Making everyone join KiwiSaver?

21:56, Aug 04 2011

Amsterdam's Schiphol airport had a problem in the men's loos: guys weren't bothering to aim.
The simple way they solved the problem provided experts with an insight into a fashionable field of economics.

They drew little black blowflies in the urinals. Instead of gazing vacantly round the room, blokes would do their best to hit the fly. Cleaners discovered, uh, "spillage" dropped by 80 per cent.

The story is so interesting to economists, they wrote a blockbuster book about it, called Nudge.

It's about a trendy new discipline called "behavioural economics", which you and I would call: "Small changes can make a big differences to outcomes."

When Michael Cullen designed KiwiSaver in 2007, he applied behavioural economics: everyone would be automatically enrolled when they changed jobs, with the option to pull out if you want to.

Traditional economics says there is no meaningful difference between making a scheme opt-in or opt-out. But you and I know the world doesn't work like traditional economics. 

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If we are signed up in a scheme automatically with the option to quit, then many of us will just go with the flow. If we have to get off the couch and sign up for ourselves, we somehow never get round to it.

Seems like a small policy change, but automatic enrolment with an "opt out" has helped more people sign up for KiwiSaver than anyone guessed.

That's good for New Zealand because it means more of us are taking some responsibility for our retirement. By saving more, we deepen our pools of investment, which helps our economy to grow, create jobs and lift incomes.

But Bill English is not so interested in the long-term strength of New Zealand. More worried about cutting costs to pay for his tax cuts today, he cut KiwiSaver subsidies as soon as National got elected in 2008.

To be fair, they had a mandate because they promised the cuts, and the enrolment rate hardly moved because of the momentum effect of automatic enrolment.

Then they slashed at KiwiSaver again in this year's budget. The Government's KiwiSaver subsidy for a lot of working people is effectively gone altogether. Now KiwiSaver enrolments are dropping, even with automatic sign-up.

So now the Government is considering automatic sign-up in KiwiSaver for everyone, whether you change jobs or not, with the choice to drop out.

They won't do it with KiwiSaver the way it is today because there are about a million working people not yet in the scheme, and with a kickstart of $1000 each, that would be a cost of a billion dollars. Therefore they will cut the kickstart if they decide to make us all join.

We change jobs on average every seven years, and usually we get a pay increase when we move, making enrolment in KiwiSaver painless. It's easy to put something aside out of money you didn't already have.

It's harder to cut your current spending to save something. More than a few people won't easily be able to find 4 per cent of their wages if the Government makes everyone join, not when the cost of living is out of control. About half of us live from pay day to pay day as it is.

A better solution would be to phase in a rising employer contribution. In Australia, employers put in about 9 per cent of wages, so people are happy with a compulsory scheme. That's where the Aussies get all the money to come over here and buy up our companies, and our economy is looking more like one of those Amsterdam flies.

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