Fraser Forum

William Watson: Nudge, nudge, KABOOM! Behavioural economics comes to Canadian policy

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Just as I finished reading a new NBER (National Bureau of Economic Research) working paper by Philip Oreopoulos and Robert French of the University of Toronto about how behavioural economics is starting to influence Canadian public policy, along comes an email from the federal Department of Finance announcing Ottawa is about to legislate the new terms of the Canada Pension Plan. Nudge, nudge, kaboom!, I thought, though just why may take a little explaining.

“Nudge, nudge” because a lot of the policy changes inspired by behavioural economics involve nudging people toward choices they’d probably make if only they thought about them enough, which they don’t. For example, in a subway station in Hamburg they painted the stairs to look like a racing track (pictured above), with lanes and flags, and, whaddya know? Lots more people started taking the stairs. In Sweden, they did it by painting the stairs like piano keys that somehow actually produce notes as people climb them. Same effect: big increase in people taking the stairs.

Many of us aging baby-boomers are climbing more stairs these days because we’ve bought Fitbits or other wrist wear that, among other things, counts our daily climbing. We could just as easily take the stairs without a Fitbit but it provides a kind of commitment that now obliges us to take them. Weird, but real.  

There are lots of other examples, many of them tracked by the U.K.’s Behavioural Insights Team (BIT), a version of which, the Privy Council Office’s new “Innovation Hub,” the Harper Tories introduced in February 2015.

Other ways of nudging people include reversing defaults—so that instead of having to opt in on your driver’s license that you agree to donate your organs in case of death, you’re defaulted in but can opt out—or one the Canada Revenue Agency is experimenting with: making people sign their tax form and read all the warnings about cheating on your taxes on its first page, before any cheating has taken place, rather than its last. There’s no word yet from a couple of pilot projects on whether doing this changes taxpayer choices. If it did, that would be a great thing: almost no expense (beyond the cost of the study, that is) would have produced a real return in a higher number of honest tax filings.

We do know from British experience that telling people they’re more delinquent than their neighbours gets faster payment of back taxes than simply warning them about penalties. (I wonder if the IRS might want to try that on Donald Trump!)

More elaborate interventions are possible, too. The federal government is trying to operate a job-matching service in which a computer takes detailed information on employers and employees and uses a compatibility algorithm to try to match them up. The trouble is, filling out the required online forms takes 20 minutes and many potential employees don’t get through it.

How to raise these low take-up rates? Both “low touch” and “high touch” nudging are possible.

Low touch involves better website design, generic email reminders, personalized email reminders, and the like. (By the way, if I’m an employer, I’d like to know how many reminders the system had to give potential employees before they finally finished the form.) High touch nudging might involve phone calls or in-person counselling—and would be a lot more expensive, of course.

Which brings us to KABOOM! (my term, not Oreopoulos and French’s). That’s where the reforms to the Canada Pension Plan come in. Ottawa and several provinces—enough to change the CPP—believe many Canadians aren’t being sufficiently rational in their approach to saving for retirement. So they have decided to make the CPP more generous, in exchange, naturally, for higher CPP taxes. This is not a nudge, however. If you don’t pay your CPP premiums, the ultimate penalty is jail time. There’s nothing voluntary about it. You shall save this way, Ottawa and the provinces declare.

Of course, if you were already saving, you can respond to higher required CPP saving by reducing your other saving. In that way, the CPP changes aren’t your last word on retirement. You can get around them. But in any policy where at the end of the line of non-cooperation you get a visit from the RCMP, that’s not nudging. That’s KABOOM!

 

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