Design and Creation of an Opt-out System

  • Jona Linde

Background

As it currently stands, very few independent contractors have a pension savings plan. Chances are great that many of them will accordingly have inadequate retirement income. One possible solution to this problem is to implement an opt-out system through which independent contractors would save for retirement unless explicitly choosing not to. The purpose of this study is to analyze what form such an opt-out arrangement might ideally take from a behavioral economics standpoint and whether the institution of such a system would produce the desired results. The research focuses on the ways in which independent contractors and their situations differ from those of employees.

Opt-out Retirement Plans

International research has shown that when potential participants are automatically enrolled in a retirement savings plan (i.e., unless they expressly choose not to be, or opt out), the number of retirement savers is substantially greater than when people need to take the initiative themselves to participate (i.e., opt in) (Madrian & Shea, 2001). The United Kingdom recently switched from an opt-in to an opt-out pension savings system and figures from the British government reveal that participation among employees at large companies consequently increased from 61% to 83% (DWP, 2013).

The normative motivation for opt-in instead of opt-out plans is twofold. First, the general consensus is that saving for retirement is a good idea for the vast majority of workers. Consequently, the mistake of participating “by accident” is considered less egregious than that of not participating by accident. Second, research shows that people unduly emphasize the “now” and thus fail to save enough for later. Automatic enrollment would work to counteract this bias.

In the Netherlands, employees are obligated to participate in some form of pension or retirement savings plan, but that is not the case for independent contractors. Mandatory plans are not the obvious choice for them, if for no other reason than it runs counter to the notion of entrepreneurial independence. An opt-out arrangement would therefore be a good option for motivating more independent contractors to start saving for retirement without undermining their independence.

Independent Contractors Are Different

The research to date on opt-out retirement savings plans has focused exclusively on employees. Independent contractors differ notably, of course, from employees on multiple fronts. Those differences could mean that the effectiveness and/or moral underpinnings for opt-out plans for independent contractors are less clear-cut than for employees.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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