Are We Saving the Right Way for Retirement?

Should membership of Kiwisaver be compulsory? Research on how humans behaviour, some of it thirty years old, points in that direction.

The current debate over the future of Kiwisaver is largely bereft of developments in economics over the last thirty or so years. Rather the frame has been an approach to human behaviour which we know does not reflect reality.


For reasons which can best be explained in terms of the history of the development of economics as a science it was assumed that individuals exhibit optimal behaviour subject to the constraints they face and the knowledge they have, carefully making rational choices which give the best possible outcomes. At the core of the model is a Rational Economic Man (the choice of gender is apposite), also known as Homo Economicus or, more briefly, ‘Econ’.


In a science such an assumption is subject to investigation. When they did, behavioural economists began to accumulate evidence that the hypothesis was not a very good description of how people actually behave. To cut to the core, many of us have poor self-control.


You are probably aware of the ‘marshmallow experiment’, in which a child is offered a choice between one small reward provided immediately or two if they waited a little. Many children are unable to restrain themselves for even 15 minutes, despite the very high return from waiting. (In follow-up studies, the researchers found that children who were able to wait longer tended to have better life outcomes.)


This is but one of a range of experiments which suggest that individuals – children and adults – hardly make optimal decisions. In the jargon, when thinking about economic decisions you have to replace Econ behaviour with human behaviour; in truth ‘Humans’ are rather like you and me. (If you want to chase up this research read the books by psychologist Daniel Kanneman, Thinking Fast and Slow and economist Richard Thaler, Misbehaving: The Making of Behavioural Economics. By ‘misbehaviour’ Thaler means that individuals do not conform to the standard model of Rational Economic Man.)


Building up savings for retirement, in particular, requires self-control over a long period. The research suggests people save less than they subsequently judge optimal, just as fifteen minutes later the child may have wished they had not gobbled the first marshmallow when they could now have had two.


The government has been anxious about Kiwisaver because it is fiscally expensive and because no one seems sure why it is necessary. I accept that the government may not want to use its revenue for the scheme, although it is well to remember that Michael Cullen was ingeniously hiding some of his budget surplus by giving it to individuals as Kiwisaver deposits. However they could not spend the pseudo-tax cut immediately but were forced to save it for retirement.


Official concerns centred on whether the scheme increased savings or whether people simply readjusted their savings patterns to take advantage of the incentives and did not save any more. If you believed that people were Rational Economic Men (or women), you expected mainly the latter. It was even claimed there was evidence to this effect but it is not very convincing, especially if you rely on the scientific standards of behavioural economics which require detailed records of household wealth which do not exist here (or in America).


The Danes keep meticulous records. Using them, a study found that the bulk of the savings generated by an automatic savings regime (such as the regular deposits made by an employer and worker into a Kiwisaver account) was ‘new’. Notice the research findings were only about most savings, for there was some displacement. The humans of behavioural economics are not extremist (unlike Rational Economic Men).


What does this mean for Kiwisaver? Ananish Chaudhuri, a behavioural economist at the University of Auckland, favours compulsory membership of Kiwisaver, arguing that it can have a significant effect on people's saving behaviour in the long run.


At issue is the ‘opt out’ provision, for while the scheme has automatic enrolment, new employees can choose to opt out from day 14 to day 56 of their employment. (Members can also go on a contributions holidy after one year.) The notion here is ‘libertarian paternalism’ proposed by Thaler and Cass Sunstein. You paternalistically frame the decision process in the way that the research evidence suggests is in their long term wellbeing but you allow people to over-ride the imposed decision. (See their book, Nudge.)


I guess I am not so much that way inclined, given that Kiwisaver is intended to be part of a coherent retirement system which includes New Zealand Superannuation. Should we require those who opt out of Kiwisaver to also opt out of NZS which is also part of the scheme?


You can already withdraw your Kiwisaver contributions for particular purposes: to buy a first home, serious illness or death, significant financial hardship, permanent emigration from New Zealand (other than to Australia) but, unfortunately, not for your tertiary education or training which might encourage grandparents to deposit for their mokopuna.


Kiwisaver has included an initial $1000 which was an incentive not to opt out but the recent budget abolished the grant. Presumably many of those who are now newly autoenrolled have less incentive to stay in. (Don’t be surprised if there is no systematic post-policy review; that is not the way we generally run policy in New Zealand.)


What arguments will the government offer when it passes the required legislation and what will the critics argue? How much will the parliamentary debate rely on the idealised logic of Rational Economic Man and how much it will be about the messy reality of Humans? You can be sure that whatever the MPs argue, they will behave more like humans.