Source: MIL-OSI Submissions
Source: National Capital
NOBEL PRIZE WINNING PLAN CAN NUDGE KIWIS TO SAVE MORE
SMART SAVINGS PLAN CAN GET KIWIS TO SAVE MORE FOR THEIR RETIREMENT TOMORROW
Most New Zealanders are not saving enough to have a comfortable retirement.
The Save More Tomorrow (SMarT) plan by Nobel Prize winning economist Richard Thaler may be the solution, but cannot be implemented in New Zealand due to certain barriers. Behavioural economists from Victoria University, with the support of a group of financial advisers have published a report as part of a submission to the Retirement Commissioner’s 2019 Review of Retirement Income Policies, encouraging the government to implement changes to make it easier to implement this plan here.
Clive Fernandes, one of the four financial advisers pushing for changes, says, “Simply telling Kiwis they need to save more is not enough. The government needs to encourage behavioural nudges which have shown to help people save more, almost unconsciously.
The SMarT plan is one of the nudges that have helped increase annual savings in the US by US$7.4 billion as per some estimates. As financial advisers, we have a responsibility to help people save more, but we need the support of the government to be able to do that”
Save More Tomorrow is a plan that helps people save for their retirement by taking into account people’s psychological limitations. The core of the plan is getting employees to commit to using part of their future pay rises to increase their retirement savings contributions. Their contributions rise each year until they reach a pre-determined maximum savings rate.
The report asks the New Zealand Government to:
– make changes in the KS2 form to allow employees to indicate whether and by how much they want their contributions to increase each year and what their maximum contribution rate will be.
– encourage research to test how well the Save More Tomorrow plan would work in the New Zealand context, by trialling it out with public sector employees such as teachers.
The financial advisers agreed that further research needed to be done on the benefits of increased savings in KiwiSaver versus potential disadvantages of KiwiSaver members increasing their contributions beyond the minimum to make the most of the scheme. This included that KiwiSaver funds are typically locked-in until retirement, and that KiwiSaver has minor incentives when compared with the investment offering which formed the basis of the overseas research on the SMarT plan.
Dr. Jan Feld, behavioural economist from Victoria University of Wellington, says, “The Save More Tomorrow Plan can help people without coercion. It simply nudges people to save more using insights from Behavioural Economics”
– A Financial Services Council survey found that, on average, New Zealand retirees report a $218 gap between their weekly income and the income they report that they need to live comfortably.
– One company that tried the Save More Tomorrow plan found that the savings rate of employees who joined the plan increased from 3.5 percent to 13.6 percent in only four years.
– The ability to offer the ability to commit to future savings increases has, according to estimates of Thaler and Benartzi, increased annual savings in the US by US$7.4 billion.
– The report was written by Dr Jan Feld and Shakked Noy. Jan and Shakked are both at Victoria University of Wellington: Jan as a Senior Lecturer in Economics and Shakked is a Master’s student in Economics and Philosophy.
– The advisers are Jonathan Parsons (AFA, Spratt Financial), Ali Bazaaz (One50 Group), Joseph Darby (AFA, Milestone Direct) and Clive Fernandes (AFA, National Capital).