Starting automatic enrolment in KiwiSaver would be a move in the right direction. It will increase enrolments and more people will end up with better provisioning for their retirement. Currently those who wish to join KiwiSaver have to opt in. The change the Government is proposing will enrol everyone by
Ananish Chaudhuri: Automatic enrolment has big impact
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A number of countries including Denmark have already switched to automatic enrolment.
When the authors of the report look at the decision of how much to contribute, they find that in one firm with a default contribution rate of 3 per cent of salary, more than one-quarter of workers contributed exactly that amount to the plan, even though the employer matched contributions dollar for dollar up to 6 per cent of salary. Once the firm switched to a 6 per cent default, workers started contributing the same proportion.
A 2013 report in the Guardian found that approximately one year after Britain introduced automatic enrolment with an opt-out feature, there were 1.6 million more savers in workplace pensions. Only 9 per cent chose to opt out.
Indeed the fact that people often fail to save enough for retirement has motivated Thaler and co-author Shlomo Benartzi to propose the Save More Tomorrow (SMT) plan. Under this plan people commit in advance to allocate a portion of their future salary increases towards retirement savings. They find that 78 per cent of the people offered the SMT plan elected to use it and a vast majority (80 per cent) remained enrolled through the next three pay raises. The average saving rates for SMT plan participants increased from 3.5 per cent to 11.6 per cent over the course of 28 months.
Making a difference by changing the default is not confined to savings behaviour alone. The strategy can be applied to other problems like the shortage of donated organs. Many countries including New Zealand have opt-out organ donor programmes, where everyone is presumed to be a donor unless they choose to opt out. These countries with automatic enrolments have donation rates that average 25 to 30 per cent higher than comparable countries with opt-in programmes.
Finally, the Government is also proposing to ditch the $1000 kick-start which was originally designed to provide an incentive for people to join. However, the move to automatic enrolment makes the $1000 kick-start less critical and will save money.
A recent study using data from Denmark compares the relative effectiveness of switching from opt in to opt out as opposed to a similar subsidy offered in Denmark. The authors of this study attribute only 1 per cent of the saving done in the Danish plans to the tax breaks while the rest of it comes from the switch to automatic enrolment.
The authors argue that subsidies may not be the most effective policy to increase retirement savings. Automatic enrolment or default policies that nudge individuals to save more could have larger impacts on national saving at lower social cost.
Ananish Chaudhuri is professor and head of the Department of Economics at the University of Auckland Business School. The views expressed are his own.
KiwiSaver Q&A
Starting this week the regular KiwiSaver Q&A column by Helen Twose will move to the Herald on Sunday. To have your KiwiSaver questions answered by the Herald's panel of industry players email Helen Twose, helen@helentwose.co.nz.