UABS KNOWLEDGE

IN THE MEDIA

Labour’s power policy rewards elderly rich

31 January 2018

The government’s winter energy payment policy is making it easier for rich old people to ‘choose’ more money for themselves, says Susan St John.

Policy of all types can be designed to nudge people into doing something that they know is good, but would never get around to doing. American behavioural economist Richard Thaler was the father of ‘nudge theory’ and the concept won him the Nobel Prize in economics in 2008.

Here in New Zealand, we see his influence in the world-leading auto-enrolment, opt-out design of KiwiSaver.

I have some problems with the implied paternalism of the ‘nudge theory’ approach, but clearly the design of policy can influence uptake of a programme. The Winter Energy Payment (WEP) is a case in point.

We know that there is only a small group of older people experiencing fuel poverty. According to the Ministry of Social Development’s 2017 Household Incomes Report: “Older New Zealanders score well overall on individual hardship items, though there is a small group that is struggling. For example, 4% report having to put up with feeling cold ‘a lot’ because of costs, compared with 10% for households with children and 7% overall.”

Labour's original plan, sensibly, was an opt-in scheme for superannuitants. Pre-election they said: “Labour will introduce a WEP for people receiving superannuation or a main benefit. Superannuitants will need to apply for the WEP from Work and Income.”

This is a classic ‘opt in’ approach where free choice is given. The older person can decide whether they need it or not. The default position is that the WEP is not paid unless a positive step is taken to ask for it. The idea is that better-off superannuitants who don’t need it are unlikely to bother applying.

Of course, the danger under ‘opt in’ is that some will not apply when they need the money. But is this a real issue here? There is no means test, stigma or questions asked; therefore no significant barriers exist to accessing it.

What then could possibly justify the pre-Christmas change in the legislation to an ‘opt-out’ scheme – not just for those on welfare benefits, but for superannuitants too?

This change means that approximately one million people will be eligible for the WEP, and it is up to recipients if they choose to opt out. The payment will be added automatically to the pension or benefit, and the advice from the Ministry of Social Development is: “If you don’t want the Winter Energy Payment, you can choose not to get it. We’ll let you know how to do this closer to the time.”

A lot of money is at stake here. The overall annual cost of the WEP is about $450m, of which roughly 70% goes to superannuitants. Single people receive a payment of $450 a year, and couples, or those with dependent children, receive $700.

The idea that some people will opt out because they don’t need it is ludicrous. The very people who should be opting out won’t even notice there was an increase. Many of those who are better off do not need New Zealand Super, or even know how much it is – Winston Peters is a good example.

Opt-out schemes such as KiwiSaver require an active decision to opt out. Natural inertia makes this unlikely, and that is the whole point – we want people to be enrolled in KiwiSaver. This policy makes it appear that Labour actually wants wealthy old people to take the extra WEP.

I am sure behavioural economists would consider this a corruption of their work. The fact is, Labour has just made easier for rich old people to ‘choose’ more money for themselves.

Read the published article: www.newsroom.co.nz

Susan St John

Susan St John is an Honorary Associate Professor of Economics at the University of Auckland Business School, and is Director of the School's Retirement Policy and Research Centre.

s.stjohn@auckland.ac.nz

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