Inside Money: Why the revolution will be incentivised

As decades of experiments with rats show, if incentives are well understood, most of us will push the appropriate levers. Photo / Thinkstock

With little incentive to do much else today I read through Alan Bollard's submission to the Savings Working Group. It was a surprisingly easy read: light on jargon, only 14 pages long and requiring just a minimum understanding of the "Nordic tax system".

As well as providing a decent high-level overview of New Zealand's financial and economic position, Bollard offers his thoughts on how to the country could lift its savings rate.

Principally, he advocates slashing government debt ASAP but Bollard also suggests we could reduce investment taxes, Nordic-style, (perhaps by extending the current PIE managed fund concessions to all forms of investment) while cutting, or at least minimising, the "quite generous" KiwiSaver incentives.

"In general, more cost-effective methods of incentivizing savings should be considered," Bollard says in the submission.

Other submitters to the Savings Working Group think otherwise. Aon, for example, recommends doubling the incentives as well as the contribution rate (to 8 per cent) while also making KiwiSaver compulsory.

Now this is a dream of many KiwiSaver providers so it was almost shocking to see that AMP, in its submission, was borderline anti-compulsion.

AMP also laid out some interesting comparisons between how the culture considers debt (which apparently NZ has a problem with) versus savings.

"It is also ironic, given the effect of highly indebted households on national welfare, that, in terms of the Financial Adviser Act, consumer credit contracts are category 2 products and therefore do not demand the same standards of financial advice," AMP tetchily states.

"Again this illustrates the asymmetrical way we treat debt and investment from a consumer perspective."

Which brings me to the submission of John Patrick O'Sullivan "ordinary New Zealander now retired but formally a Bank Manager with a major trading bank".

"The Savings Working Group needs to know what ordinary people think not what the academics assume drives their savings behaviour," O'Sullivan says in his intro.

And it's hard to argue with his conclusion that the main driver "of savings behaviour is incentives".

"That is 'what's in it for me'," O'Sullivan neatly sums up the thoughts of millions of ordinary Kiwis.

Bollard says this too in a more academic fashion: "The national savings rate is an outcome of a series of, mostly private, choices. The national savings rate is neither a policy lever, nor something that public policy can simply deliver."

However, as decades of experiments involving rats (pigeons work just as well) and tins of sweetened condensed milk have shown, if the incentives are well understood most of us will push the appropriate levers.