Nudging your weaknesses into strengths for a happy retirement
Attempts to positively change people's behaviour without removing freedom of choice can have a life-changing impact
If you stop at the men's restrooms at Schiphol Airport in Amsterdam, you'll spot a fly in the urinal. It's just an etching on the porcelain, but it was a smart response to the problem of spillage. The rationale? If urinal users had their attention focused in the right direction, there might be less mess. And sure enough, spillage rates were reduced by 80% — but spare a thought for those taking the measurements.
It's been over a decade since behavioural economist Richard Thaler and law professor Cass Sunstein used this simple example in Nudge: Improving Decisions About Health, Wealth and Happiness, to illustrate choice architecture or "nudges" in action (and a recent visitor to these urinals confirms that the flies are still in place). As an example of a nudge, it may seem inconsequential, but its simplicity belies the profound, life-changing impact of attempts to positively change people's behaviour — without removing freedom of choice.
Thaler's Save More Tomorrow programme, in collaboration with behavioural economist Shlomo Benartzi, has worked phenomenally well.
They started with blue-collar workers who were struggling to pay their bills and could not see their way clear to save. But they agreed to save 3% of their salaries at their next raise, and after four pay rises, they were saving almost 14%. Benartzi says 15,472,080 Americans are now "effortlessly setting aside money for retirement".
Thaler and Benartzi cleverly circumvented — and harnessed — behavioural weaknesses.
Loss aversion is our tendency to feel the pain of losses more strongly than the pleasure of gains. Researchers found that if R100 fell out of your wallet, you'd find it more annoying than you'd find it gratifying to find R100 on the pavement.
The disturbing implication is that if we're asked to slice off a percentage of our salaries to save for our future selves, we find it difficult to make the rational decision to do so. We see giving up money as a loss because we have to cut our spending now. For the Save More Tomorrow workers, the increased savings coincided with their pay rises, minimising loss aversion as their take-home pay didn't drop.
The other behavioural tendencies they capitalised on are our optimism about our future ability to practise control, and our inertia. We happily sign up to fulfil positive intentions later — we'll start exercising on Monday. Inertia comes into play in that once we're committed to a pre-selected choice — a default - we're likely to stick to it. The Save More Tomorrow programme default was to remain enrolled; savers had to go to the trouble of opting out.
Nurture your nature
Have you considered that you are losing out on a tax refund if you don't contribute, or contribute minimally, to a pension or provident fund and/or a retirement annuity? On a taxable income of R450,000 compared to R405,000, the South African Revenue Service (Sars) calculates a difference in net normal tax of R15,285.50 (ignoring nuances to keep things simple). So, effectively, if you earn R450,000 and contribute R45,000 (10%) to a retirement fund, you pay R15,285.50 less tax.
"This implies that, with the tax saving, the contributions of R45,000 only cost the person R29,714.50 (R45,000 contribution less R15,285.50)," Sars points out. However, employers are obliged to make these deductions, so the savings are already reflected in increased take-home pay.
If you belong to an employer-sponsored pension fund, increase your contribution at the next opportunity. The timing might not coincide with your annual increase, so you're unable to overcome loss aversion, but you have inertia in your favour: once set up, you're unlikely to change it.
"Auto-escalation of employer-sponsored pension fund contributions is part of our consulting advice to employers and funds," says Vickie Lange, head of institutional best practice/research and product development at Alexander Forbes. "Unfortunately very few funds have implemented this."
However, your retirement annuity or unit trusts probably have an auto-escalation option. Some asset managers offer the option to set the month the escalation kicks in, so time it to coincide with your pay rise.
When you resign before retirement or are retrenched or dismissed, you are entitled to access your pension benefit. According to the Alexander Forbes Member Watch, in 2018 only 8.7% of members preserved their pensions — lack of preservation is the biggest contributor to poor pensions. This is an issue the default regulations to the Pension Funds Act addresses: your pension fund is now required to preserve your benefit automatically if you leave your job before retirement. To have it paid out or moved to another fund, you have to specifically instruct your fund to do this. Use the 10X Investments preservation calculator to spark loss aversion: preserve R1m at 50, say, and on default glide (auto-adjusted with age), you'll gain an extra R601,000 at 65.
Finally, make your future self tangible by using FaceApp (US concerns about its Russian origins aside). How will your 65-year-old self feel about your current loss aversion?