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Opting into “Opting Out” of charitable giving

March 23, 2011 Leave a comment

Michael Sanders

A recent poll by Workplace Giving, a payroll giving company, indicated that of 1000 respondents, 68% would favour the introduction of an automatic-enrolment system for payroll-giving. This kind of system would make the default for all workers in participating firms to be enrolled in a the scheme, giving to a given charity at a given level – they could then, if they so wished, opt-out of the scheme, or change the amount they give, and/or the charity to which they are giving (64% of respondents indicated a preference for having a hand in choosing the charity in the first place).

Why should this be the case? Only a minority of workers (only 6% of workers in participating firms, 2.4% of all workers)[1], actually give through payroll giving at the moment. While it is natural to suspect some selection bias in the answers to these questions, the magnitude of the difference suggests that at least some respondents who answered positively about the automatic enrolment system are not currently enrolled in payroll giving schemes in their firms.

If they are so keen to give to charity that they would favour and opt-out arrangement, why do they simply not enrol themselves in existing schemes, or set up a direct debit of their own accord? Work from across the field of Behavioural Economics appears to suggest some answers.

The first, and most obvious suggestion, is that individuals have a self-control problem, and continue to put off the act of enrolling. In these cases, a self-aware individual may prefer a “commitment device” such as an automatic-enrolment system, which compels (or in this case forces) them to partake. Evidence from the pensions literature in the united states suggests that automatic enrolment can have powerful effects on individuals’ behaviour in overcoming their self-control problems[2].

Respondents to the survey may also be demonstrating systematic overconfidence. Although the existence of this phenomenon is observed in previous research, for example finding that 93% of all drivers believe they are above the median ability[3], it is particularly interesting when combined with self-control problems. Despite previous evidence to the contrary, for example not yet having signed up to Payroll Giving, individuals strongly believe that they are more likely to overcome their self-control issues in the future. Given their expectation that they will sign up to payroll giving…tomorrow, and that their colleagues will not, automatic enrolment will make no difference to them in the long run, but will have a larger impact on others’ giving.

Finally, the institution of an opt-out is likely to induce more homogeneity of charity choice (among those passively remaining in the scheme), compared with softer policies such as “active enrolment”, whereby individuals are compelled to make a decision for themselves (often through a mandatory form)[4]. If the respondents were motivated by a particular cause (heart disease, for example), and believe themselves a more active participant in decision making, a prescriptive policy may be better for them, albeit at the cost of social welfare.

These phenomena, and others like them, may pose significant obstacles to the Government’s plan to induce a ‘step change’ in giving in the UK – something which, as this blog has previously discussed, will be very hard to do. They also point to a more nuanced problem with giving; instituting auto-enrolment may increase the level of giving, but if workers are heterogeneous in their charity preferences, it may decrease social welfare, or be a second best policy compared to a softer intervention. Although the results of this poll are positive for those who support payroll giving schemes, it is clear that more research must take place before we are able to accurately predict its effects.

 


[1] Potter & Scales (2008) “Review of Payroll Giving”  Strategy Complete Ltd. Commissioned by Institute of Fundraising

[2] Choi,  Laibson, Madrian, Metrick (2006)  “Saving for Retirement on the Path of Least Resistance”. Behavioral Public FinanceToward a New Agenda. Ed McCaffrey and Joel Slemrod, eds. New York: Russell Sage Foundation pp304-51.

[3] Svenson (1981): “Are we all less risky and more skilful than our fellow drivers?” Acta Psychologica 47: 143-148.

[4] Carroll,  Choi, Laibson, Madrian, & Andrew Metrick (Forthcoming) “Optimal Defaults and Active Decisions.” Quarterly Journal of Economics

2011: the last Census?

March 10, 2011 Leave a comment

Rich Harris

 

There has been much discussion about the 2011 Census and whether it will be the last.

The Census remains important as a prime source of social and demographic data used for population forecasting, allocating monies to local authorities, service planning, and in commercial marketing such as geodemographics.

The problem, however, is that is already dated by the time the data are published (typically two years after Census day: this year March 27th) and these are only updated on a ten year cycle. It can be argued that in precisely those areas of most social interest – those of rapid demographic and social change – the Census soon tells us least.

Could private sector organisations provide the data instead? Well, it has been suggested but such data are not necessarily representative of the entire population and what could be lacking is both the opportunity for small area studies of geographical differences and free access to the data which the Census currently provides for.

Could other Governmental data be used instead? Again, possibly, but it would be perverse to argue (as some seem to) that this would be less intrusive: do we really want the Government creating large, linked datasets describing all aspects of our lives? There are strict confidentiality controls around the use of the Census: the data are made available for areas not for individuals and where there is a risk that specific people could be identified the data are suppressed.

What the Census does do is allow for questions to be asked about the social and economic make-up of the country and to ask socially relevant questions about, say, the inequalities between neighbourhoods or of trends towards or away from social and ethnic segregation. It is useful for holding governments and policy-makers to account. Perhaps that is why they are becoming less keen on it?

3 million will face punitive tax rates under Universal Credit

Paul Gregg

 

Further details of the new Universal Credit were recently announced, with much fanfare. The plans integrate a number of different benefits and tax credits into one system which will make transitions in and out work administratively easier for claimants. The new system also makes taking mini-jobs (<16 hours) far more attractive, both to those out of work and to those currently working 16 to 20 hours in order to be eligible for the in-work tax credits introduced by Gordon Brown.  When Ian Duncan Smith first discussed the need for reform he also highlighted the very high effective tax rates people face when earning more. We all pay income taxes on extra earnings but tax credits and the new Universal Credit are also withdrawn, leading to high effective tax rates.  The details show what will happen to these effective tax rates under the new system and compares to what it calls the current system.

The current system will apply from April this year, which is important because the new government increased these effective tax rates in their first budget. The table below shows the figures announced today in the final two columns. It shows how the new regime will reduce the numbers of people with effective tax rates over 80%, but increase the numbers facing 70% to 80% tax rates. It will also increase the numbers facing 60-70% tax rates; this is people just on Universal Credit. Overall there is an increase of half a million people facing effective tax rates at 65% or over.

But this excludes the effects of the budget earlier this year and in the first two columns I report the numbers produced by HM Treasury at the time. They are not quite identical for the ‘current’ system for reasons that are not clear. But the point here is that this budget sharply increased the numbers facing tax rates between 70 and 80%, though to be fair this was mostly a move from 70% to 72 or 73%. But the point is that despite earlier statements from Ian Duncan Smith, the numbers facing punitive tax rates will have risen by 300,000 under this government and the normal tax rate for these people will have moved from 70 to 76%. As such the new regime encourages people to work a little bit, but reduces the incentive for people to work more.

Marginal Effective Tax Rates Financial year 2010/11 Financial year 2011/12 Current

 

Projected under Universal Credit (IFS)
80%+ 0.3 0.3 0.7 0
70-80% 0 1.4 1.7 2.0
60-70% 1.6 0.2 0.2 0.9
Under 60%     1.3 0.9