Conversations with ChatGPT - Pensions Savings & Cost of Living

16 Jun 2023

Not all information that appears in this article will be accurate. At time of writing, ChatGPT only has access to internet data up to September 2021, meaning that information produced after this point may not be represented in its answers. These articles are an experiment to test how ChatGPT responds to different questions that it may or may not have clear, accurate answers to.

Angela is a persona created to converse with ChatGPT.

Perhaps the biggest change for many in the UK over the past 12 months or so is the change in the cost of living. Specifically, this refers to a decrease in ‘actual disposable income’ of the average person in the UK, due to the rise in cost of everyday goods. I’m keen to get to grips with what ChatGPT interprets the cost of living crisis means for pensions savings. As ChatGPT can only access data up to September 2021, I’m interested to see how it will respond to queries about a general cost of living crisis.

How might a cost-of-living crisis affect pension savings for different generations?

ChatGPT responded:

A cost of living crisis can have varying impacts on pension savings for different generations. Here are some potential effects:

1. Older Generation (Baby Boomers and Silent Generation):

• Fixed Incomes: Retirees from older generations often rely heavily on fixed sources of income such as pensions, Social Security, and savings. If the cost of living rises significantly, their fixed incomes may struggle to keep up with increasing expenses.
• Inflation: Inflation erodes the purchasing power of money over time. If there is a cost-of-living crisis accompanied by high inflation rates, retirees' pension savings may not grow as quickly as the cost of living, leading to a decline in their real purchasing power.
• Healthcare Costs: Older generations tend to have higher healthcare expenses. If the cost of healthcare rises disproportionately during a cost of living crisis, it can place additional financial strain on retirees, affecting their ability to save or sustain their retirement funds.

2. Generation X

• Savings Erosion: Generation X individuals are typically in the middle of their working lives, and many have started building their pension savings. If a cost of living crisis results in economic instability, job losses, or reduced wages, they may experience difficulties in consistently contributing to their retirement accounts.
• Increased Financial Responsibilities: Generation X individuals often find themselves in the "sandwich generation," meaning they are simultaneously supporting their children and aging parents. If the cost of living crisis leads to increased financial responsibilities, it may divert their resources.

3. Millennials and Generation Z:

• High Cost of Living and Housing: Younger generations often face challenges related to housing affordability, rising education costs, and high living expenses. A cost of living crisis can exacerbate these issues, making it harder for them to save for retirement.
• Economic Uncertainty: Cost of living crises can lead to economic uncertainty and job instability, making it difficult for younger generations to secure stable employment or earn consistent incomes.

It's important to note that the impact of a cost of living crisis on pension savings will depend on various factors, including the severity of the crisis, government policies, personal financial situations, and access to social safety nets. Individual circumstances can greatly influence the specific effects on pension savings for different generations.

That’s a very interesting set of responses from ChatGPT. Aside from the points regarding healthcare costs and social security which is more US-centric, ChatGPT has provided a relatively nuanced view of how the different generations face different risks. I’m particularly keen on the recognition given to the ‘sandwich generation’ and the resulting financial squeeze, as well as the importance of individual circumstances.

I’d like to take this a step further and see how ChatGPT would rank these risks against each other.

Which generation (from the above list) is likely to be most at risk from a cost of living crisis in the UK?

Here was the response from ChatGPT.

In the context of the UK, the generation that may be most at risk in terms of pension savings during a cost-of-living crisis is the younger generation, primarily Millennials and Generation Z. Here are some factors contributing to their vulnerability:

• High Housing Costs: The younger generations face significant challenges when it comes to housing affordability in the UK. Skyrocketing property prices and rental costs make it difficult for them to save for retirement or even find stable housing.
• Student Loan Debt: Many individuals from younger generations have accumulated substantial student loan debt due to higher education costs. This debt burden can restrict their ability to save for retirement and allocate resources towards other financial goals.
• Job Insecurity and Wage Stagnation: Younger generations often experience greater job insecurity and wage stagnation compared to previous generations. Economic instability during a cost of living crisis can exacerbate these challenges, making it harder for them to secure stable employment or earn competitive wages. This, in turn, affects their capacity to save for retirement.
• Longer Time Horizon: Millennials and Generation Z have a longer time horizon until retirement compared to older generations. While this may seem advantageous, it also means that they will be more exposed to the potential negative impacts of a cost of living crisis over a more extended period, including multiple economic downturns or recessions that can impact their ability to accumulate substantial pension savings.
• Changing Pension Landscape: The pension landscape in the UK has undergone significant changes in recent years, such as the shift from defined benefit pension schemes to defined contribution plans. This change places a greater burden of retirement savings on individuals, and the younger generations may face challenges in navigating these systems and making adequate contributions.

It's important to note that these factors do not imply that older generations are immune to the effects of a cost of living crisis in the UK. However, given the specific challenges faced by the younger generations, they may be at a higher risk of facing difficulties in building substantial pension savings during such a crisis.

Some very interesting conclusions here. I think the first three points are relatively ‘regular’ points, I think a good proportion of the population would highlight these points as clear difficulties for millennials and Gen Z pension savers. However, I think points 4 & 5 are the more interesting discussion points. These points include a greater consideration of the wider context which many younger pension savers may not necessarily have considered. I’m keen to explore the fifth point further.

Regarding the 5th point in the above response, how can pension savers from these younger generations ensure they make adequate contributions?

ChatGPT responded:

Here are some strategies to consider:

• Start Early: The power of compounding is a significant advantage for long-term investors. Starting to save for retirement as early as possible allows for more time for investments to grow.
• Take Advantage of Employer Contributions: If an employer offers a workplace pension scheme or matching contributions, it's essential to participate and contribute enough to maximize the employer's matching contribution.
• Budget and Prioritize Retirement Savings: Creating a budget that includes a specific allocation for retirement savings is crucial.
• Automate Contributions: Setting up automatic contributions from one's salary or bank account can ensure consistent and regular savings towards a pension.
• Educate Yourself on Pension Options: Understanding the different pension options available is essential for making informed decisions. Younger savers should research and compare pension schemes, considering factors such as fees, investment options, and flexibility.
• Increase Contributions with Income Growth: As income increases over time, it's advisable to increase pension contributions accordingly.
• Diversify Investments: Diversifying pension investments across a range of asset classes can help spread risk and potentially enhance returns over the long term.
• Stay Informed and Adapt: Keep abreast of changes in pension regulations, tax incentives, and government initiatives that may affect retirement savings.

Remember, individual circumstances can vary, and it's always advisable to seek personalized advice from a financial professional who can consider specific goals, risk tolerance, and current financial situation when making decisions regarding pension contributions.

Overall, I’m impressed with some of the responses from ChatGPT in this discussion. In previous discussions, I think ChatGPT hasn’t quite grasped the overall context of some of my enquiries, but it seems to have adapted well on this occasion.

We are currently working with our marketing department to send out a Consumer Duty styled letter to a cohort of our clients to keep them informed on how they can come out best from the cost of living crisis, in terms of pension savings. ChatGPT has certainly helped to inform or reinforce some of the key points.

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Consumer Duty: Opportunities & Threats
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COVID-19 & UK Pension Poverty
Future of Retirement Savings UK