Labour’s power policy rewards elderly rich

24 January 2018
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Honorary Professor Susan St John

An 'opt out' winter energy payment policy from Labour is making it easier for rich old people to ‘choose’ more money for themselves, writes Susan St John.

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

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

Now 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 – and we want to encourage that behaviour to contain costs … nudge, nudge.

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 access it.

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

This change means 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 WINZ is this: “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.”

There is a lot of money at stake here. The overall annual cost of the WEP is around $450m, of which roughly 70 percent goes to superannuitants. Single people receive a payment of $450 a year and couples, or those with dependent children, receive $700. (Presumably two superannuitants flatting together would get $900? Is the reasoning that they would have separate bedrooms?)

More seriously though, 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 the better-off don’t need New Zealand Super or even know how much it is or should be (Winston Peters is a good example).

Opt-out schemes like 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 from Labour makes it look like they actually want 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.

Dr Susan St John is an Honorary Associate Professor of Economics at the University of Auckland's Business School. Her research and teaching interests are focused on public sector and retirement policy issues, including decumulation of savings and annuity issues, tax and poverty issues, and applied macroeconomics. She is also economics advisor to Child Poverty Action Group.

Used with permission from NewsroomLabour’s power policy rewards elderly rich published on Wednesday 24 January 2018.