As with the rest of the world, a large portion of the population in the United States do not set aside enough of their income for pension savings. Life is full of urgent and important expenses, and pension seems distant and not sufficiently urgent, by comparison, to warrant setting aside ongoing expenses. Unfortunately, the problem worsens the further the level of income decreases, as low-income workers must, by necessity, use a relatively large portion of their income to ensure a dignified existence after retirement, but they are also the ones who most require every bit they could have saved for the here and now. Current estimates are that only two of every five Americans at retirement age have some kind of pension savings.
The branch of behavioral economics has registered some extraordinary successes in dealing with the problem, perhaps the most well-known of which is the SMART plan, conceived by Nobel Prize winner Richard Thaler and his associate, Israeli researcher Shlomo Ben Artzi. By operating default choices and the worker’s commitment to begin gradually saving as of their next salary raise, they succeeded in getting millions of Americans to begin saving for retirement pensions by carrying out the decision before it was too late.
The branch of behavioral economics has registered some extraordinary successes in dealing with the problem, perhaps the most well-known of which is the SMART plan, conceived by Nobel Prize winner Richard Thaler and his associate, Israeli researcher Shlomo Ben Artzi. By operating default choices and the worker’s commitment to begin gradually saving as of their next salary raise, they succeeded in getting millions of Americans to begin saving for retirement pensions by carrying out the decision before it was too late.
Low-income workers naturally need to set aside a relatively large portion of their income to ensure a dignified existence after retirement, but they are also the ones who most require every bit they could have saved for the here and now.
However, most Americans cannot allow themselves to enjoy the program, especially households with income of under $40,000 a year. Beyond the inability to consistently set aside portions of an already-minimal income, they have practically no use for the tax benefits included in pension plans, as their tax rates are low in the first place.
Developmental economist Esther Duflo and her colleagues sought to explore whether it was possible to encourage this class of the population to save by combining precise timing and a government grant, in accordance with the sum of the savings. For this purpose, the research team collaborated with HR Block, one of the secondary contractors of the American Tax Authorities which handles submitting annual tax documents and tax returns derived from them. During March 2006, anyone who went to one of HR Block’s 60 branches in St. Louise, automatically participated in the research.
Developmental economist Esther Duflo and her colleagues sought to explore whether it was possible to encourage this class of the population to save by combining precise timing and a government grant, in accordance with the sum of the savings. For this purpose, the research team collaborated with HR Block, one of the secondary contractors of the American Tax Authorities which handles submitting annual tax documents and tax returns derived from them. During March 2006, anyone who went to one of HR Block’s 60 branches in St. Louise, automatically participated in the research.
The percentage of people who chose to set aside sums and the average sums set aside.
All the clients handled during that month were randomly allocated to one of the three conditions, a third received a proposal to route some of their tax returns to a pension plan and receive a grant of 20% of the sum they chose to save; a third were given a similar offer but the grant was at a rate of 50%; and a third received an offer to automatically save part of their tax returns with no grant at all. In each of the conditions the sum of the grant was limited to a maximum of $1,000.
As the researchers assumed, the percentage of people who chose to take advantage of the offer was directly proportionate to the amount of the grant, in each of the test groups: no grant, 20% and 50% grant, a total of 3%, 8% and 14% chose to save, respectively. The sums those savers chose to set aside also spiked when the offer included a grant, though surprisingly, the actual sum of the grant did not seem to have any apparent effect. In both groups where a grant was offered, people chose to save around $1,100 versus the average of $768 set aside by the group that was not offered a grant.
As the researchers assumed, the percentage of people who chose to take advantage of the offer was directly proportionate to the amount of the grant, in each of the test groups: no grant, 20% and 50% grant, a total of 3%, 8% and 14% chose to save, respectively. The sums those savers chose to set aside also spiked when the offer included a grant, though surprisingly, the actual sum of the grant did not seem to have any apparent effect. In both groups where a grant was offered, people chose to save around $1,100 versus the average of $768 set aside by the group that was not offered a grant.
The researchers’ proposal came at the right time and with no additional effort on the part of the citizens, just before the tax return money “from heaven” went into the account, served as an immeasurable relief in the decision to route the funds to savings.
One interesting conclusion drawn from the data indicated that the percentage of participants and the sums set aside were especially high for married participants. Likewise, and unsurprisingly, the higher the individual’s overall income and specifically the tax return they were about to receive were, the greater chance there was of them accepting the offer.
Perhaps the most important finding was the fact that people responded to the offer to save. Most had access to saving options, including grants in various conditions, regardless to the proposal received in the context of the current experiment. But they had to actively initiate joining a savings plan and overcoming the bureaucracy involved in it. The researchers’ proposal came at the right time and with no additional effort on the part of the citizens, just before the tax return money “from heaven” went into the account, served as an immeasurable relief in the decision to route the funds to savings and, if possible, to even win a grant.
Perhaps the most important finding was the fact that people responded to the offer to save. Most had access to saving options, including grants in various conditions, regardless to the proposal received in the context of the current experiment. But they had to actively initiate joining a savings plan and overcoming the bureaucracy involved in it. The researchers’ proposal came at the right time and with no additional effort on the part of the citizens, just before the tax return money “from heaven” went into the account, served as an immeasurable relief in the decision to route the funds to savings and, if possible, to even win a grant.