What if you could save and earn money for your retirement while shopping?
Imagine you’re at the grocery store, picking up food for the week—bread, eggs, milk, fruit and vegetables, your son’s favorite afterschool snack, the coffee your partner really likes. The total comes to $100. As you swipe your debit card to pay, $20 is automatically added to your retirement account. That simple. You spent $100 and saved $20 for your future financial security.
This “saving through spending” setup is an innovative way that government, financial services companies, retailers, and tech companies are working together to help people grow their retirement savings. By combining saving with everyday spending, programs in places as diverse as Mexico, Australia, and Spain are hoping to help solve the problem that too few people are saving enough for retirement, especially for those with lower incomes who fall outside of traditional pension and retirement structures.
In a recent survey, nearly half of all adults from 16 countries—including the United States, Russia, China, and others—do not feel secure about their retirement. In the U.S., half of people 55 and older have zero account balance in their pension pots. The lack of emergency and retirement savings is even worse in most developing countries, where high shares of informal employment mean even fewer people are covered by corporate retirement plans, and where the unsteady nature of the work makes it even tougher to save.
This “saving through spending” setup is an innovative way that government, financial services companies, retailers, and tech companies are working together to help people grow their retirement savings.
One of the best examples for how saving-through-spending programs can work is Miles for Retirement in Mexico (Millas para el Retiro). Miles is an app that connects to every user’s credit or debit card. The app helps people build their retirement savings in two ways. First, when registering, every member defines the percentage to automatically save from their own account in relation to how much they spend. For example, if you set 5 percent and bought $100 worth of groceries at the store, $5 would be automatically transferred from your checking account into your retirement account. The second way people grow their retirement is through promotions from stores and brands which offer contributions to your retirement account when you purchase a product (more on this later).
Once the money is in your retirement account, it is invested in one of the dedicated low-cost retirement saving funds (called SIEFOREs), which are managed by private pension funds (called AFORES). After it’s set up, the app is on autopilot and hamsters away savings into your retirement account every time you shop.
Vitalis, an actuarial and investment consulting company in Mexico, launched Miles for Retirement in 2017. According to the Miles for Retirement CEO Jorge Lopez, the mission is to help provide the large numbers of low-income and informally employed workers, who are now mostly left out of the public and private pension plans, with a free, automatic way to save for retirement. The app was backed by the government agency responsible for overseeing pension investments, CONSAR, as well as most of the pension fund industry.
At first glance, saving through spending sounds contradictory. But at an individual level, we know from numerous studies that we are more inclined to spend to achieve short-term gratification than to save and delay our gratification far into the future, which is what saving for retirement is all about. One of the main culprits underpinning this behavior is present bias, meaning we often overvalue present rewards at the expense of future returns, leading us to spend and borrow too much in the short term and not save enough in the long term.
At a structural level, we know the reason that many low-income workers are not saving is an economic, rather than a behavioral issue, as it is virtually impossible to save anything while making minimum wage. Additionally, low-income workers might not have access to retirement accounts or pensions plans through their employer and so don’t set one up.
So for both cognitive and structural reasons, saving for retirement is a challenge. But everyone has to spend, making it a powerful intervention point. This is exactly where the platforms like Miles kick in with the merchant and brand contributions, through special promotions. For example, a supermarket or a coffee shop will credit people’s saving accounts when they purchase a specific item, like a loaf of bread or a coffee. On these specific items merchants pay the contributions to the savings account of the member, so this way also members who can’t afford to contribute on their own can collect contributions and start saving.
For both cognitive and structural reasons, saving for retirement is a challenge. But everyone has to spend, making it a powerful intervention point.
But how does this work for merchants? What’s in it for them? For one, instead of offering discounts to attract consumers, the “deal” for Miles members becomes more money in their savings account. Merchants also get extra publicity for their products and services via the app. For example, when purchasing life and disability insurance from Lockton, members will receive 10 percent of the paid premium back to their Miles saving account. The number of partner brands with promotions is increasing and covers a range of merchants, including food (Good Day), health (Mediclub/telemedicine), coffee (Starbucks), and online retail (Amazon).
“It is an idea that not only does something for people but also brands,” said Fernando Bellotti, Creative Chairman of Publicis Groupe, which is also helping to popularize the program. “What’s the use of selling a lot today if those same customers can’t buy them tomorrow?” As this more long-term view is adopted by more retailers and other companies, the numbers of promotions will increase, enabling more members to save without making any contributions on their own.
Currently, Miles is the commercial network that generates the most voluntary retirement savings in the whole of Mexico. If it continues growing at its current rate, total savings could reach $350 million by 2027, according to the governmental agency CONSAR.
By law, voluntary contributions in the SIEFORE funds can be withdrawn 1 to 5 years from the start of saving; the rest is set for retirement and can be paid out at retirement as a life annuity, and if the annuity is higher than the minimum wage, the rest can be withdrawn as a lump sum. One can also imagine a possible scenario where a similar app could operate in a country where the infrastructure of pension funds does not exist, and the savings generated by the app would be invested in a low cost target date fund managed by a third party provider.
Similar platforms are starting up all over the globe. In Spain, there is an application called Pensumo, with a similar concept and approximately 10,000 members and growing. In Australia, saving-through-spending platforms are even further developed with examples like SuperSuper and Boost Your Super. Both enable members of the superannuation retirement funds to “boost their super” by integrating so-called cashback sites that top up your super plan when you shop anywhere from eBay to Amazon to others that, like Miles, contribute a percentage of your spending to your plan.
The combination of saving and spending based on mobile platforms can potentially reach a wider population of workers, including the self-employed and informally employed, who are now mostly left out of the classic three pillar retirement systems.
According to estimates by Boost your Super, the average user can save an additional $438 annually. Compounded over 40 years assuming a 5 percent annual yield and adjusted for inflation, that could boost your retirement savings by roughly $65,000 which is a sizable amount. And these are all savings generated by intervening during consumption that would have happened anyway at the same prices.
As the numbers of low-income and informally employed groups grows around the globe, one part of how to help them save for the future could be these saving-through-spending platforms. At the end of the day, we all have to buy the basics, so why not accumulate savings along the way? Even though challenges with financial literacy and the sense of urgency regarding the need to save for retirement remain, the combination of saving and spending based on mobile platforms can potentially reach a wider population of workers, including the self-employed and informally employed, who are now mostly left out of the classic three pillar retirement systems—public pensions, employer-sponsored plans, and individual plans—and are also underserved by the banking sector.
The new apps would serve as a fourth pension pillar that would enable low-income workers and those outside traditional retirement systems to build financial security. Could this also help merchants and brands start thinking long-term and not only about the sales numbers for the next quarter? This strategy could help their customers achieve financial security in a mutually supportive relationship where all sides win.