Longevity Centre –UK (ILC – UK), which conducted research across 30 advanced economies, also found that young people need to save at least 18% of their lifetime salaries just to have an “adequate” income in retirement.
The report, which measures affordability, adequacy, and intergenerational fairness, found that low investment returns, low interest rates, slow economic and wage growth, and the demise of defined benefit pension schemes are to blame for a “hostile economic environment” for young people entering the workforce today.
The report found that only 12.5% of workers save more than 15% of their earnings for retirement, and that over 30% of people between the ages of 25-44 make no savings whatsoever. The think tank warns that this group of people are in severe danger of reaching retirement age with little to nothing to show for it.
Despite the impact of auto-enrolment in the UK, which has seen nearly six million more people join a workplace pension scheme since October 2012, under auto-enrolment savers are only obliged to pay in 0.8% of their earnings. This will rise to 4% by April 2019 (plus 3% for companies and 1% for the government), but as the report highlights, 8% is still a long way short when it comes to building a sufficient pension pot.
Dean Hochlaf , assistant economist for ILC-UK, says: “The combination of persistently low returns, sluggish wage growth and a changing labour market means today’s young people will need to save more to enjoy their retirement. The government must do more to extend pension coverage and ensure that contributions towards private schemes are sufficient, especially amongst overlooked groups such as the self-employed and those on low incomes who have yet to benefit from initiatives designed to improve private savings.”
The report follows plans announced by the government this week to bring forward a rise in state pension age for those born between 1970 and 1978 - highlighting that people can’t rely on the state pension to fund their retirement.