With the demographic landscape changing, and concerns about the sustainability of welfare programs intensifying, many young people are asking a fundamental question: are retirees a drain on the economy? However, rather than pointing fingers at the older generation, it’s important to ask what the younger generation is doing to prevent themselves from being a burden when they retire!
It's understandable that 25–35-year-old might feel a sense of frustration about the allocation of resources to retirees. The argument often centres on the idea that older generations are taking a larger share of welfare benefits, leaving less for those still in their working years. However, this perspective oversimplifies a complex issue and overlooks the fact that retirees, during their working lives, also contributed significantly to these very programs.
Social welfare systems, like the age pension and Medicare, were established as a form of inter-generational contract. The idea was that each generation would support the ones before it while expecting the same support in return during their retirement.
This system worked well when there was a larger working-age population to support retirees. Admittedly, as the global population ages and the birth rate decreases, there are now fewer young workers to contribute to these programs, making them seem strained.
To address the issue and prevent the younger generation from becoming a burden when they retire, there needs to be a significant improvement on the education of basic financial and investment principles, helping to improve their financial literacy across the board. Research has shown that Gen Z demonstrates the lowest levels of financial literacy meaning they will be financially worse off than previous generations.
And it’s not just Gen Z. A study by Standard Life, highlighted that the majority of millennials were confused about how much they should save for retirement, or how much they will need to retire comfortably.
There is a greater focus on immediate financial well-being, such as paying off debt and setting up emergency funds, and less focus on saving for retirement. This lack of foresight was particularly evident when 5,million people withdrew money from their super during the pandemic. Data from the Australian Tax Office revealed Six in ten of those people were under the age of 35 and a survey by the Institute of Family Studies showed a considerable amount was spent on essential and discretionary items and paying off debt.
While this 'soft-saving' helps to alleviate immediate financial pressures, it is a short-term fix or to put it another way, a delay tactic that could backfire. A 2023 report by Blackrock highlighted that only 53% of workers believe they are on track for a comfortable retirement.
There’s no two ways about it. Retirement needs to start early and should begin with regular contributions and top ups instead of just relying on employer contributions. The magic of compound interest through super will heavily reduce reliance on the age pension.
Then there is investing. Superannuation savings is one form of financial security but early investing in a diversified investment portfolio adjusted to individual risk profiles (with dividend reinvestment) can produce a rate of return at 10% per year and in 20 years’ time could generate a generous income in retirement.
Finally, get advice. Yes, there is a proliferation of DIY investment platforms and robo-advice, but good old fashion financial advice from trusted professionals will set you up for a lifetime of financial security…without reliance on the age pension and finger pointing from the next generation.