VR Logo

Lotteries, GST and annuities

Unusual incentives: how to coax people into buying annuities and in making GST a success

When it comes to solving problems that require behavioural change among a large number of people, there seems to be a widespread belief that exhorting people to do the right thing is enough. We see this in many areas--in fact, almost all of so-called public service advertising is an example--but there are many others. 

Take the simple case of buying term insurance. If there is a no-brainer in personal finance, then this is it. Anyone who has dependants should have term insurance, and yet there is deep resistance among a lot of people against buying something that doesn’t return anything. A lot of this behaviour may have been taught by insurance agents but it’s real. How can this be changed? The generally acceptable answer is that someone should educate people about insurance, the idea being that those who refuse to buy insurance do so out of ignorance and if one fixes ignorance then the problem can be fixed.

Maybe this happens to a small proportion of people but such attitudes are often deep set. Changing the psychology of savers may need a psychological trick. Here’s one that, long ago, would get people to buy insurance. In the late nineteenth century, when insurance companies were first trying to get people to buy their products, there used to be a form of annuity called a ‘tontine’. In a tontine, a group of people of similar age would buy what would effectively be a single, joint annuity. They would each get their share of the income that was generated by the annuity amount. Except that if when any member died, his share would go back into a common pool. 

The total income stream from the annuity remained constant. It was paid out to all survivors, divided equally between them. This made the product very interesting. As time went by, those who were long lived got a higher income. When only a handful survived (tontine groups generally had twenty to fifty members), then the income was enormous compared to what it had been in the beginning. When the final members died, the insurance company got full possession of the deposited amount. In effect, buying a membership of a tontine was a bet on your own longevity, but with an added potential bonanza that’s not there in a normal annuity. The longer you lived, the more financially comfortably you were.

At some point, tontines were banned because of some scams. Or perhaps members started murdering each other, I don’t know. Anyhow, I think that there’s a reasonable chance that a tontine-like annuity would encourage more retirees to buy annuities. 

Here’s another example of an unusual money-related trick that could come in useful for the government in the near future. Since 1951, Taiwan has had a national lottery system whose tickets are invoices issued for purchases. The entire country follows a unified invoice system with a common numbering system and on the 25th of every odd-numbered month, lottery winners are announced. 

The prizes are substantial, ranging from a single first prize of NT$10 million (about Rs 2.1 crore) down to numerous NT$200 (Rs 420) prizes. There’s some sort of a gradation system which makes a connection between the size of the purchase and the level of prize that one is eligible for.

The PM has spoken of GST making ‘kachcha’ bills a thing of the past. However, I’m sure our traders are determined to keep stealing on taxes as they mostly do now. The one thing that could force them to go pukka would be if the final buyers insist on proper billing because the invoices are also tickets to a lucrative lottery. The cost of the prizes would be trivial compared to the tax revenue. I think Finance Ministry officials should start googling ‘Taiwan Uniform Invoice lottery’ if they want to make GST a success.