Wednesday, 9 March 2016

Incentives and the loss of the Kiwisaver kick-start

Sometimes I wonder. Do politicians really not understand the role of incentives? Or are they deliberately ignoring them. Exhibit A is the daft statement by John Key about removing the $1000 Kiwisaver kick-start in last year's Budget: the change will "...not make a blind bit of difference to the number of people who join." Well, it turns out the change did make a blind bit of difference, as this New Zealand Herald article notes:
The number of people signing up to KiwiSaver has slowed significantly since the removal of the $1000 kick-start...
Analysis by the Herald shows the average number of people signing up to KiwiSaver per month was 15,029 in the year to June 2015 and 16,976 in the year to June 2014.
But since finance minister Bill English scrapped the kick-start incentive in last year's May Budget sign-ups have fallen to an average of 8996 per month with the lowest sign-up level, in October, below 8000.
None of this should be a surprise. Rational (and quasi-rational) decision-makers weigh up the costs and benefits of their decisions. If you remove the $1000 kick-start from Kiwisaver, then this reduces the benefits of joining, while the costs remain the same (lower consumption today), and at the margin at least some people will choose not to join. It turns out that 'some' people is actually quite a lot of people - nearly half of those who would have joined. [*]

Moreover, quasi-rational decision-makers are affected by present bias - they weight costs and benefits that occur now much more heavily (compared with costs and benefits that occur in the future) than they should (e.g. what economists refer to as hyperbolic discounting). So, that $1000 lost benefit carries much more weight in the decision about joining Kiwisaver (or not) than it should. The benefit is still lower and highly salient even if you point out that there are significant other benefits of joining Kiwisaver. For example, from the same article:
Matthews said the trend was disappointing but not a surprise given human behaviour.
"To me what that signals clearly is a lack of financial literacy because within two years you have $1000 from the government in terms of the member tax credit.
"Over the life of KiwiSaver, $1000 is insignificant."
Those other benefits were present before the kick-start was removed, and are present after. So, nothing has changed in that respect. So if a person hadn't already joined Kiwisaver, they probably aren't going to change their minds in a hurry as a result of benefits that were already present. What changed was the kick-start benefit was lost, and as the data show pretty clearly, the numbers signing up for Kiwisaver declined substantially. Incentives matter!


[*] Now, a reduction in signups could be expected because as a higher proportion of the population join Kiwisaver, there are fewer non-members left in the population to sign up. But, it's unlikely to have had that dramatic and sudden an effect!

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