PSYCHOLOGY Nudges on Pension Schemes by Zach Conneally - Profesor/a de inglés - Barcelona

Zach Conneally

Profesor/a de inglés

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PSYCHOLOGY Nudges on Pension Schemes

The people in Ireland are living longer than ever before. According to statistics of The World Bank, the life expectancy of an Irish person is 81.6 years of age, ("World Development Indicators-Google Public Data Explorer", 2018).While this can be seen as something good it is also worth mentioning that it means we are going to have to put more away while we are younger to provide for ourselves in our ‘golden years’. Although many often joke that their children will care for them when they are old it is actually only ourselves who can be sure we will be stable as we grow older. That is why is it so important to put away a small piece of earnings as often as possible to take care of ourselves when we’re older. As of 2018 the State pension is €243.30 ("Social Welfare Rates for 2018", 2018) per week for pensioners aged between 66 and 80. However, if you are wanting to spend what are known as ‘the best years of your life’ travelling the globe, saving for a ‘rainy day’ or spoiling your hypothetical grandchildren you will be needing to set aside a large additional sum in your working years to do so.

A recent study by Deloitte found that only four out of every ten workers in Ireland are in a pension plan ("Future proofed: your ultimate guide to pensions | Deloitte Ireland", 2018). However, the National Pension Policy Initiative of 1998 recommends that a suitable gross retirement income would be 50 percent of the gross pre-retirement income. For example if a worker earns €70,000 when it comes time to retire, their pension income would equate to €35,000, say approximately €12,000 of this would be coming from the State meaning €23,000 would need to be self-funded. To achieve a figure like this a fund of over €575,000 would be needed (National Pension Policy Initiative, 1998). Although this is quiet an unrealistic expectation to have it is here to show the point that workers need to save a considerable amount of their wage in order to care for themselves when they are no longer earning. A nudge which could be put in place to aid in worker’s pension plans is an opt-in pension scheme. A nudge is an aspect in our surroundings that is influential to our behaviour.  In theory, a national scheme could be rolled out in which the first hour of every worker’s daily wage will be put aside and placed into a pension plan. All workers will have automatically enrolled into this plan when signing their contracts on job commencement and can at any time opt out of this plan. This nudge does not forbid any options as workers have the opportunity to opt out whenever they like and their economic incentives are not altered either. The nudge would be expected to increase the amount of Irish workers in a pension plan as it would be assumed that the majority of workers would not opt out due to not having any other pension plan.

Unbeknownst to most workers staying enrolled in the plan is in their best interest as it plays against their Present Bias. The present bias refers to the tendency of people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments (O’Donoghue, &, Rabin, 1999). In this case the Present Bias is combatted by the workers having a commitment device, as their money was deposited monthly into a pension scheme they are unable to touch it, allowing it to accumulate into a large amount over time. Workers who have opted out of the scheme are more susceptible to spend the money on impulse purchases that have no benefit in the long run as they have access to it. These workers are more prone to ‘hot states’ due to the distorting effects of momentary emotions (Loewenstein, 1996).

Tests to measure the effectiveness of this nudge would be difficult and time consuming but nonetheless possible. A suitable test to assess the benefits of this nudge would be a longitudinal between subjects study. The study would measure the effectiveness of a pension scheme over not having one and would also study the effects of the Present Bias. Participants’ data could be compared in pairs based on various aspects including income salary, job position and gender. Participants would be monitored throughout their career and in their retirement. Life satisfaction, stress tests and health tests would be employed on the participants to see if having a pension scheme in place could lead to a happier, healthier life. Stress tests would assess if having a plan in place leads to better overall general health such as blood pressure, etc. Participants would be examined on a yearly basis and the data would be compiled over their careers.

Although the nudge as a concept is highly beneficial to workers, several negative results could be obtained from conducting such a study. One possible negative result from this study is that the first hour of the worker’s wage everyday would be going into an untouchable pension scheme. Implications of this approach are extreme as it would be placing a squeeze on the workers financially as they may not be earning enough to support themselves or their family in the meantime. Take for example a single mother of three children working in a part-time position. A person in this role may not have the available funds to be in a position of setting aside an hour’s pay daily. Another possible implication is that workers may not be fully aware that they are enrolled in this pension plan or of the ability to opt out of it. If this was the case it would affect the validity of the nudge as it would create a paradox in which it would be forbidding opt out options. To combat this clear outlines must be provided in the contract and possibly seminars would be held for incoming staff at businesses that are enrolled in the scheme.

 

In conclusion people have a reason to celebrate – they’re living longer. However, don’t be prepared to spend too much on these celebrations or impulse buys as this money can easily be put aside out of access to be used when money is no longer being made. Simple nudges can be affective in altering behaviours for the better as long as the person is aware of them and not manipulated. Nudges can be used in every aspect of life from getting the general population to recycle more, donate their organs when they die or even hypothetically to invest more in their pensions.
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