{"id":1097,"date":"2012-05-07T09:00:37","date_gmt":"2012-05-07T08:00:37","guid":{"rendered":"https:\/\/charisma.local\/charisma2023\/char1smaSSL\/?post_type=finance&p=1097"},"modified":"2013-05-14T12:30:59","modified_gmt":"2013-05-14T11:30:59","slug":"you-cant-nudge-a-nest-without-breaking-some-eggs","status":"publish","type":"finance","link":"https:\/\/www.journalofculturaleconomy.org\/charisma\/finance\/you-cant-nudge-a-nest-without-breaking-some-eggs","title":{"rendered":"You can\u2019t Nudge a NEST without breaking some eggs"},"content":{"rendered":"

In the days of Fred Goodwin\u2019s knighthood, even high interest rates and Monkees reunion concerts couldn\u2019t persuade the average Brit to save enough for their retirement. But the government believes a gentle Nudge can make a decisive difference. Between October 2012 and 2015, all UK employees over 22 will be enrolled into defined-contribution pension schemes unless they actively opt out<\/a>. Inertia is intended to achieve what rational persuasion never did \u2013 get young workers to put aside enough to live on comfortably in later life, without relying on the necessarily niggardly basic state pension.<\/p>\n

Past attempts that relied on voluntary enrolment were never especially successful, even with the lure of reduced charges (as with stakeholder pensions) or employer contributions (as in late, lamented defined-benefit occupational schemes). Fewer than half UK citizens regard saving for a pension as worthwhile, and more view house-buying as the best way to store up assets, according to the first run of the ONS\u2019s Wealth and Assets Survey. Enrolment in occupational pensions has relentlessly fallen<\/a> (to the lowest level since the 1950s). \u00a0But the political response \u2013 designed under New Labour and reaching its launch-date under the Coalition \u2013 has stepped back from making occupational schemes compulsory. Instead, \u2018choice architecture\u2019 is expected to do the trick.<\/p>\n

Giving history a push<\/h4>\n

The idea \u2013 which behavioural economists Richard Thaler and Cass Sunstein must wish they\u2019d patented \u2013 is to create situations where people still do their own thing, but are steered down a better route. That\u2019s the route that government experts thinks is good for them \u2013 but, crucially, also a route that can be shown to serve their own best interests. The new \u2018behavioural\u2019 approach contrasts with old-style Behaviourism, which implied that someone could be cajoled into any action that was given good associations (and avoid any action given bad ones) by the architect of choice. That authoritarian form of liberation, propounded at the tail-end of an age of dictators, is irreparably tainted by Pavlov\u2019s salivating dogs and Skinner\u2019s rats in a box.<\/p>\n

The new approach only pushes people, say the \u2018Nudge\u2019 theorists, in the direction they really want to go. It rescues them from demonstrable biases that deflect them from the rational decision, and from the \u2018akrasia\u2019 that \u2013 to our eternal regret – makes us do one thing when we pledged to do another. We all want to save more tomorrow; it\u2019s just that we keep forgetting to do so when tomorrow comes. So a nudge towards deduction-at-source is all we need for those retirement plans to succeed. That\u2019s what the pension schemes under the National Employment Savings Trust (NEST) are intended to provide.<\/p>\n

Later this year \u2013 as it becomes clear how many are opting-out and fleeing the NEST – we\u2019ll know whether the NEST can<\/em> deliver a hard enough nudge. But the troubled history of personal finance advice and savings promotion raises a serious question about whether governments should<\/em> be pushing people in this direction.<\/p>\n

Stocks vs socks<\/h4>\n

There are plenty of NEST-supporting tales on the virtues of deferred financial gratification. If you put aside \u00a310 every week of a 40-year work life, you\u2019ll have \u00a320,800 at the end \u2013 eroded of course by inflation, but more than compensatingly expanded if it\u2019s been saved or invested wisely. By the magic of compound interest, each \u00a310 invested today at 2.6% (the average real interest rate on UK 10-year government bonds from 1970-2010) will be worth \u00a327.92 \u2013 in today\u2019s money – in 2052. Put into the stock market, with dividends re-invested, it could be worth several times as much, if fund values grow as they did from 1950-1990.<\/p>\n

But there are also some powerful cautionary tales. Of people whose life savings disqualified them from means-tested benefits so that they were no better off than their spendthrift neighbours. Of pension pots destroyed by the late Robert Maxwell, or an inopportune stock-market crash. Of years of self-denial in pursuit of some late-life leisuretime which never came because of premature death.<\/p>\n

And those compound-growth comparisons may be misleading. The long-term growth of stock-market values is bounded by the growth of national output (real GDP), which for the UK averaged just 2.2% annually in 1970-2010, not as high as long-term real interest rates. [Data in Table 1 of a recent Bank for International Settlements working paper<\/a>]. Investment banks\u2019 much higher historical averages, based on fund performance, display a significant survivor-bias, and also ignore the large management charges that erode retail investors\u2019 return, as well as the amplification of returns in 1950-90 by the influx of new funds. Real stock market returns have been substantially lower since 1990, and there is no guarantee they will regain their former glory.<\/p>\n

The steerers and the steerage<\/h4>\n

So Nudge theorists\u2019 basic premise \u2013 that people are unable or unwilling to act in their long-term interests, and \u2018choice architecture\u2019 can move them closer to a rational choice \u2013 is not beyond dispute, at last in the case of retirement saving. Some people genuinely believe it is better to spend now than put money aside \u2013 given that such sequestered sums could, not inconceivably, be eroded by inflation, swept away in a financial crisis, stolen by a corrupt accountant or taxed away to leave them no better off than others who don\u2019t save. Paternalist administrators with a hotline to the life-assurance actuaries will tell them that they are under-estimating how long (on average) they will live after retirement, and failing to visualise the distress of mixing destitution with decrepitude half a century from now. But people know that averages are no guide to their own longevity, and that savers who die prematurely end up subsidising Methusalahs\u2019 annuities.<\/p>\n

Equally seriously, there are many who would like to save more for tomorrow, but genuinely need to spend all they have today. Those who bemoan the irrationality of buying a car for \u201c\u00a3199 a month\u201d, when this involves borrowing at interest rates that will double its eventual purchase price, forget that \u00a3199 is the most that many households can afford. People on low incomes borrow at extraordinarily high interest rates because their prime concern is keeping monthly outgoings within income, not counting the total cost. The government recognized the inevitability of the poor paying more when it decided to penalize early student-loan repayment \u2013 a cost-saving option only open to graduates who get rich quick \u2013 and reinforced that inevitability when it chose to scrap the early repayment penalty<\/a>.<\/p>\n

The first edition of Thaler and Sunstein\u2019s bestselling \u2018Nudge\u2019 came out in 2008, just as the financial system that looks after people\u2019s savings was getting a taxpayer bailout after gambling them all away. In a Postscript to their revised (2009) edition, they claim the crisis reinforces their case. But the failure of most (including \u2018behavioural\u2019) economists and financiers to foresee the banking and market meltdowns should deliver a warning to experts who claim a superior insight that entitles them to nudge. Those who kept their spare cash in an old sock would have been the only ones still solvent, if governments had lacked the will or resources to rescue the system. And those who didn\u2019t put enough capital aside were only emulating the supposedly moneywise bankers.<\/p>\n

It\u2019s easy to show that someone was financially foolish if they end up with unrepayable debts, or too small a pension. But these judgements are reached with hindsight, and would also reveal the idiocy at businessmen who go bankrupt \u2013 like Henry Ford and Walt Disney, who soaked their creditors before showering them with riches. And they often betray an affluent disregard for how hard it is to save from low income, even when there\u2019s a safe place to put the savings.<\/p>\n

If people \u2018hyperbolically discount\u2019 \u2013 economists\u2019 largely pseudoscientific term for under-valuing future consumption opportunities compared with the present \u2013 then they should be more indifferent to retirement saving the further they are from retirement. But most respondents to a survey reported in 2010 by insurance group Axa said they would save more if the statutory retirement age increased<\/em>: Governments should look \u2013 very carefully \u2013 before they make others leap. There is a long and regrettable history of overconfident technocrats pushing the masses in a direction they realise (too late) is profoundly wrong. The people who preferred to stay in their slums rather than move into high-rise blocks, who queued outside Northern Rock despite assurances it was solvent, or who didn\u2019t take the \u2018outstandingly safe\u2019 thalidomide drug, proved better judges of their self-interest than those in authority at the time.<\/p>\n

The danger is no different when the experts are dangling carrots, rather than wielding sticks. That\u2019s why the existence of a Downing Street \u2018Nudge Unit\u2019, engineering choices far beyond the NEST<\/a> is disturbing as well as amusing. We may be idiots to walk into a wall, but if it\u2019s been build across the pavement, the architects won\u2019t escape blame.<\/p>\n

ACKNOWLEDGEMENTS<\/h4>\n

Photo<\/a> by Ben Terrett<\/a>, used under a Creative Commons license.<\/p>\n","protected":false},"excerpt":{"rendered":"

Alan Shipman on recent attempts to ‘nudge’ savers towards higher pensions contributions Read More<\/a><\/p>","protected":false},"author":69,"featured_media":1121,"menu_order":0,"comment_status":"open","ping_status":"open","template":"","meta":{"_acf_changed":false,"footnotes":""},"categories":[1,7],"tags":[369,29,371,368,249,370,372],"class_list":["post-1097","finance","type-finance","status-publish","has-post-thumbnail","hentry","category-all","category-writing","tag-cass-sunstein","tag-finance","tag-nest","tag-nudge","tag-pensions","tag-richard-thaler","tag-savings"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance\/1097","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance"}],"about":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/types\/finance"}],"author":[{"embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/users\/69"}],"replies":[{"embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/comments?post=1097"}],"version-history":[{"count":5,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance\/1097\/revisions"}],"predecessor-version":[{"id":1124,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance\/1097\/revisions\/1124"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/media\/1121"}],"wp:attachment":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/media?parent=1097"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/categories?post=1097"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/tags?post=1097"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}