National Pensions Framework

Having had some time to digest the National Pensions Framework document , my overall impression is still that this is a very sensible and perhaps even groundbreaking document. I say "perhaps" because there are still many details left undecided and it is still quite possible that the enactment may fall very short of the ideals. I say "groundbreaking" because there are few Irish policy documents that really grapple with developments in modern behavioural and microeconomics and attempt to use them for wideranging and pragmatic policy solutions. I have rarely read a document like this with the same sense that it is possible that they have found a pragmatic and workable solution to a major policy problem. But general principles and actual implementation are obviously two different things.

My first main thought is that the raising of the state pension age to 68 over the next few years is a sensible step and one that needed to be made. The mechanism is that those aged 49 and other now face  a state pension commencement age of 68, with those aged 50 to 55 getting it at age 67. Some commenters have argued that it would have been better had pension age been linked to some sort of longevity formula and there are, of course, arguments for this. But the general direction is very sensible and makes Ireland one of the first countries to grasp this issue. The extent to which people working in manual jobs will be adversely affected is something that should be looked at. But in general, the extent to which over-65 life expectancy has risen is such as to make a firm adherence to a 65 pension age just not sensible.

The extent of employers contribution versus state contribution is the outcome of a political debate and I am sure will continue to be debated. One empirical question clearly is the extent to which forcing employers to contribute will influence their hiring and wage decisions. Another aspect is the role the pension providers themselves will play in this. It is not clear to me from the document precisely who will provide the main schemes, whether there will be default providers and so on. The government will provide much of the administrative aspects of the overall scheme but the pensions themselves will be provided by the market. There will also be a strengthened regulatory role for the Pensions board. When I say the devil is in the details, there are many demons lurking in how all of this might work. While the behavioural economic elements of this strategy are exciting, they really will not amount to much if the pension schemes people are being enrolled into are not sound and properly regulated, particularly given that automatic enrollees will largely be enrolled into defined contribution pensions.

The automatic enrollment feature is a very positive step and one that many of us here are clearly interested in, given our research area. Remember, this will have no implications for public sector workers and relatively little implications for people who already have a private pension plan. It also "bites" more at the lower to middle end of the income distribution with employers contributions being relatively small in relative terms for a person earning 100k compared to a person earning 20k. I would make a few points about the automatic enrollment aspect

(i) The employer contributions aspects create strange incentives for employers. For example, a company with 100 workers earning 20-40k per year that currently has a pension scheme with 30 per cent take-up, could find themselves with an extra fifty thousand or so per year to pay in terms of staff costs. While the employer would be obliged under the current scheme to enroll people onto the pension plan, they would not be obliged to enthusiastically endorse this to their workers. The social interactions that take place in this regard are interesting to think about. In general, the employer response to a national automatic enrollment scheme where the employers are bearing a good chunk of the costs is an element not usually present in the US literature.

(ii) Automatic enrollment is used now in many different contexts. See, for example, KiwiSaver  in New Zealand and the British system of automatic enrollment into private pensions. The document is correct to point out that the type of inertia that leads people to postpone pension decisions is reversed under automatic enrollment and that there is considerable evidence that this may lead to higher enrollment rates. However, the automaticity of enrollment is only one feature of how behavioural effects might operate here. As yet, the document makes it unclear what the default employee contributions are going to be and how many options and ranges of providers will be available to the person. The actual form that the person interacts with will be a crucial factor in determining enrollment rates in this scheme. Something that presents a wide range of complex options in a manner that generates uncertainty among people who may never have placed money in a pension before may trigger opt-out of this scheme. Given (i) it is likely that employers will be helpful to employees who request the opt-out option. My sense at present is that it will be a challenge to really communicate to employees what exactly they are getting from these schemes. In particular, it will be a challenge to communicate very clearly to employees exactly what happens when they move jobs. How will their benefits transfer between jobs. Where can they check to make sure they are not being short-changed?

(iii) The potentially negative effects of (i) and (ii) are compounded by the fact that, at best, the Irish economy will be in a slow recovery by 2014 meaning that many employees will be more cash-constrained than in normal circumstances. This is somewhat countered by a point raised by Colm Harmon that many employees in the lower to middle pay ranges may end up with a windfall of sorts if the PRSI system is moved to a universal mandatory payment model. As Colm points out, this might act as a way of countering loss aversion for some categories. In general though, I would say the escalating commitment features of something like "Save More Tomorrow" are not present here and this is something that may lead to opt-out. Depending on the timing of economic recovery, it may be possible to embed escalating commitment clauses into these schemes if salaries begin to rise again in 2014.

(iv) One aspect of the scheme that might be of interest to US readers is that automatic enrollment is further enhanced by two other features. Firstly, people who sign up get a bonus if they remain for 5 years continuously. Secondly, and perhaps more controversially, those who opt-out are enrolled again after 2 years. This did not raise too many eyebrows in Ireland but I imagine critics of "libertarian paternalist" policies might point to this as an example whereby the nudges are too intrusive.

(v) Company peer effects will be a very important part of the decision to opt-out of these schemes. Duflo and Saez's paper on peer effects is worth consulting in this regard.