KiwiSaver is ‘nudge’ theory in action, but is it a nudge too far?

Jenesa Jeram
The Spinoff
11 October, 2017

What is the difference between automatically enrolling workers in KiwiSaver and putting a housefly sticker in a urinal for men to aim at?

Any well-read economist will tell you that both are oft-cited examples inspired by behavioural economics and ‘nudge’ theory. In fact, you might have read about both initiatives this week when it was announced that prominent behavioural economist Richard Thaler has been awarded the Nobel prize in economics.

But there is a difference between trying to raise the nation’s retirement savings and improving men’s bathroom etiquette. One is likely to do more harm than the other. And spoiler alert, the answer is not reducing mess in the bathroom.

Thaler could be considered a bit of an economics anti-hero. While classical economics is centred around a rational man who makes decisions in his best interests, behavioural economics recognises that this isn’t always the case.

Humans are flawed. We are busy, lazy, stressed, ill-informed, and overwhelmed with choices. Some of us want to be good. But being good takes effort.

Behavioural economics recognises these cognitive biases, and Thaler’s work makes the case for understanding these biases to influence people’s choice framework and decision-making. ‘Nudges’ should make it easier for people to do what they really want to do.

So far, not so controversial. The problem comes when this theory is applied to public policy and in particular, lifestyle regulations.

Since Thaler’s work entered the mainstream, KiwiSaver is used as a prime example both in New Zealand and overseas of his theory in action. The opt-out component of our voluntary retirement savings scheme (as opposed to opting in) is considered unique on the world stage.

Unique and innovative public policy is not always the best public policy though.

The first question to ask is why the policy – in this case KiwiSaver – is needed in the first place. Its inception was based on the desire to encourage a long-term savings habit and asset accumulation amongst those who would otherwise not attain an adequate lifestyle in retirement.

But in response to the Retirement Commissioner’s 2016 review of retirement income policies, economists Michael Chamberlain and Michael Littlewood have drawn attention to Treasury reports that find “New Zealanders were probably over-saving for retirement before KiwiSaver started in 2007.” Remember that New Zealand also has one of the lowest elderly poverty rates in the OECD.

Chamberlain and Littlewood also cite Treasury reports that find that two-thirds of KiwiSaver contributions are simply transfers from other financial assets and that “KiwiSaver members seemed to have accumulated less net wealth than non-members.”

The policy may be unique, but the outcomes are hardly extraordinary.

It follows that the second question to ask is whether those who the policy is aimed at are in need of a ‘nudge’. In other words, are people failing to save because of their cognitive biases? It is plausible that at least some of the population do not think enough about the future, or do not understand what level of savings they will need to ensure a comfortable retirement.

But it is equally likely that some are earning incomes where they are only just making ends meet, let alone having the mental and financial bandwith to save for the future. There are also some who sincerely and rationally prefer to value their present lifestyle over their future lifestyle.

The third question that needs to be asked is whether the government’s ‘nudge’ has the potential to cause harm. In this case, KiwiSaver could. When workers are automatically enrolled in KiwiSaver, they are also enrolled in the lowest-risk conservative scheme. While conservative schemes are appropriate for workers close to retirement, they will not lead to optimal asset accumulation for younger workers.

By taking away the agency required for an individual to enrol in a retirement savings scheme, ‘nudging’ might correspondingly make people complacent about the best way to optimise their savings within the scheme. Nudges should make life easier, but should not make people complacent.

Auto-enrolment in a government retirement scheme is just one example of how ‘nudge’ theory is pervading lifestyle regulations. There are plenty of examples of policymakers trying to nudge people towards healthy choices. While well-intentioned, many are ill-considered.

Policies to make smoking less socially attractive risk further stigmatising a group who might already be smoking because they feel marginalised. Policies around the inconvenient placement of alcohol and junk food in supermarkets may give people a little more exercise, but are unlikely to deter those most likely to over-indulge. And sin taxes face the challenge of either being too low to have any real effect on health, or so high that they harm those who still choose to indulge.

Thaler’s contribution to the field of economics should be celebrated as a useful (if not common sense) insight that policymakers should be aware of.

But not all nudges are equal. Putting a sticker in a urinal is a simple solution to a simple problem. The stakes are much higher when it comes to lifestyles and livelihoods.

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